4 Dec 2018
Musings from Asia on the U.S. Market Investment
I spent a week in Asia in November—two days in Hong Kong, one day in Shanghai, and two days in Singapore—visiting our clients. Today’s report will address the topics most on the minds of our Asian investors.
Time in the market
The first topic, which was animatedly discussed was around strategic asset allocation and the merits of broad global and strategic asset class diversification.
Our purpose in trotting this out consistently is to show that asset classes of every variety move in and out of favor and it is ultimately a somewhat random walk.
The well-known “investing quilt chart” is less-well known outside of the United States. Some version of this is used by countless U.S. investment and money management firms to highlight the volatile nature of asset class rankings year-to-year, as well as the related merits of diversification. But as Asian investors are generally more trading-oriented, they tend to be less familiar with this type of analysis.
Chasing the top performing asset class after the fact doesn’t tend to pay rewarding dividends. What we highlight instead is that a broadly diversified portfolio tends to smooth out the ride; ultimately generating healthy returns at the end of the period, with lower risk than all-or-nothing market timing. Remember, “time in the market is more important than timing the market.”
As interesting as the aforementioned enlightenment about asset allocation was, there was still keen interest in shorter-term market gyrations; with a rash of questions about the FAANG stocks specifically, and tech leadership more broadly.
I gave a synopsis of the sector-based recommendation changes we made in mid-August; including the downgrade of the technology and financial sectors (from outperform to neutral) and upgrade of the utilities and REITs sectors (from underperform to neutral). Those changes left only one outperform rating—health care—and only one underperform rating—communications services.
From the start of this year through the September 20 S&P 500 high, the consumer discretionary and technology stocks led the way, with about 19% gains for both sectors. However, since then, the only three sectors which are up this year are utilities, consumer staples and REITs—clearly a shift away from growth and momentum to value and defensiveness.
But there is a bigger story here and it’s one of “stealth” and/or “rolling” bear markets. Although none of the major U.S. equity averages is in traditional bear market territory (using the standard -20% definition), we have been experiencing a stealth or rolling bear market for much of this year.
Although not a comprehensive list, we have seen bear markets in the cryptocurrencies and the “short-volatility”-related vehicles (mostly inverse exchange-traded notes) earlier this year; followed by emerging markets; followed by the FAANGs; and followed more recently by oil.
Even within the U.S. equity indices, the underlying weakness is notable.
Tariffs, tariffs, tariffs
Perhaps no surprise is the interest our Asian investors had in the trade “war” between the United States and China; and specifically the implications for the U.S. economy.
Although it’s been true to say the impact on the overall U.S. economy has been di minimis to date, that will not be the case going forward if the additional pending and potential tariffs kick in.
The second quarter real gross domestic product (GDP) growth rate of 4.2% was somewhat inflated by companies front-running tariffs and boosting imports in advance. That inventory-building is set to reverse over the next couple of quarters, which means the expected one percentage point hit shown above would come off a smaller rate of growth—not to mention the ripple effects into the confidence, inflation and capital spending channels, among others.
Buybacks on fire
There was keen interest in the trends of corporate buybacks this year and whether the blistering pace is likely to persist.
Although many investors were hoping that tax reform and the repatriation of overseas-held corporate cash would funnel money into longer-term capital investments, money has remained biased toward stock buybacks. According to J.P. Morgan, November is shaping up to be the strongest buyback month on record; and Goldman Sachs expects S&P 500 share repurchases to climb another 22% to $940 billion next year.
All in all
Although Asian investors have a reputation for being more trading-oriented, it was nice to witness their acknowledgement of the merits of longer-term diversified strategic asset allocation. However, their keen interest in the fate of the FAANG stocks suggests that shorter-term trends and factors like momentum (or lack thereof) also remain top of mind.
Investment involves risk. Past performance is no indication of future results, and values fluctuate. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Diversification and rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.
Past performance is no guarantee of future results. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
About the author:
Liz Ann Sonder, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.