The first signs of panic?
I have been waiting for the first signs of real panic in Asia's bear market. First, there was the question of why India had been so defensive, with its current account deficit, high structural inflation, strained banking system, difficult government finances and high valuations. India's market has started to drop. And then we had weakness in Japan, the perennial safe haven. That market has weakened dramatically, too. And now, the all-conquering S&P 500 Index has seen acute volatility. Is the U.S. the last market to lose confidence? Certainly, confidence seems in short supply all over the world.
It looks like we may be about to get some attractive prices for shares of quality companies offered up by the markets. China's A-share market has been the place where we have been looking most earnestly. But now valuations appear to be improving across a broad range of markets—from Asia's frontier markets to its most developed. And while shares of some slower-growth companies have been the place to hide over the past few months, we have seen sharp price corrections in some of the faster-growing businesses, making valuations there more reasonable, too. The sell-off in the markets is being aided by some redemptions out of exchange-traded funds (ETFs). Tighter monetary policy in the U.S. and the effects of credit policy in China are creating a bit of a liquidity squeeze. Sentiment over Asia is generally weak both within Asia and outside of the region. The impatient money appears to be selling out, to be capitulating. That has often been a time of opportunity for the long-term investor.
I am pleased to see opportunities to invest in companies whose share prices have fallen below long-term fundamental values. It means more value is being offered to the investor. And as some people sell out of passive vehicles, I can look beyond what the media says today and see reasons to be cheerful about Asia's profit growth.
First, we have to ask ourselves: “What's causing this?” Well, the headlines continue to be about trade wars and, in their most hyperbolic moments, stories of empires fading and rising and geopolitical challenges. The truth is a little more nuanced. Tariffs do hurt individual businesses. The effects on entire economies are much less and far more complex than the simple rhetoric of U.S. vs. China might suggest. Companies adjust and supply chains adjust. But the tariffs have had an effect on sentiment, particularly in China but increasingly so in the U.S., too, as U.S. companies start reporting that the effects are not one-sided.
But the effects of tariffs remain, in my view, of secondary importance compared to monetary policy. The U.S. Federal Reserve continues to tighten. It may even accelerate tightening if core inflation continues to rise. In China, monetary policy has been tight enough to bring core inflation down below 2%. The domestic Chinese economy is slowing due to domestic policy—much less so because of the trade confrontation.