A sharp correction in global stock markets like last week’s makes it easy to lose perspective. A 5 percent fall might feel like a lot – but in the context of, say, a full year, it’s not that much.
And that makes it all the more important to step back and take stock of where markets have been in recent months… starting with last year.
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In 2017, it was hard to find a market that did poorly
No stock market with a total market capitalisation greater than US$100 billion declined last year.
The worst-performing markets (which were still in the positive column) were the United Arab Emirates, Saudi Arabia and Russia — all major oil producers that suffered during a year when oil prices were weak.
As for the 10 best-performing markets, they posted 12-month gains of between 34.8 percent to 52.7 percent. Vietnam, with a soaring economy, recovering real estate market and strong investment inflows from China, was the market to be in last year.
But so far in 2018, the picture for best- and worst-performing markets is completely different.
Previously strong markets are now among the worst markets
The worst performing market in 2018 so far is Turkey. Its stock market has been caught up in a severe economic downturn, soaring inflation and a falling currency brought about by a macroeconomic crisis, political incompetence and U.S. sanctions.
China is the second-worst performing market this year. We’ve written previously about how the simmering trade war with the U.S. is hurting its economy and investment climate (here and here) – and, in turn, its stock market.
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The Philippines, which performed spectacularly well last year (up 25 percent) is down 23.4 percent in 2018 so far. That’s been a result of unchecked inflation and a soaring trade deficit caused by a massive infrastructure spending program.
As for the winners this year…
Three of the worst-performing markets last year (United Arab Emirates, Saudi Arabia and Russia) are now among the world’s best-performing markets. Stronger oil prices have a lot to do with this.
The U.S. market is also doing well so far this year. But as we’ve said before, the longest running bull market in history is likely entering its final stages, given expensive valuations.
All this to say… it pays to be diversified
Earlier this year, we shared (here) about steps you should take to mitigate the risks associated with elevated uncertainty and expensive market valuations.
It boils down to taking four simple steps. First, keep some cash on hand as a hedge for falling markets and a tool to take advantage of undervalued situations. Second, always stick to your stop-loss levels. Third, own some gold as insurance against financial calamity. And lastly, diversify. This involves spreading your wealth across different markets, economies and asset classes.
Remember, today’s strong markets may not stay strong for long. And by keeping an eye out for the underperformers – and getting in early – you could benefit as those markets play catch up. A diversified portfolio makes sure you’re protected from falling markets – while you can profit from rising ones.
Editor, Stansberry Churchouse Research