During Volatile Market Times Simply Stay Invested

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One of the important topics that I have written about many times in the past is Market Timing. Some of those posts can be found here, here, here and here. I came across an interesting article by Fidelity Investments discussing ways to deal with market volatility.

From the article:

Click to enlarge

Stock Returns after Volatile Times

U.S. stock market returns represented by total return of S&P 500® Index. Past performance is no guarantee of future results. It is not possible to invest in an index. First three dates determined by best five-year market return subsequent to the month shown. Sources: Ibbotson, Factset, FMRCo, Asset Allocation Research Team as of March 31, 2015.

In fact, what seemed like some of the worst times to get into the market turned out to be the best times. The best five-year return in the U.S. stock market began in May 1932—in the midst of the Great Depression. The next best five-year period began in July 1982 amid an economy in the midst of one of the worst recessions in the post-war period, featuring double-digit levels of unemployment and interest rates.

Source: Six strategies for volatile markets, Fidelity Investments

As the chart above shows, market timing does not work and panic selling during those times is not a wise strategy. Sometimes doing nothing is the best thing to do. During the recent great recession, the S&P  500 plunged to 666 in March 2009. Today it is trading at over 2,055. In hindsight, March 2009 would have been the best time to pick up stocks on the cheap. However not many people were brave enough to do that. But even investors who did not sell out during that panic, would have done much better had they stayed the course.So the key takeaway is where there is blood on the street, it is a great time to invest or stay put.

Central Bank Balance Sheets: China vs USA

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The Central Bank of China has pumped billions of dollars into the economy in the past few years thru the various stimulus programs. As a result its balance sheet has ballooned to over $5 Trillion now making it the largest in the world. This figure is even bigger than total assets of the Federal Reserve. A Fidelity report noted that the Central Bank of China balance sheet has grown more quickly in the past decade than that of the Federal Reserve’s.

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Central bank Balance Sheet-China vs USA

Source: What a China selloff may mean for U.S. investors, Fidelity

One of the factors behind the soaring US stock prices in the past few years is the multiple QE programs implemented by the Federal Reserve. The chart below shows the relationship between the QE-3 in 2014 and the S&P 500:

Fed Balance Sheet vs SP500

Source: This chart shows the Fed’s balance sheet is still fueling stocks, MarketWatch, Jan 9, 2015

The Largest and Most Powerful Public Chinese Companies 2015

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Every year Forbes magazine publishes the largest companies in the world. These firms are selected based on many factors including revenues.

From the 2015 report:

The FORBES Global 2000 is a comprehensive list of the world’s largest, most powerful public companies, as measured by revenues, profits, assets and market value. We use a composite score that weighs those four metrics equally, as one barometer alone would present a biased and incomplete account.

The following Chinese firms appeared on the Forbes Global 2000 list for 2015:

Source: Forbes

Some observations:

  • China’s biggest banks ICBC (IDCBY), China Construction Bank(CICHY), Agricultural Bank of China(ACGBY) and Bank of China (BACHY)are in the top 10 list. This is indeed surprising since the Forbes ranking is at a global level. This also shows the growing dominance of Chinese banks.
  • Oil companies usually tend to huge in most economies. So it is not surprising to see PetroChina(PTR) and Sinopec(SNP) on this list.
  • While the US has 579 companies represented in the Global 2000, China and Hong Kong firms account for 232.
  • The presence of tech companies such as Baidu(BIDU) shows the growing importance of the technology sector in the Chinese economy.
  • Banks play a critical role as China transitions from a manufacturing-based economy to a consumption-based economy. Chinese banks are the major lenders to not only consumers but also companies and regional governments. Hence in addition to the four global banks mentioned above, domestic banks such as Bank of Ningbo, Bank of Nanjing, Bank of Chongqing and Chongqing Rural Bank are large enough to be included in the Global 2000.

Download in Excel format: The 149 Largest and Most Powerful Public Chinese Companies from Forbes Global 2000 for 2015 

Disclosure: No Positions

Keep Calm And Consider Buying These Ten Stocks

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The U.S. equity market fell sharply today with the Dow down 1.47% and the S&P 500 off by 1.67%. Unlike the dramatic reversal in the markets yesterday, investors simply wanted to dump risky assets such as stocks.

Market participants are spooked by a multitude of fears including Greece, China, potential interest rate increase, global economic slowdown, commodity market collapse, etc. However all these fears are overblown and it is unlikely that a great collapse will occur in equity markets worldwide especially in developed markets. Hence wise investors should use this selloff as an opportunity to add high-quality companies to their portfolios at current levels. Plenty of bargains can be found in the markets of the developed world. Before we can get to the list of potential candidates for additions, let us review some of the reasons that dispel the myth that were heading towards a major equity market disaster.

1. Though the Shanghai Composite Index is off by over 30% so far this year and will fall further, the US and other developed economies will not be highly impacted. Sure there may be short-term declines in stock prices like today but China is not going to kill the economic recovery in North America and Europe. Moreover European indices actually closed green today ignoring the carnage in China.

2. The Greek debt drama may prolong for a few more months but Greece is most likely to be part of the EU. In the worst case scenario, the current debt will be restructured by the troika and by this weekend the EU leaders will iron out some form of deal agreeable to all parties.

3. Global commodities have been languishing in a bear market for the fifth year now. So commodity market collapse is not new as China did not all of sudden stop importing commodities in recent weeks. The fact the demand for major commodities have been soft for many years now and equity markets have flourished taking into this consideration.

4. The crash in Chinese equities is not going to push the US and European economies into recession. China is still an emerging market and such boom and busts are features of such markets. So simply because Chinese stocks collapse it does mean US stocks will follow as well. It should noted that during the last market crash, Chinese stocks fell by over 70%.

