“Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning,” Albert Einstein once said. Einstein is among the most famous physicists in the world, but as with many of his discoveries and teachings, these wise words are applicable in other areas. This includes, surprisingly, managing a portfolio, particularly during a financial crisis.
Twenty years ago recently, Thailand spent billions of dollars to defend the Thai baht against attacks from currency speculators. This was perhaps the canary in the coal mine that signaled the onset of the Asian financial crisis.
Seven weeks later, at the beginning of that July, Thailand devalued the baht and requested technical assistance from the International Monetary Fund (IMF). In the following weeks and months, other Asian countries devalued their currencies and sought assistance. Panic selling saw stock markets tumble, and the Asian growth story appeared to have come to a crashing end.
But the key to a crisis is a cool head. The UK stock market fell 22% in two days after Black Monday in 1987. Yet, as with all crises, there was a tomorrow.
Company management and policymakers should know, only too well, that the worst thing they could do is to make knee-jerk decisions. Despite the crisis, some companies managed to weather the storm. For example, one prudently-managed bank emerged from the Asian crisis in good shape. Unlike many of its western peers, it survived the Global Financial Crisis in 2007 just fine. Today, it is a regional financial services giant. Over the past 20 years, its share price total return is in excess of 350%. That doesn’t mean all companies were met with the same fate, but it does mean, that it’s possible to see a better tomorrow.
All investing is better done for the long term, and doing so in emerging markets perhaps even more so. They have had their share of ups and downs of their own makings – like the Asian crisis - but have also suffered from the decisions of others too.
Asian and emerging stock markets experienced panic selling in the aftermath of U.S. President Donald Trump’s victory last November. Headlines at the time included “Emerging Markets Sink After Trump Victory” and “Tidal wave of selling follows Trump’s US Election Victory.” Just six months, on the story has changed to “Strong fundamentals lift FTSE Emerging Markets Index” and “Foreign capital is flocking back to emerging markets in Asia.”
This turnaround is partly driven by a more considered view of the risks posed by a Trump presidency, as well as increasing confidence in the economic and earnings recovery that emerging markets are experiencing. Risks of course remain. Geo-political tensions on the Korean peninsula and growth slowing in China are two examples. But it was striking that the panic about emerging markets in the West was not matched on-the-ground in the markets themselves.
When it comes to investing, it is crucial to draw on lessons from the past, keep calm in the present, look to the future and continually ask questions. Perhaps Einstein’s advice can be refined to: “Learn from yesterday, survive today and invest for tomorrow. The important thing is to not stop questioning.”
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries.
Image credit: A.J. Dawson / Alamy Stock Photo
This article originally appeared in Investment Week.