By Craig McAvinue – 1 November, 2023
“Buy low and sell high, it's pretty simple. The problem is knowing what’s low and what’s high.”
A somewhat shaky start to quarter four, historically the best performer with most markets down across the board:
Data table is from Google Finance
The USD continued to strengthen against other currencies, albeit with fairly modest movements:
Data table is from Google Finance
For the first time in 2023 we saw a third consecutive monthly fall in most developed markets, with the S&P 500 now down 12% since its all-time high at the end of July.
The strength of the first seven months of 2023 was always going to take its toll at some point this year, as investors cashed in on buying low. They have also been able to take advantage of rising interest rates, with a fair return on cash deposits being available, in some countries matching inflation. In their recent meetings, central banks across developed countries have paused increasing rates on borrowing. As general inflation rates have fallen around the world, it’s clear the monetary policy is working. Certainly most believe that next year we will see interest rates being lowered. Indeed, banks are already offering lower interest rates on fixed deposits today than they were a month or two ago, signalling that’s where they see the market trending.
The above factors suggest that that value has been and will likely continue to be created in shares today at their current levels. As with all investing, the focus needs to be on quality businesses which will inevitably grow over time, though the current situation offers lots of opportunities for the value investor who wants to buy stocks that are overlooked by the market and are being traded below their true worth.
Many regular readers will know my thoughts on trying to time markets (buying and selling based on predictions of future prices). It’s basically impossible to execute, as no one knows what will happen tomorrow, let alone a year or two down the road. Value investing could be seen as trying to time markets, but it’s typically more sophisticated in identifying companies with prices that are unjustifiably low based on intrinsic worth.
It also considers broader factors such as interest rates and other economic signals that suggest the markets themselves are low and good value.
Focusing on what you own and owning quality will always be key for long-term success. When we do see a large price or index drop and understand the fundamentals behind it, this is a value play, not timing the markets. An example of an opportunity like this recently occurred in the SET (Stock Exchange of Thailand), my home country. We have seen some significant drops, over 8% in the last month. Much of this has been attributed to increases in the interest offered on treasury bonds that are linked to US interest rate rises.
The consensus is that the US will start to lower rates, which creates value in the SET. Thailand’s fundamentals are still sound, especially in the consumer and telecommunications industries, where a large percentage of young people are eager to consume. As with many Emerging Markets, Thailand also benefits from ongoing urbanisation, which benefits the big corporations that tend to dominate the stock markets. Having also recently navigated a tricky political situation, I’ll be putting a few hard earned Thai baht to work at these levels.
The month of October also saw the start of a horrific war in the Middle East. Stock markets typically react to conflicts and geo-politial events, but the impact is usually severe only when existing, embedded economic issues arise.
There is the risk that this conflict could expand beyond the confines of its current location, especially if Iran becomes more visibly involved. Iran has notable power, given its strength as a global oil supplier and ability to control vital shipping routes. Much like when the start of the Russia – Ukraine war caused serious supply chain issues and triggered high inflation, markets around the globe were impacted. That said, the economic backdrop at the time was more vulnerable than it is today, with inflation now under control and Covid moving toward the history books.
Sadly, wars, natural disasters and pandemics will continue to flare and cause spikes in the value of your portfolio. So once again the key to your own success is making sure that your time horizon and risk are aligned.
Finding quality at low prices is key and right now these opportunities are there. To quote the great Warren Buffet, “price is what you pay, value is what you get.”
These articles are intended to give you enough information to make informed decisions, but insurance is complicated. Whether you still have questions on this topic or feel ready to take the first steps toward getting a policy, our advisors can help.
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