The biggest headline in international markets during the third quarter has been Asia, with China as the most visible actor. International market volatility in general has been tremendous, but Asian market volatility has been even more pronounced in this relatively short period. The red continent produced a lot of red color in the form of investment losses pouring forth from all Asian markets, giving a little bit of added color to investors’ cheeks. Granted, almost all of these markets (excepting Japan, Hong Kong and Singapore) are classified as emerging markets. Nonetheless, the distinction of established versus emerging markets did not matter in the recent period: all Asian markets suffered a similar fate. There was mass de-risking going on. There were no good houses in a no-good neighborhood. In the recent sell-off, the broad MSCI All-Country World Index (NASDAQ:ACWI) experienced 18.7% losses from peak to trough. Asia, however (using the broad Asia ETF (NYSE:GMF), had losses of 28.6% in the quarter. China in particular, which seemed to be the catalyst, had 33.9% losses peak to trough. It was tough sledding for international investors in general and even tougher for those with Asian exposures.
Blood In The Streets
There is a very crude trading maxim that says the time to invest is when there is blood in the streets (Thailand comes quickly to mind). Although there was little political uncertainty to speak of in the last two months, there was certainly lots of red in the form of estimated losses. We do not hold the contrarian view that it is now time to return to Asian positions. The extreme volatility will make for great entry opportunities at some point, but uncertainty yet lingers, given the recent problems. Tight monitoring and astute judgment have to come into play now for active investors and managers. We currently hold 23% of our international ETF model in cash reserves due to the overall risk level. We may choose to deploy at any time if we see opportunities, but continued caution and an overall defensive posture appear to be prudent at this time.
China was a major negative catalyst in the recent months, but our Chief Global Economist, Bill Witherell, informs us that the Chinese economy is not as bad off as we might think, in spite of the recent very unsettling currency moves.
The slowdown in China and the related fall in commodity markets was a trigger. China's economy still has not given signs of bottoming, but the slowdown is not as great as some appear to believe. Overall growth is still likely to come in at around 6.8% GDP growth this year and around 6.5% in 2016. The problem has been that the slowdown in manufacturing and construction has been more severe. The impact has been heavy on emerging markets, first in Asia but also in Latin America, Russia, South Africa and the Middle East.
Pay attention to the estimated GDP (gross domestic product) projections for China, given the vast decline in its markets. Only 6.8% projected growth for this year, and only 6.5% for next year. This is similar to other Asian economies as well. So cry me a river for such lowly GDP growth. Most emerging-market economies have comfortably double the GDP growth of developed markets. Outside of the obvious caveat that all economic statistics and their sponsoring sources must be questioned, we do know that global demographic trends favor Asian countries, including India, where aggregate GDP growth is likely to be in the high single-digit range consistently.
At some point the broad investor class in the US will come to fully appreciate changing global demographics and the long-term implications for investment performance. Yet, as we have seen, the favorable long-term picture comes with lots of volatility. For now, we are cautious with regard to Asia. To quote Art Cashin: “Stay nimble.” To cite the sagacity of my mother: “A bird in hand is worth ten in the bush.”
Michael D. McNiven, PhD, Managing Director and Portfolio Manager.