Fears of a U.S. stock market crash were escalating in January, with the S&P500 losing more than 5% for the month, and the Nasdaq falling around 9%.
With such big losses in the largest stock market in the world, those owning risker frontier / emerging stock markets such as Vietnam are going to feel even more pain, right?
So far anyway.
At the risk of this changing by the time people read this blog post, let’s examine what happened in January.
I will show a chart below that shows some of the key asset classes throughout the world and their returns during January 2022.
Before glancing at the chart, I wanted to draw attention to the Vietnam stock market which is not covered below.
The VN-Index fell just 1.3%. As I touched on earlier, the S&P500 lost a bit over 5% and the Nasdaq fell 9%.
GLOBAL STOCK MARKET RETURNS IN 2022 THUS FAR TO JANUARY 31
It wasn’t a case of just one frontier market like Vietnam that stood out as outperforming the US markets comfortably. We can see from above that the performance of the MSCI emerging and frontier stock market indices fell less than the US stock market in January.
GLOBAL STOCK MARKET VALUATIONS 2022 – THEY MATTER.
In my opinion, a big part of what I described just above in regards to emerging stock markets not falling as sharply as the US and in particularly the tech sector, is simply that starting point valuations matter eventually.
In January investors really started to take note of this.
EMERGING VS DEVELOPED MARKETS OUTLOOK 2022
I touched on this potential in a blog post late last year, as noted below where I highlighted expected future returns in various asset classes.
In particular, I pointed out the below chart of the GMO forecasts from Jeremy Grantham.
5 RISK FACTORS FOR A U.S. STOCK MARKET CRASH IN 2022
Here I will list some points that are concerning investors that we might be experiencing a US bear market. At the same time, I will elaborate on why some may offer a creditable argument that many emerging stock markets may not fall by as much if this were to occur. This may apply to the Vietnam stock market also.
- Inflation / Interest Rates
- Technology crash
- Energy prices
- Past Performance
Valuations – Sometimes a picture says it all really, so I shall just leave this here..
Doesn’t look too dissimilar to the gap that formed in early 2000 as the tech boom was about to end.
Inflation / Interest Rates – The response of the Federal Reserve in regard to inflation risks in theory should be greater than in many emerging markets due to the current setting of substantially negative real interest rates. Whilst it is difficult to generalise about interest rate settings in a basket of emerging market countries, I think one could argue that it is the US that is running a larger negative real rate setting. Any sort of reversion to traditional interest rate setting in the US would come as a major shock to markets.
Technology crash – Arguably a lot of the valuation risk I highlighted earlier can be attributable to lofty valuations in the technology sector. Over the last decade this sector has grown substantially as a percentage of the overall US stock market. If we are to get a continuation of the January trend of a bear market in technology stocks, then the US will be harder hit. This sector is not as significant in emerging market indices.
Energy prices – One bright spot for equity investors in January was if they had exposure to the energy sector. However these days this sector has collapsed to a tiny percentage of the S&P500, meaning a boost in this sector doesn’t move the needle too much in terms of the US stock market returns. There is actually a greater weighting to the energy and materials sector within the emerging stock market index, which assisted their outperformance in January.
Rising energy prices however can cause a flow on effect to inflation and interest rates, and exacerbate the fall in high flying US growth stocks.
Past Performance – The US market has been a clear winner when looking back at stock market returns of the last decade. As a rule of thumb when we are looking out at such long timeframes such as a decade or more, I prefer to bet on mean reversion with valuations on my side. From that perspective one can easily make a case of the US stock market underperforming in the future.
In order to tie some of the above factors in terms of risks to the Vietnam stock market specifically as opposed to broadly emerging markets, you can refer to a recent article of mine discussing the risks of a Vietnam stock market crash.
RISKS OF A VIETNAM STOCK MARKET CRASH
Overall I would rate the Vietnam stock market a good chance of outperforming the U.S. again this year, even thought it did so comfortably last year as well. Relative valuations are a good starting point to make such a forecast. The potential crash risks are discussed below:
what is the best global stock market to invest in for 2022?
Let me know your thoughts. Is it that crazy to suggest so called “riskier” emerging markets might actually fall by less if we experience a U.S. stock market crash? What is your pick for the best global stock market to invest in for 2022? Is it a developed market, or a frontier / emerging market, how will Vietnam perform?
Is Vietnam a good investment?
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