Many asset markets experienced losses over the course of January. However painful this start to 2016 might have been, it does potentially offer investors (at least) two positives.
The first positive depends on whether the market falls reflect a deterioration in the asset’s underlying economic fundamentals. If these fundamentals are (broadly) unchanged then the market fall presents an opportunity to purchase the same asset at a lower price. Boxing Day sales have extended into February in these markets. However, if the underlying fundamentals have worsened then the fall in the asset price might not represent a more attractive entry point than was available in 2015. Many oil-related stocks come to mind in this latter case.
The second positive is relevant to investors who have allocated capital to ‘risk managed’ products. Have these products proved to be as robust as claimed through the real life stress test that was January? As uncomfortable as recent conditions might have been, these falls are still relatively small when compared with more painful downturns such as 2001-3 and 2007-9. This real life stress test represents (at least) a second bite at this particular cherry, following on from events related to Greece in mid-2015. If the product has not held up to the extent claimed during the sales process, perhaps it’s time to make a change before the risk management shortcomings have material consequences?
Benjamin Graham held that “in the short run, the market is a voting machine but in the long run, it is a weighing machine”. Sentiments can swing wildly in these short-term popularity contests but attractive openings might also emerge. The polls currently do not make pretty reading but why not peer through the gloom to identify if opportunities are being created?