How should investors position themselves during periods of market volatility?

Fund Manager Q&A

Market volatility has been a feature of Asian and Global Emerging Markets  (GEM) for quite some time. The reasons are well known and range from global issues such as the pandemic to region-specific events such as Evergrande and concerns around the Chinese property market.

The question for investors is how to navigate market volatility and identify products which are resilient to elevated levels of uncertainty. A selection of FSSA portfolio managers discuss their approach to managing portfolios in uncertain times and offer their insights on the most effective strategies to ensure long-term investment success.


With recent market volatility, what advice would you offer investors?

Martin Lau: As an investor in Asia and China equities for more than 20 years, investing in volatile markets is not a new experience for me! However, along the way I have learned a few lessons. The first is probably to maintain the correct perspective. I have often found that the best investment opportunities present themselves during volatile or even depressed market conditions. Quite often, these periods have allowed me to buy great quality stocks at lower prices.

In the eye of the storm it is easy to be captured by market sentiment or swayed by constant negative media commentary. Resilience is key - in fact, whether it is Covid-19 or turbulence in the Chinese property market, the reality is that such factors are likely to prove transitory. The most important approach is to maintain a long-term, quality-based perspective.   

The second insight I would offer is to always focus on company fundamentals. Ultimately, it is company earnings that determine share price performance. Government policies, interest rates, GDP growth etc. are not relevant. However, knowing what you are investing in, and why, allows investors to filter out short-term market volatility and concentrate on what really matters.


How important are company fundamentals in volatile times?

Sophia Li: Within the Japanese market, volatility has taken the form of extreme style and sector rotation.  I have seen the market shift from favouring quality growth towards cyclical companies. Historically this type of rotation has been driven by rising US interest rate expectations and a subsequent foreign investor sell-off. Japan, however, is not the US – here economic growth is low and inflation is not demand-led. Rather, it is being driven by higher commodity prices.

Current levels of market volatility are unwarranted within the context of Japanese equities. When markets disregard fundamentals, extremely attractive opportunities often emerge and I am currently adding small to mid-cap companies to the portfolio. Almost half the holdings in the portfolio are software and commercial services-related companies. These businesses tend to have high, defensive gross margins and low cost inflation. My view is that short-term volatility is not a risk, but an opportunity. Fundamentals and quality always pays off in the end.


How are companies reacting to the current environment?

Vinay Agarwal: Corporate turbulence has been a recurring characteristic of the India market for a decade. Previous challenges have included: demonetisation, implementation of the Goods & Services Tax (GST), scandals surrounding the allocation of natural resources and the NBFC crisis which caused a market crash and crippled growth within the real estate sector. These caused short-term market volatility, but proved to be catalysts for positive change.

For the last couple of years, many Indian companies have moved into consolidation mode. Balance sheets have been strengthened and operating costs cut. Previous events further led to tightened government regulations. Again, a positive development as higher levels of regulation favour organised companies at the expense of those ignoring taxation and labour laws. Longer term, this will lead to a more stable corporate environment.

Short term, markets may retain some of the present volatility.  Cost inflation is a feature globally and puts both margins and working capital under pressure. However, as always, I believe quality will always prove its worth. Those businesses with strong franchises, superior pricing power and quality management will thrive.  


What opportunities do volatile markets offer investors?

Rasmus Nemmoe: I think it is too easy to be consumed by market noise and short-term factors. Of course the last two years has presented challenges within GEM. However, there are and will continue to be, clear winners. Within our GEM portfolios we hold several holdings directly leveraged to both the travel and dining sectors. These continue to benefit as economies reopen post-COVID and populations start travelling, both for leisure and business. Customers are returning to restaurants and eating out in general.

I view these types of companies as ‘structural compounders’, businesses with strong business models, great brands, defensive balance sheets and solid growth opportunities. Companies with these characteristics provide portfolio resilience in times of elevated volatility and I am confident they will continue to deliver going forward.


Is it possible to increase portfolio resiliency?

Richard Jones: In a word, yes. It is actually fairly straightforward and based on three basic principles. First, understand the value of quality. Nobody can predict the future but in our experience, good companies prosper during good times and suffer the least during bad periods. By quality, I mean companies with a high return on equity (ROE) good growth rates and proven management teams.

Secondly, don’t over pay. Quality normally has a price, but if you avoid valuation extremes, it is perfectly possible to buy high-quality companies at sensible valuations. Compound returns at an absolute rate of 8-10% pa is a good benchmark.

Lastly, maintain discipline and investment conviction. I know from experience that when headlines are at their most negative, the downside is often already in the price. Keeping a calm, considered head is essential. Top-down factors may drive overall market volatility at times, but these seldom result in permanent loss of capital if investments are genuinely high-quality businesses. These principles are the solid foundations for building portfolio resilience.    


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