When Will The Market Turmoil End?

The Motley FoolIf you thought that Ben Bernanke was going to exit quietly from the global stage, then you could not have been more mistaken. The Federal Reserve chief’s parting gift to the world was to set in motion the winding down of America’s monetary easing activities.

He started it. So it is only right that he ends it too.

After pumping what has amounted to several trillion dollars into global economies, Bernanke has said that enough is enough. He believes that there is now sufficient money sloshing around the world to start driving economic growth in the US.

And he is probably right.

Signs of life

Consumer spending in the US is growing and a rise in exports would suggest that the world’s largest economy is starting to put the worst of the 2008 recession behind it. Employment in the US is gradually improving, though more needs to be done, and America’s housing market is showing signs of life.

America is growing again, albeit in fits and spurts. However, not everyone is delighted with the Federal Reserve’s decision to taper. India’s central bank governor, Raghuram Raja, has blamed the US and other western nations for the financial tremors that have shaken emerging markets.

From Russia to South Africa, and from Argentina to Turkey, emerging markets have been noticeably rattled by the withdrawal of easy money. This has caused the Russian rouble to drop to its lowest level for five years. In Turkey, the central bank has had to double interest rate in an attempt to prop up its fragile currency.

Global markets appear to be in panic mode and investors are left wondering how they should act.

Should I stay or should I go?

Some have bailed out. Some are hanging on in the hope that the market rout might be short-lived. However, the smart investor will be looking for buying opportunities.

The question we should be asking ourselves right now is whether we believe that the world economy will be better and stronger in five years’ time.

If you believe it could be, then the correct response to the market turmoil is to focus on companies that can capitalise on growth in the US. We might also want to look for businesses that could exploit the nascent recovery in Europe.

Additionally, there are many firms that could take advantage of China’s biggest policy shift for two decades – a move from international demand to more sustainable and controllable growth based on domestic consumption. And lest we forget, Japan is waking up from twenty years of deep sleep.

A 30-second guide

Legendary investor Peter Lynch once said that that if you spend more than 13 minutes analysing economic and market forecasts, then you have just wasted 10 minutes. So here is a potted guide to what is happening in the world. It should take no more than 30 seconds to summarise.

Together, the economies of the US, the Eurozone, China and Japan account for almost 60% of the world’s economic output. And if the global economy can grow at around 3%, it would imply that the size of the world economy could double from around $70 trillion today to around $140 trillion by 2038.

Over the next 24 years, as the global economy doubles in size, there will be many winners and there will undoubtedly be some losers too.

Our job as a private investor is to identify winning stocks from the vast pool of shares available to us. You can’t do that properly if you are constantly distracted by worries about political and economic events and the gyration of global stock market indices on an hour-by-hour and minute-by-minute basis.

Investing secret

Within the Straits Times Index (SGX: ^STI), there are no fewer than 27 companies that generate revenues and profits outside of Singapore. These include Global Logistic Properties (SGX: MC0), which derives most of its revenue from China and Japan, and Sembcorp Industries (SGX: U96), which does nearly as much business outside of Singapore as it does within.

Others that include SingTel  (SGX: Z74) and ComfortDelGro  (SGX: C52)  have been increasing their global exposure to diversify their geographic risk.

The upshot is that market turmoil should not be seen as a threat to your wealth. Instead, it should be viewed as a golden opportunity to start bolstering your long-term returns.

The secret to investing, which is really not a secret at all, is to buy when prices are low. That rarely happens when everything is going swimmingly. It inevitably occurs when the world is wallowing in worry, which is precisely what it is doing now.

This article first appeared in Take Stock Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.