Market correction no time to panic

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Tuesday’s steep market slide in Asia sent most of the world’s markets reeling. The TSX had its biggest drop since 2004, and the Dow Jones Industrial Average fell by almost 416 points. When a drastic fall like this happens, it’s natural that many investors will second-guess the safety of their investments, but industry professionals emphasize that market corrections like yesterday’s are going to happen now and again, and will most likely be temporary.

The drop on global markets was spurred by the Shanghai Stock Exchange, which slumped by 8.8% — its hardest fall in more than a decade. Other market indexes such as the Dow Jones Industrial Average and the TSX composite indexes followed suit, dropping 3.29% and 2.72% respectively.

Such sudden drops in stock exchanges can send clients into a panic about the safety of their investments, but if the reaction of this morning’s markets are any indication, yesterday’s events will have little negative impact on investments of clients who have their money invested in long-term plans.

In fact, Brian O’Neill, senior analyst at Morningstar Canada, highlights that even after yesterday’s market correction, only two of its funds’ indexes are down over the last month, the Morningstar U.S. Fund and its emerging market fund.

“Yesterday was certainly a painful day, but over the course of the year, or even the month, it was somewhat muted,” O’Neill says. O’Neill says that Canada was hit particularly hard and is not recovering at the rate of other major markets because it is heavily weighted in resources, and when a major market like China has a steep correction, it will have a direct impact on the growth potential of Canadian resources.

O’Neill highlights that even this has a silver lining: There has been a substantial shift by Canadian investors to invest in foreign equity because of the volatility of the Canadian market due to its dependence on a few sectors. So, other than for those who have invested heavily in some Chinese and East Asian equity, global funds should be able to ride out the correction smoothly, and the conventional wisdom of diversifying globally holds true.

“When you’re looking at a market like Europe and the U.S., they have very different characteristics than you would get in the Canadian equity markets, so it’s certain the validity of diversifying globally is more pronounced in times likes this,” he says.

O’Neill’s cautious optimism is similarly echoed by other fund industry professionals.

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AIC’s motto is “buy, hold and prosper,” so it’s probably not surprising that Robert Almeida, senior vice-president of AIC’s portfolio investment services views this market downturn as a hiccup to long-term prosperity.

“The markets are a voting machine, but the values of businesses are based on their future cash flows,” Almeida says. He stresses that, if anything, it’s a great time to go bargain hunting.

“The best times to invest, in history, are all on the bottoms, 1987, 1999, etc. If in 1987 you knew for sure 20 years later where the TSX would be, you wouldn’t be selling. You would have been a big-time buyer. You knew the TSX was going to be 13,000 points 20 years later. You would have been borrowing everything you have to invest,” Almeida says. “There are a lot of good companies that are down right now, so it’s a great time to go shopping for great business.”

Bob Gorman, TD Waterhouse’s chief portfolio strategist, also views the situation as an opportunity. “This market correction is long overdue, both worldwide and in China specifically,” he says. “China’s market has been on quite a tear. You see a lot of signs of excess and speculative activity, which the Chinese government even admitted they were seeing and wanted to address. The further a situation goes like this without some sort of refresh, the worse it is going to be down the road.”

Gorman says his company is watching things carefully and advisors should caution their clients’ expectations. “We’ve had a period of extraordinarily low stock-market volatility. Any sort of retreat is very seldom a one-day event. We will very likely see some sort of retreatment in the next little while. I do think this is a pull-back and correction and not the beginning of a bear market. This is not cause for major concern for the major markets.”

Because he thinks the Chinese market still needs to sort itself out, Gorman does advise that foreign holdings in Chinese equity should be kept small and are in most global equity funds anyway.

“Don’t get caught up in the noise” is the advice Investors Group’s senior vice-president of financial services Rob O’Keefe is telling advisors. “I don’t think anyone should be rattled in this type of an environment. This is another tremendous opportunity to show the value of a truly good financial advisor,” O’Keefe says.

“A balanced portfolio may not be immune, but it’s certainly going to be less affected by individual market movements,” he adds. “Put yourself in the position of a pension plan administrator. What do you think they’re doing right now? They’re not panicking; they’re looking at taking advantage of any opportunity, rebalancing if necessary, but otherwise they stay focused on the long-term.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(02/28/07)

Mark Noble