So from an investment standpoint, all the current chaos in equity markets presents attractive entry points for investors in developed equities. Many sectors such as utilities, railroads, healthcare, consumer goods, etc offer opportunities for long-term investors. For example, there is absolutely no major impact to US utilities from the chaos in China. They do not depend on exports to China and generate most of their revenues from the domestic market.

Ten stocks are listed below with their current dividend for consideration:

1.Company: Southern Company (SO)
Current Dividend Yield: 5.03%
Sector: Electric Utilities
Country: USA

2.Company: Canadian National Railway Co (CNI)
Current Dividend Yield: 1.74%
Sector: Railroads
Country: Canada

3.Company: DTE Energy Company (DTE)
Current Dividend Yield: 3.61%
Sector: Electric Utilities
Country: USA

4.Company: BASF SE (BASFY)
Current Dividend Yield: 3.64%
Sector:Chemicals
Country: Germany

5.Company: Autoliv Inc (ALV)
Current Dividend Yield: 1.97%
Sector: Auto Parts
Country: Sweden

6.Company: Unilever NV (UN)
Current Dividend Yield: 3.39%
Sector: Food Products
Country: The Netherlands

7.Company: Union Pacific Corp (UNP)
Current Dividend Yield: 2.29%
Sector: Railroads
Country: USA

8.Company: Kimberly-Clark Corp (KMB)
Current Dividend Yield: 3.27%
Sector: Household Products
Country: USA

9.Company: Bank of Nova Scotia (BNS)
Current Dividend Yield: 4.29%
Sector: Banking
Country: Canada

10.Company:Edp Energias De Portugal SA (EDPFY)
Current Dividend Yield: 5.67%
Sector: Electric Utilities
Country: Portugal

Note: Dividend yields noted above are as of July 8, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: BNS, CNI and DTE

China ADRs: A Review Of Year-To-Date Returns

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Chinese equities have plunged dramatically in the past few weeks. From being the top performer among emerging markets, the China equity market has entered the bear market with a fall of over 28% in the Shanghai Composite Index from this year’s peak. Despite the decline, the index is still up by just over 15% year-to-date.

Investors may want to consider the following points before investing in China:

  • The Chinese equity market rose more than 100% in the past 12 months even though economic growth was sluggish. Many individual stocks more than doubled or shot up more.
  • Unlike other emerging countries such as Brazil and India, retail domestic investors are the cause of the boom. Foreigners do not play a major role in China since the country has strong restrictions on foreign equity investors investing in the local market. According to one report, more than 90 million individual investors make up about 80% of the market.

From an article in the BBC:

  • Herd mentality

About 80% of investors on the Chinese mainland’s stock markets are small retail investors – or so-called mum and dad investors. Investing – and talking about their shares – is a national pastime for millions. And many have admitted that they are driven by what their friends and family are doing. “Retail traders are by their nature enthused by momentum,” says market specialist Chris Weston from IG Markets. “If the market is rallying, they feel like they need to be involved on fear of missing out. That momentum is now headed sharply lower and so they want out.”

  • Millions of individual investors opened brokerage accounts in the past year as the market soared. These inexperienced investors do not have the resources or the ability to ride out market volatility.

From Fuelled by greed, Shanghai’s stock market is a raging ox in Global Times in June:

In April, both of China’s two exchanges saw nearly 5 million new A-share accounts opened. In Shanghai especially, the passion for investing in the stock market is at an all-time high, and the greed that has overcome ordinary residents here is almost palpable.

Just a few floors downstairs from the Global Times, where a securities company happens to have an office, a high-spirited stream of retirees can be seen making punctual visits throughout the day to cash in on their portfolios or reinvest in new offerings. It’s comical to picture these gossiping grannies sitting in the doorways of their longtang debating the valuation of 1818-SZ or whether to hold or sell ICBC, but that’s exactly what’s occurring.

On morning metro commutes, nobody is playing Fantasy Westward Journey anymore; now the new trendy game is SSE. The faces of nearly every other passenger glow green and red from the real-time stock tickers on their tablet devices.

Every morning at People’s Square, near the Shenwan Hongyuan Securities office, droves of locals can be seen expounding investing advice and whispering supposedly “insider” secrets to each other. Though many of their claims are dubious, gauging from the animated atmosphere, trading stocks has become the city’s new obsession.

After many years of stagnation, the sudden reversal of fortune of the Chinese stock market sent everyone scrambling. Everyone was afraid of missing out on the next golden opportunity. Even people with absolutely no prior investing experience – or sufficient savings to spend – did not hesitate to get in on the latest hot stock.

A classmate of mine, who spent all her savings on a new apartment, recently borrowed an additional 100,000 yuan to invest in the market. On Thursday, when the Shanghai exchange plunged 6.5 percent, she lost 7,000 yuan in the blink of an eye.

China’s stock market is notoriously volatile, but over-confident new investors seem to be ignoring the potentially high risks. A friend’s colleague just sold his apartment for 300,000 yuan less than the market price so he could come up with the cash to make a “sure thing” investment.

  • Some 1,301 companies have been halted from trading on the mainland exchanges and IPOs have been suspended. In addition, the government is taking many other steps to halt the slide. Most likely such measures will fail.

Following the performance of common stocks listed on the mainland market, China ADRs trading on the US markets also declined today as investors dumped them in droves. Hot stocks such as Alibaba(BABA) plunged to their lowest level since the IPO a few months ago. BABA is down over 23% so far this year.

The table below shows the year-to-date returns of exchange-listed Chinese ADRs:

Source; BNY Mellon

About half of the ADRs shown above trade for under $10 per share.

The complete list of China ADRs including the ones trading on the OTC markets can be found here.

Disclosure: No Positions