Market turbulence is never pleasant

Market turbulence is never pleasant.  Despite the fact that almost every market commentator has cautioned that at some stage a correction would come (some have been cautioning for longer than others), when they finally come, no amount of pre-warning can ease the pain.  There is also always the additional fear that this time "things may spiral out of control, thereby ending the world as we know it".
 
Of course nobody can predict the exact timing of a correction. The best investors can do is to make sure they are properly diversified according to their risk profile, so that in the event of any downturn, their losses are limited.  Making fundamental changes to your portfolio during extreme turbulence is tantamount to trying to change sails during a gale. It is very risky.  Get your risk profile right, select a portfolio appropriate to your risk profile and sail that portfolio through whatever conditions markets experience.
 
We are now three weeks into the "sub prime" led correction.  Most world markets fell somewhere between 10% 15% from their highs.  Articles abound on how much investors lost and how much value was erased from global stock markets interestingly, there is not that much on how much investors have made,  or how stock markets have grown in value since the lows of 2003.
 
It is always difficult to determine the extent of a correction until the dust has settled. However, we can make the following observations:

* The world economy remains healthy.
* Global equity markets are reasonably priced.
* We have been concerned about the mispricing of risk for some time.
* Albeit abrupt, the current adjustment in credit markets will be healthy over the long term.
 
In summary, world markets were worried that the US Federal Reserve would not respond appropriately to recent volatility.  The Fed has to be wary of not intervening to protect those who need to suffer, while at the same time avoiding a global credit crunch.  If the Fed simply came to the rescue when things went wrong every time people took on risk, risk would never be priced correctly.
 
By lowering the discount rate, the Fed has effectively struck a balance between letting those who need to suffer, experience the necessary pain, while at the same time ensuring the contagion does not spread to perfectly sensible organisations.
 
While it is probably safe to say that we have seen the bottom of this particular correction, the effects will continue to reverberate for some time.  Call it "cleaning out the US excesses, chapter two".  Chapter one was after the stock market madness of the nineties, where corporate greed, fraud, accounting irregularities and tax evasion were almost accepted business practice.  The excesses of the US housing bubble will be with us for some time still as they work their way through the system.  It is going to remain choppy, but hopefully a little less so.
 
Investec Asset Management has no exposure to sub-prime mortgages or leveraged, structured credit products.  And while we do have exposure to asset-backed securities we have favoured prime mortgages and other asset classes that are underpinned by strong fundamentals.
 
By Jeremy Gardiner, director, Investec Asset Management