Who would have expected this start to the New Year? After a fairly humbling 2015 most investors were looking for a bit of a break heading into this year.
Yes, equity markets, especially the US looked expensive when judged relative to history using traditional metrics such as P/E and P/B.
But in the context of low interest rates and relative to other major asset classes our research was more consistent with a “dull” equity market offering below average returns, not a meltdown off the bat.
Of course we have also been saying for a while now that capitalmarket volatility is too low and that a whole generation of investors has become hyper sensitized to the smallest blip in uncertainty.
The memory of 2008 unfortunately still permeates our thinking. Investors as a whole have forgotten that while equities tend to out-perform safer assets occasionally you have to go along the ride and find yourself holding on for dear life on a roller coaster.
While everybody has already heard all the usual explanations for the correction, in all honesty, we have been taken aback by the suddenness and magnitude of the equity market downdraft. Let’s briefly review.
High Quality Fixed Income Has Been the Only Place to Hide
- Fixed income strategies have been the only true hedge for equity market risk
- Superior fixed income performance has been associated with higher credit quality and extended maturity
- US small caps have dropped the most, down over 8% (as of 1/11)
- Precious metals have behaved like in the old days, i.e., as a safe haven asset during periods of market stress
All Equity Regions, Industries and Styles Have Suffered
- All major global regions have suffered with Latin American equities down the most
- China is YTD the worst performing equity market
- Energy and Materials have once again been the worst hit sectors
- Some “smart” beta tilts such as Low Volatility and Dividend Growth have delivered smaller losses than core indices
Mixing and Matching Asset Classes Has Not Immunized Investors From Pain
- Of the six multi-asset class strategies that we track, only our All Fixed Income strategy is in positive territory for the year
- The more equities in the mix the more pain investors have felt
- Even the plain vanilla 60/40 strategy was down more than 3% last week
Equity Downdrafts Create Some of the Best Stock Picking Opportunities
Early in my career I used to hear how corrections were healthy for investors. However I never felt that corrections did anything but make my stomach churn. Corrections have always made me nervous, but with the benefit of experience I have come to see corrections as often ideal starting points for picking up beleaguered stocks assuming an unchanged fundamental picture.
Our view at Global Focus Capital is that equity market fundamentals have not materially deteriorated thus creating additional opportunities for stock selection. The list above highlights some stocks ranked by market cap deemed as attractive by our stock selection methodologies. All these stocks have had losses exceeding 10% YTD.
We offer this list purely as an illustration of possible attractive stock selection opportunities and make no representation as to the suitability of the stocks in an investor’s portfolio. We view such a screening exercise the same way a fisherman uses a fish finder – it alerts you to opportunities but you must still exercise judgment and possess skill to make the catch!
Eric J. Weigel
Managing Director and Founder of Global Focus Capital LLC
DISCLAIMER: NOTHING HEREIN SHALL BE CONSTRUED AS INVESTMENT ADVICE, A RECOMMENDATION OR SOLICITATION TO BUY OR SELL ANY SECURITY. PAST PERFORMANCE DOES NOT PREDICT OR GUARANTEE FUTURE SIMILAR RESULTS. SEEK THE ADVICE OF AN INVESTMENT MANAGER, LAWYER AND ACCOUNTANT BEFORE YOU INVEST. DON’T RELY ON ANYTHING HEREIN. DO YOUR OWN HOMEWORK. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSIDER THE INVESTMENT NEEDS OR SUITABILITY OF ANY INDIVIDUAL. THERE IS NO PROMISE TO CORRECT ANY ERRORS OR OMMISSIONS OR NOTIFY THE READER OF ANY SUCH ERRORS.