After 35 years in the industry, I have seen many ‘corrections’ but the recent years always seem to bring out the ‘experts’ who unfortunately were not shouting loud two weeks ago.
There are a couple of points I would highlight from the global and GEM perspective.
Firstly, equity markets have performed well leaving a lot of profits on offer in equities globally, particularly the US and technology.
Second, the current US earnings season has been mixed with even some of the tech darlings disappointing, but also cautious comments in specific areas of the economy and notably amongst the lower end of the income pyramid.
Third, the recent US jobless claims were a bit higher than expected with the rate increasing slightly, but this could be because more people are rejoining the workforce rather than jobs lost. Importantly I would suggest the risk of wage increases has now passed for the US economy, but the Fed continues to focus on this metric which is arguably in the rear-view mirror rather than looking ahead.
Combined with the manufacturing PMI which was weaker than expected we can see how the ‘recession, not soft landing’ narrative gathered momentum. For good measure the Japanese central bank rate increase impacted the ‘carry trades’.
Jerome Powell is facing a dilemma. A rate cut would be welcome but before the Sept meeting may look like panic. A week may be a long time in politics but is an eternity in asset markets when there is no obvious mechanism to calm the nerves.
We will see data this month for the US economy and consumer and that will help to assess credit card data, mortgage data, loan growth, etc. Lower bond yields should certainly help sentiment on credit costs, but also the lower gas prices.
I think the extent of the sell off in Asia in particular illustrates the extent of leverage in the system, and this is always the factor that is difficult to assess until after the event.
As Buffett says, ‘buy when others are fearful’, and importantly the valuations in many of our GEM names are 20-25% below their 7-10 year average numbers but as always we are looking for that catalyst to identify when a good company becomes a good investment opportunity.
India continues to look attractive and has held up reasonably well, but we have seen our better performing names sold on profit taking in recent days. China trades on lower multiples but I don’t expect recent equity volatility to tempt domestic investors given their ongoing concerns on the property market. Elsewhere is very stock specific, and even Mexico has held up reasonably well even with slight currency weakness.
Taiwan and Korea are tech heavy names as you know, and the recent tech correction has highlighted their discount to historic valuations. Our interest is very stock specific and TSMC will remain the world’s largest semi chip manufacturer for many years to come with very limited competition and will retain its pricing power. The industry leaders are the way to play the tech theme rather than looking for beta in the smaller supplier names. And this focus on the industry leader across countries has served us well over the last 12 years.
My conclusion is that panic selling rarely works, but forced reduction in leverage is always required and that has been an important factor at play. We will continue to invest in the industry leaders with strong cash generation and an attractive valuation.
As Charlie apparently convinced Warren, ‘buy good businesses at a fair value and wait till they rate higher, but don’t buy a poor business at a low price and hope for a fair value.’
A clever man indeed.
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