China time?

Craig McAvinue By Craig McAvinue – 1 February, 2024

“Deciding to commit yourself to long term results rather than short term fixes is as important as any decision you'll make in your lifetime.”

Stock and currency markets performance

stock

Data table is from Google Finance

January came and went in a flash, with somewhat mixed results. Generally we saw Developed markets up and Emerging markets down.

currency

Data table is from Google Finance

With Federal Reserve talk leaning towards a longer period before we see any rate cuts in the US, the greenback’s value was somewhat bolstered.

Markets are volatile places

A look at the Asian components of the indices listed above sees January as a rather dynamic month. The difference of over 14% in just one month between the same investment in Japan versus China tells a compelling story. An annual return of 14% is one that 90% + of investors would be overjoyed with, let alone a monthly return.

china and japan

Had we ended the month a week ago, China would have been down double digits for the month, and just two days ago the S&P 500 gain for January would be sitting at over double where it ended.

Last month’s blog addressed the different geographical areas of investment, discussing and questioning the terms commonly used, such as Developed and Emerging markets. January’s figures illustrate these differences.

Volatility in the markets is more condensed in certain sectors. Technology for instance is less stable than some other sectors and the movement in value of the tech giants plays an enormous role in the US performance of markets overall.

US interest rates remain a driving force …

Key to the S&P 500 movements this month (as has been the case during much of the last few years, since monetary policy became a “thing” again) was that the previously anticipated interest rate cuts that were predicted to start in March will now likely be delayed until May or even later.

So long as interest rates remain high and decent returns on cash are available, the risk involved in buying shares makes them less attractive. The last trading day of January on the S&P 500 saw the biggest single-day drop since March of last year, simply on the back of the news about interest rates.

… and emotions move markets

The job of a trader is to buy and sell. The good ones buy low and sell high. So when news like this causes ripples, trends are followed. Whilst this is of course important in the short term, for longer term investors (as all equity-based investors should be), the quality and performance of the underlying businesses you own is more important. Price is important of course, but as the great Warren Buffet says, price is what you pay, while value is what you get.

emotion in investing

Emotion, noise, and news often overshadow real performance in the short term, but not in the long run. Shares in Google (trading as Alphabet) illustrate this point. They released their quarter four results yesterday, and their revenue beat the market expectations by more than US$1 billion. Yet the share price fell by more than 7%, due to the external factors related to interest rates as mentioned above. However, the last 12 months have seen the company’s share value rise 40%, and even including the terrible year for tech that 2022 was, their five year return is 150% – that’s 30% per annum. This is what matters, as the company is growing over time. 

Year of the Dragon

China has always been far more enigmatic than the US when it comes to trying to assess the value and, even to some degree, the quality of the shares in its indexes. After a terrible year last year, whilst most of the world saw positive movement, Chinese markets are off to a bad start in 2024. So perhaps there are some cheap options for the value investor, just as long as the underlying quality is there too.

This month signals the start of the lunar new year. Across Asia, the largest annual movement of humans will take place in the coming days, as billions of people travel home for the holiday. China expects some 9 billion domestic trips to take place during this time. Not only travel, but all forms of consumerism will be on the up as families give each other presents and enjoy eating, drinking and generally spending money. Could this be the impetus needed to kickstart an eastern bull market?

china travel

2024 is the Year of the Dragon. As a dragon myself, I’m entering my fifth 12-year lunar cycle, or 48th year. Looking back at the previous years of the dragon, we saw positive returns in three (19% in 1976, 12% in 1988 and 13% in 2012) while the dot com bubble of 2000 spoiled the clean sweep (down 10%).

Make of that what you may, price, value and potential may see the Chinese Dragon roar again soon …

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