As equity markets navigate the dreaded month of October, negative investor sentiment and high volatility continue to set the tone, led by adverse commentary from the US. This time, instead of seeing dip buying, areas that have outperformed are being sold down as central banks withdraw liquidity.
Since the US market has outperformed the rest of the world, this week’s indiscriminate sell-off was not surprising. On paper, corporate earnings have beaten estimates, but the strain of higher input costs is beginning to show, driven by trade tariffs and a tight labour market. In fact, volatility has yet to reach the highs seen in February this year.
Asian equity markets on the other hand have already experienced the pain and valuations are looking attractive. Emerging markets in Asia are structurally different from Argentina and Turkey, as current account balances in Asian economies have improved notably over the last 20 years. In addition, external debt levels are more manageable, as corporates learned from the Asian Financial Crisis the importance of maintaining conservative leverage.
The US-China trade war is not a deal breaker for active investing in China. It seems prepared to mitigate the impact of tariffs through a range of measures, including improving their own efficiency levels, shifting factories to other regional markets and passing on some tariff impact to US consumers.
Asia fixed income
The US equity sell-off also weighed on the Asian fixed income market, where weaknesses persist as trade wars, default rates, the wall of maturities, and heavy supply dominate headlines. Volatility is likely to linger, but valuations are attractive compared to US and European fixed income after the recent correction.
In this late stage of the expansionary cycle, we believe Asia and China high yield bonds offer a lower volatility, high income alternative to capture growth momentum.Meanwhile, broader market weakness has left Asian investment-grade bonds and emerging market corporate debt looking attractively valued; aggregate yields for Asian IG bonds are at post-2009 highs. However, we anticipate more downside surprises in the US.
Take the long view
Uncertainty and nervousness in the market provides a good testing ground for any investment philosophy. That’s why it is important to focus on the long-term, looking beyond short-term sentiment dips and viewing volatility as an opportunity to invest in businesses that offer robust growth prospects and are run by proven management teams.