By contrast, sentiment is negative for the rest of Asia. Investors are underweight, growth expectations have become more realistic, and valuations are below long-term averages. In fact, the only time Asian markets have traded at a larger discount to the world over the last 20 years was during the Asian Financial Crisis in 1997.1 This contrast illustrates once again that volatility creates opportunities.
Guarding against potential threats
Finally, we’d like to answer a question that crops up frequently in today’s volatile economic environment: When we build portfolios, how do we seek to safeguard them against the negative factors currently plaguing global markets?
- First, we analyze individual businesses through our earnings, quality and valuation (EQV) filter. This disciplined process enables us to avoid getting sucked into the vortex of short-term noise.
- Second, we seek to avoid excess risk by shunning high-valuation glamor stocks. Instead, we seek businesses that are very sustainable, demonstrate positive repeatable results, have very high visibility, and have competitive advantages that we don’t see eroding.
- Third, we emphasize balance sheet strength. The companies we like to own must have strong balance sheets, which allow them to withstand the storm of economic downturn and sustain earnings power in the long run.
All things considered, emerging markets’ economic outlook isn’t very encouraging. But we don’t dwell on the risks per se. Rather, we focus on how they can be good opportunities for our investors.
1 Source: Merrill Lynch, “Highest in 18 months,” June 30, 2015
2 Source: Morgan Stanley, July 20, 2015
3 Sources: Invesco, FactSet, Data as of June 30, 2015
Important information
Price-to-book (P/B) ratio is the market price of a stock divided by the book value per share.
The corporate earnings revision ratio, used to measure changing expectations, is the ratio of analysts’ upward and downward earnings estimate revisions.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.