Big discounts overseas

Stocktake: Proinsias O'Mahony's take on the markets

A customer counts Indian one-hundred rupee banknotes – the currency has dropped in value recently. Photograph: Dhiraj Singh/Bloomberg

A customer counts Indian one-hundred rupee banknotes – the currency has dropped in value recently. Photograph: Dhiraj Singh/Bloomberg


Emerging markets took another pounding last week after the Federal Reserve confirmed it was “broadly comfortable” with plans to soon scale back stimulus measures.

The Indian rupee and Turkish lira hit record lows while stocks also tanked. Indices in Indonesia and Thailand have declined 20 per cent since May, while India’s Sensex is 12 per cent lower. The MSCI Emerging Markets Index is down 11 per cent this year compared to a 17 per cent gain for the S&P 500 – the widest gap since 1998.

“How much further can these sell-offs run? Whatever you think is reasonable, double it. These things always overshoot,” said UK hedge fund manager Stephen Jen.

Fair point, although contrarians with a long-term outlook must be tempted. Large-cap EM stocks are priced as if they are “going out of business”, a Citigroup report said last week, a 25 per cent discount to developed large caps. On a price-book basis, emerging equities now trade at a 28 per cent discount compared to a 10 per cent premium in early 2011, said Cantor Fitzgerald.

September affective disorder anyone?
The worst month for stock markets – September – is but days away.

Investing according to the months is daft, but the statistics are striking. Since 1896, the Dow Jones has lost an average of 1.15 per cent in September compared to a 0.71 per cent gain for all other months. September has been the worst month in five of the last nine decades, never ranking higher than ninth in that time.

The performance gap is narrowed if one strips out the worst years, but not by a huge margin. The September effect dates back more than 200 years in the US and UK and is evident in most developed markets. One US doctoral student found markets declined in September in 16 of 18 developed markets analysed, significantly so in 15 cases and more than any other month in 12 instances.

Investors who put $1 into the US market in 1927 would have $2,363 in 2007, the thesis found, compared to $6,784 if they cashed out in September and placed their funds in a risk-free asset.

Fluke? Probably – no explanation fully stands up to scrutiny, although one intriguing suggestion is that seasonal affective disorder (SAD) may be a factor.

Whatever the reason, the figures are ugly.

One car does not drive performance at Fiat
Head of equity strategy at Saxo Bank Peter Garnry gave a nice response when questioned online about his recommendation of Fiat shares recently.

Garnry was asked if he drove a Fiat. He doesn’t. This prompted the Fiat sceptic to say, “If you would drive one, you would know the different problems the company is facing.” Garnry was nonplussed: “The latest sales and operational figures disagree with your analysis which furthermore displays confirmation bias and a very subjective and small statistical sample size,” he sniffed.

Is that a bear on the horizon?
Ongoing anxiety over Federal Reserve tapering saw stock markets pull back in August, the Dow recently suffering its worst week of the year and declining again last week.

Bears warn a correction (a fall of 10 per cent) or bear market (20 per cent decline) is overdue, but there’s nothing inevitable about market sell-offs.

Yes, 10 per cent corrections were seen in 2009, 2010 and 2011, but they are not an annual event. There have been just 27 corrections since 1945, with only two occurring between 1987 and 2000, and one between 2003 and 2007. There have been just 12 bear markets since 1945.

It typically pays to bet on the bulls. As noted, there have been three corrections since the bull began in 2009 compared to 18 pullbacks of 5 per cent or more.

However, the Vix, or fear index, has not climbed above 16 in recent weeks, indicating the current pullback is not over.

Vix expert Bill Luby notes there have been 22 pullbacks (the smallest being 2.7 per cent) since 2009.

In every case, the Vix exceeded 18 at least once.

In numbers
29 - The percentage of American Association of Individual Investors who last week described themselves as bullish, the lowest number since April.

31 - The percentage of Nasdaq 100 companies today that were also in the index in 2001.

14,995 - The percentage gain enjoyed by Priceline. com shareholders since its 2002 low. The stock is within touching distance of becoming the first S&P 500 company to top $1,000, but its market capitalisation remains below its 1999 peak.