(PUB) Investing 2015

2

Making Sense of the Market Tumble Continued From Cover

Three-Month Market Drop in Value of $10,000

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p MSCI EAFE NR USD

p MSCI EM NR USD

p Barclays US Agg Bond TR USD

12,000

p MSCI China A NR USD p MSCI EU NR USD

p S&P 500

10,800

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9,600

8,400

7,200

06/2015

07/2015

08/2015

As this graph of the drop in value of an initial $10,000 investment shows, the summer sell-off was brutal for China and emerging markets. Developed markets suffered much more-muted losses, while U.S. bonds were flat. Data from 06/01/15–08/31/15.

A better gauge would be five-year returns. The MSCI Emerging Markets Index is down 1% annualized for the trailing five years while China A-shares are up 5% annualized. MSCI EAFE is up 6 . 4% annualized, and the S & P 500 is up 16% annualized. While performance isn’t the same as valuation, the stark differences in five-year numbers do suggest that emerging markets are the better rebound bet than the U.S. It also illustrates why the U.S. might sell off significantly before the next wave of bargain- hunters jumps in. At the end of August, our stock analysts estimated that the U.S. market was trading at about 90% of fair value. That’s cheaper than most of the past five years but nowhere near the figures in the 60% – 70% range it touched in 2008 and 2009 . What’s Fund Managers’ Take? Templeton Global Bond TPINX manager Michael Hasenstab says China will right itself but the real bargains are in other emerging markets: “While we do expect moderation in China’s growth, we continue to see it as healthy and an inevitable normalization for an economy of its size. By and large we think markets have severely overreacted. We are seeing bargains we haven’t seen since the late 1990 s.

Treasuries Flat Treasuries often rally when stocks fall sharply, but this time they rallied only to sell off a bit. The rally was short-lived. Some said it was because China sold some of its Treasuries as part of its effort to keep the renminbi near its new peg, but it’s hard to know for sure. For the year, the Barclays US Treasury 20 + Index is down about 1 . 7% while the Barclays US Aggregate Index is up about 0 . 5% . So, high-quality bonds have at least largely held their value amid the sell-off, but they haven’t provided as much relief as years past. U.S. Market Bottom Aug. 25 The market hit its low on Aug. 25 . At that point, nearly all the equity funds in the Morningstar 500 were in the red. However, the United States staged a nice rally at the end of the week so that it was only about 3% in the red for the year to date. So, we’ve had lots of wild swings, but the end result isn’t all that dramatic in the U.S. Where Are the Bargains? China’s A-share market fell 15% in August while emerging markets fell 13% , foreign markets fell 9% , the S & P 500 fell 7% , and Treasuries were flat. But I doubt that China A-shares are actually the best bargain out there.