Thu, 13 Feb 2014
Although U.S. markets are high and emerging markets have headwinds, these blue chips are great for investors with long time horizons, says StockInvestor editor Matt Coffina.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. 2014 has been off to a rocky start, particularly compared to the great returns we saw in 2013. I am here today with Matt Coffina--he is editor of Morningstar StockInvestor--to see what investors should do.
Matt, thanks for joining me today.
Matt Coffina: Thanks for having me, Jeremy.
Glaser: What do you think is behind some of this volatility we've seen so far this year? People have been talking about emerging markets, they've been talking about growth. What do you think is really behind these moves?
Coffina: I would say, first of all, we have to keep in mind that 2013 was a great year for the stock market. The S&P was up more than 30%. Very few pullbacks of note. So to a certain extent, you have to assume that the market was due for some kind of a modest correction or pullback, and investors are almost just on the lookout for any cause for concern to make that happen. That said, the more immediate concerns at the moment seem to be the U.S. consumer, some bad weather in January, a very competitive holiday season on the retail side, and other things like that have people a little bit worried about the U.S. consumer.
And also, emerging markets have been certainly front and center. And that concern really seems to focus on the Fed's tightening of its monitory policy as well as concerns about China's slowing growth. A lot of these emerging markets, their economies are linked to China in some way. So that has ripple effect as China slows and potentially in the future is demanding fewer commodities from other countries like Brazil, for example.
Glaser: These sound like legitimate concerns, especially considering that stocks were basically priced for perfection going into the year. Would you expect more volatility, expect a broader sell-off through the year?
Coffina: I try to avoid making that kind of prediction. I think volatility is the norm in the stock market. So if we look back historically, 5% pullback tend to occur about three times a year on average. Ten percent pullbacks tend to occur about a once a year on average, and 20% pullbacks tend to occur about every three and a half years on average. So volatility is the norm and it's always a possibility if you're investing in stocks that stock prices are going to go down in the short term. That said, the very long-term trajectory of stocks is upward. Stocks are still one of the best vehicles for wealth creation over the long run, but you have to have that longer-term horizon. You don't want to put money in stocks that you're going to need, say, anytime in the next five years.
Glaser: If these sell-offs are a pretty common occurrence, then, does that mean that you should always stay fully invested, should you try to find ways to buy the dip and maybe sell when things are little bit higher? Is that a kind of strategy that you think could be successful?
Coffina: We stay more or less fully invested all the time. I think it's very hard to try to game the ups and downs of the market. Really no one has any idea, myself included. Anyone else that tells you differently, I think you should be concerned about what they're telling you. Nobody has any idea what the stock market is going to do tomorrow, next week, next year.
I think over five to 10 years, if you own the right kind of company--and the right kind of company in my mind is companies with wide moats or expanding economic moats--those companies are going to compound their intrinsic values over time. They're going to grow earnings. They're going to raise their dividends. And they're going to be worth a lot more 10 years from now than they are today. So then it's just the function of being patient and making sure that you can stay invested for the long run, that you're not a forced seller into a downturn and that you can make sure that you don't sell until you get full value for your shares.
Glaser: Has the sell-off presented any new opportunities yet?
Coffina: There are some stocks, particularly those exposed to emerging markets, I would say. We tend to get our emerging-markets exposure through higher-quality, consumer defensive kinds of names or health-care companies that participate in markets globally. So a couple of names that come to mind would be Coca-Cola and Philip Morris International. I thought that both of these stocks are reasonably attractive going into the year. Both are down 8% to 10% this year, which makes them that much more attractive in my view. I think declining emerging-market currencies is certainly a headwind for these companies and it's going to have a direct impact on their revenue and earnings from these countries. But over the longer run, a Coca-Cola or Philip Morris is going to do just fine. And really they benefit from the emerging-market exposure.
If you have a long enough time horizon, these foreign exchange headwinds are going to even out over time. To the extent they are caused by higher inflation in emerging markets, these companies have pricing power and are able to keep up with inflation. Having that exposure to emerging markets also gives them relatively faster growth than if they were just in developed markets. So I think the emerging-market exposure is a good thing in the long run even though it's a little painful in the short run to investors.
Glaser: It sounds like volatility is really the norm, then: Investors should keep their long-term focus, look for companies with great competitive advantages, and keep that short-term money someplace a little bit safer.
Coffina: That's exactly how I would put it. Money you're going to need in the next five years, I would keep it in money market funds, certificates of deposit, bank accounts, things like that, but if you have a longer-term horizon, it's OK to turn off the CNBC, you don't need to check in on your portfolio every day, and you want to make sure you keep that long-term horizon focused on five-plus years into the future.
Glaser: Matt, thanks for sharing your thoughts today.
Coffina: Thanks for having me, Jeremy.
Glaser: For Morningstar, I'm Jeremy Glaser.
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