If you have been living in the cave for the past month. Guess what? The month of October 2018 took the fright out of many investors with the MSCI World Index Exchange Traded Fund (URTH) plunging down by 9.6 per cent, erasing all gains made since the beginning of 2018. To from  January to end-October, the ETF is down 0.7 percent. While the performance in October mirrored that of S&P500 index, the yearly performance of the URTH ETF lagged the S&P500’s return of 4.3 percent.

Has The Market Bottomed?

URTH

  Source: Phillip Securities Pte Ltd (30 October 2018)

Many market watchers and investors do not see the recent bloodbath as the market’s bottom. Amidst the sell-off, investors are naturally being inundated by talks of a ‘bear’ market, or running into ‘correction’ modes. The month of October 2018 was dubbed to be the final death knell to the 10-year bull run.

That said, some investors might not subscribed to the notion that the latest decline was a sign that a recession is about to come, citing the positives coming from the earnings growth projections, the expectations that the US-China trade tensions will eventually simmer down, and oil prices remaining stable, among others.

Although none of us have a clear crystal ball to the future, the fundamentals of the financial markets, like price-to-earnings (P/E) multiples have come down quite a bit. According to macro forecaster Edward Yardeni from Yardeni Research Inc., the lower forward P/E multiples might suggest that there are value opportunities that could be found in regions such as the Emerging Markets.

 forward pe

Source: Global Index Briefing: MSCI Forward P/Es (Yardeni Research Inc., 24 October 2018)

China-Focused Stocks

According to Edward Yardeni, the forward P/E multiples for Chinese markets came in at 10 times during the month of October, and is one of the lowest among the major emerging economies. This is followed by South Korea (7.6 times), and Turkey (6.1 times).

The relative low forward P/E multiples seen in China resulted from weaknesses owing to the ongoing trade tensions with the United States. While the S&P 500 was still positive for the year at 4.3 percent despite a washout October month, the iShares China Large-Cap ETF (FXI) was down 13.4 percent during the same one-year period.

Also, for the month of October, the FXI ETF did poorly with a negative 10 percent performance as compared to the negative 9.6 percent for the S&P 500 index during the same period.

FXI
Source: Phillip Securities Pte Ltd (30 October 2018)

Taking a look at the one-year daily chart of the FXI ETF, we noted that the price has fallen drastically from a peak of US$54 in late January 2018 to the low of US$37.845 in October. The peak-to-trough drop is equivalent to almost a shocking 29.9 percent price drop for the past ten months!

However, for an astute, calm and rational investor, the fall in China’s stock prices along with the current projections of its forward valuations might present opportunities to take a hard look at selected sectors like the Chinese banks. For example, the BMO Hong Kong Banks ETF (HK: 3143) is now trading at an attractive valuation offering a dividend yield of 7.6 percent.

3143

Source: Phillip Securities Pte Ltd (31 October 2018)

Compared to the one-year daily chart of the FXI ETF shown previously, the BMO Hong Kong Banks ETF is showing a roughly similar decline of 30.2 percent decline from peak-to-trough during the same period.

Investors are seeking large and well-capitalised Chinese bank exposures with reasonably sustainable dividend yields, the 7.6 percent dividend yield from BMO Hong Kong Banks ETF might compensate for some of the capital losses investors suffered this year, as long as dividend payouts continue.

However, there are risks with exposing one’s portfolio towards Chinese banking sector as these Chinese banks, as a group, has a significant collective exposure to China’s real estate sector.

Meanwhile, the Chinese government has been clamping down on rampant borrowing that many Chinese investors have been taking on to buy Chinese real estates. Moreover, tighter regulation to rein in loan practices could stem off borrowers with lower credit ranking profiles. This could lead to negative impacts on both the shadow banking and mainstream banking sectors.

Look Forward To November And Ahead

Historically, November is a month where the stock market sees a pickup. After a downbeat October month this year, bargain hunting could help lift the markets into the close for the year. However, investors need to watch what and how they go about allocating their investment portfolios.

Investors though should take the opportunity to rebalance and adjust their risk exposure, and not to limit investments into any single asset. Ideally, investors should always stick to their long-term investment objectives and not be too affected by short-term market gyrations.

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