Unpredictability: making monkeys out of the markets

There is a real lesson here for investors. I had a great debate with a good friend last month regarding the benefits of investing in a world where fast trading algorithms (using super-fast computers to detect market opportunities to buy, sell or short stocks) make it hard even for traditional asset managers to compete. So what chance is there for retail investors? My friend decided to get out of trading stocks.

Investing has been such a complicated business because there are just too many variables to handle. Gone are the days when you thought you could understand how markets perform. The rules of the game changed when policymakers began intervening through unconventional monetary policies, and politics became part of the equation. 

You would have thought logically that growth economies would produce growth stocks.  The BRICS economies (Brazil, Russia, India, China and South Africa) met in Durban at the end of March. These five countries account for over half of total global growth since 2001, but their stock markets have not done that well. Since its peak in 2007, the BRICS index is down 37 per cent.  

Chinese retail investors have declined in number, based on the number of accounts closed. The A share index is down 31 per cent since its peak in 2009, and the Brazilian, Russian, Indian and South African stock market indices have all been in negative territory since the beginning of this year. On the other hand, the US and Japan are sluggish in growth yet their stock markets performed 11.1 per cent and 20 per cent better, respectively, since the beginning of this year.

Despite being in overall crisis and negative growth, even the European stock markets performed in positive territory, mainly due to better performance in Germany and France. There are globally diversified companies in these economies that can outperform despite the slowdown in the European economy.

The real problem is that negative real interest rates around the world are truly destroying the ability of investors to judge what is the right asset to invest in. Markets are clearly bubbly when emerging-market investors start investing in taxi licenses. Accordingly to a Bloomberg report, Turkish taxi licenses today trade for $580,000 each. My Hong Kong taxi-driver was complaining to me that a Hong Kong taxi license was trading at over HK$7 million (just under $900,000) and yielding next to nothing. It made no sense to him as a taxi-driver to be an owner. This reminded me that in 1996, golf club membership was being touted as the best investment ever, with the 1997 Asian financial crisis wiping out all gains thereafter. 

So what should an honest, no-inside information retail investor do? I guess the old-fashioned advice to invest in diversified, good-value stocks and maintain ample liquidity is still sound. Global bonds have done well since the financial crisis due to massive quantitative easing. Even those who speculated on Greek bonds when they were yielding more than 20 per cent have done well. But it is difficult to argue that ten-year US Treasuries and German Bunds at under 2 per cent per annum represent no risk. Certainly, Japanese 10-year bonds at 0.55 per cent per annum, when the official inflation target is 2 per cent per annum, must carry considerable interest-rate risks.

Over the long term, there is no question that investing in one’s own home is a good investment. This is an officially supported leveraged investment, since most mortgages still require not more than a 30-per cent down payment for the first home. The fact that there is a growing middle class in most of emerging Asia means that demand for housing is still on the increase, but given such low interest rates, it is hard to imagine how much further house prices can rise relative to the affordability index. 

My own inclination is to go for high-yield, solid-growth companies that are globally diversified. You basically invest in the region that you are most familiar with, and in companies that demonstrate good governance and know what they are doing. The average price/earnings ratios of the Hong Kong, Singaporean, Malaysian and Thai markets are still below those of the US (17.7).  China A share has a PE ratio of only 8.1 and a yield of 3.7 per cent.  

Of course, the art of investing depends completely on the investor’s risk appetite, age and liquidity requirements. If you are fully invested in illiquid assets or in illiquid markets, you cannot get out, even though the returns look good. Property markets are notoriously easy to get into and difficult to cash out of, especially in the smaller markets. Bond investments may look good on paper, but when you want to exit, the selling price may be lower than what you think you can get, especially for retail investors. 

Knowing that even monkeys can beat the market gives one food for thought. You can do better, but you must invest the time and energy to think through what you are investing in, what risk you are taking and what you want to achieve. A friend in Australia had no formal training in investments, but decided that she could outperform the market; she relied on her instinct and own research into companies, and is now doing pretty well on her own. 

Even monkeys know how to survive, so don’t look down on monkeys.

 

Andrew Sheng is president of the Fung Global Institute.