Clem Chambers, founder of ADFVN.com and one of the City’s most well-known characters, answers your questions
Question for Clem:
“I’m bored of the major European stock markets. It’s just too damn hard to find value. What other world stock markets should I be taking a look at?”
The market pays people to risk their capital in the market. In this manner, risk is equivalent to reward. This is a firm law of investing and trading.
What most people overlook is that money is not the only way to get paid. Money is fungible into anything you want it to be, so that if you get a buzz out of trading or investing you will be paid in kind for that and get less cash. Fun and excitement cost investors and traders alike.
So a boring market is just the place you want to be – the market has to pay people to invest in boring stocks more than it has to pay people to invest in interesting markets.
To seek excitement is to search for entertainment and its associated losses. But if you are determined to shake up your portfolio here are the main candidates:
Funnily enough, Europe is currently just where the value is. The stock markets of Germany, France and Italy have all crashed. In a market crash the good and bad stocks get crushed just the same, so there is plenty of opportunity for the keen stock picker to swing into action and separate the wheat from the chaff and for the trader to try and time a rally.
It could be argued that Europe is bound to the euro and, even if European stocks rally, what is the point if the euro’s value is going to fall off a cliff? Doing so would counterbalance any equity market rally with a fall in the value of its equities in non-euro currencies. As such, it might be a good plan to look away from Europe’s potential.
The obvious response is to point to the emerging markets. Whilst this has been a mantra for nearly a decade, the emerging markets are taking a drubbing. Even so many valuations are still extremely high with famous names in India and Brazil still commanding the sort of P/Es that would dizzy investors in the developed markets, where 40 and 50 P/Es are only reserved for the most fashionable stocks.
The BRIC countries, Brazil, Russia, India and China are clearly in a bear market – hardly a prime place to be looking for value.
In practical market thinking Australia and Hong Kong may as well be China, making them unappealing as far as value goes. This means that the only markets left is the US and if you want to think of the UK as not truly Europe, then the London market also.
Both markets have taken a big hit in the resent crisis, not as hard as Germany, France, Italy and obviously Greece, their recovery has been strong.
Underlying the big picture is what is going to happen to the US dollar and the UK pound, two currencies that appear bound together.
If you think the euro is going to fall then it would seem the chances of a strong pound and dollar are good. But that is really a Forex bet rather than equity investment. Yet with Europe off the table there is only Japan to add into the mix.
With Japan constantly in deflation, with a stock market ground into the dirt by a massively overvalued yen and a long term chart with nothing but twenty years of pain in it, you have to have a clear belief and nerves of steel to buy into Japanese equities.
So you either sit out the BRICs bear market or go looking for value in the US and UK, where happily there is plenty on offer; from small, medium and big caps equities. It’s a good idea to stick to deep value in these markets as the mess in the bond and currency markets are the actual drivers of everything whether equity, commodities or otherwise.
This makes life tricky. Yet very cheap stocks can be resilient in such markets as weak shareholders are long gone, leaving behind the believers.
Value investing is in the long run a time tested way to build wealth. In good and bad markets following the basics of value investing will keep you out of trouble. For this reason alone it is hard to find value in booming market. As we are clearly aren’t in a boom, we can look forwards to an extended period where there will be plenty of opportunities for the patient and careful investor to build up a great long term value investment portfolio.
Clem Chambers is the founder and chief executive of ADVFN.com, which offers stock quotes, charts, news, FOREX, futures & options and stock screeners on more than 70 stock markets worldwide. He is also the author of 101 Ways to Pick Stock Market Winners.
If you’ve got a question for Clem, whether on trading, economics or business in general, email us at: [email protected]