Feb 13, 2018

Market Correction! 3 Sectors You Can Buy Into


The recent market correction sent the news media into a frenzy, declaring that the stock market has "collapsed" or "crashed". The truth is that the stock market simply has gone way above its valuation and a good 10% correction will do some good to trip the fats down. Prior to this market cycle, it is normal to have a 10% correction on an annual basis, and it is a combination of easy money and low inflation that lead to years such as 2017 which we did not see a single correction despite a tightening monetary environment. However, is it time to throw your entire wealth into this window of opportunity and ride the market right to the stop? 

Once again, I will like to caution my readers that we are at the tail end of the economic cycle and the big crash might come in a year or two. So while it is a good thing to take advantage of this opportunity, investors should be selective in selecting sectors which are not overly expensive and be prepared to take profit when the opportunity is ripe. Here are the 3 sectors that are interesting to watch in the coming year.



Commodities

The return of inflation provides a good tailwind for the commodity market as inflation is often an indication of demand outstripping supply, driving prices of raw materials up. Given that the commodities market experienced a huge crash from 2014-2016, the value of commodity market is compelling as compared to the equity market which hasn't experienced any significant correction since 2011. Although the value of commodity stocks has risen over the past one and a half year, there is still room to run before it reaches anywhere to its peak in 2014 with demand for commodities on a rise.



Financials

Banks have been suffering in the past decade after the global financial crisis, thanks to a combination of tightening regulations, record fines and low interest rates. The rise of Donald Trump, who is championing deregulation for the financial sector, along with an increasing interest rates, are all positive factors for this battered sector.


China Consumer Stocks

Ever since the crash of the Chinese stock market in 2016, the chinese stock market has been slowly recovering. The transformation of moving from an export base economy to a consumer base economy has been gaining steam and the rising income of the Chinese population has seen them spending more. This market correction has brought the China stock market down to an attractive level and this gives investors an opportunity to enter. However, concerns about the risk of debt restructuring of the financial sector and state owned enterprise still remains and should there be tremors in those sectors, the chinese consumer sector will probably be the least impacted.


Buy Expensive - Sell More Expensive?

The recent market correction has brought the market down to a more reasonable value for us to enter. However, I am still concern about the risk of this already very old bull market and we should not over extend ourselves should the market decides to correct further as a result of one reason or another. As many of you have already read, this market correction has many analysts scratching their head and scrambling to explain why. Some blame it on the US Treasury yield, while others blame it on complex volatility products. The rationale is simple, when the market gets too expensive, investors will start to sell and the effect will just snowball. 

Are we near to the end of the market cycle yet? As of now, we are still a year or two away from that possibility but the risk will get higher as interest rates around the globe starts to accelerate. The risk of a recession is often at its highest near the end of the interest rate cycle, whereby central banks will often overshoot the monetary tightening. 

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