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Market volatility: why VEPL is the new HODL

As a sharp downturn in world markets shakes confidence, investors should look to the past to identify a path through volatility, says Pendal Group’s Asian Share Fund manager SAMIR MEHTA 

“HODL!” has been the call to arms for a new generation of investors in recent years — an accidental misspelling of “hold” that became a meme and a rallying cry for how crypto investors should behave when faced with market turbulence.

But as a sharp downturn in world markets so far in 2022 shakes confidence, perhaps investors need to adopt a different meme, says Samir Mehta, who manages Pendal’s Asian Share Fund.

“The meme we should be guided by is VEPL! — Valuations, Earnings Progression and Liquidity,” he says.

Market volatility so far in 2022 is showing a familiar pattern to previous downturns and investors can look to the past for a path through, says Mehta.

He recalls a market aphorism that as the tide turns on easy monetary policy. It’s the small fish that die first as those asset prices underpinned by excess liquidity and leverage start to unwind — but ultimately at some point “a whale gets beached”.

This time around, examples of the ‘small fish’ are the collapse in the Turkish lira amid runaway inflation and the rapid retreat of cryptocurrencies.

“We now have to figure out — where is the whale?” says Mehta.

Past ‘whales’ have been the collapse of the US housing market in the GFC, the tech wreck of 2000 and the Asian financial crisis of 1997.

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Pendal Asian Share Fund

‘Every generation thinks they invented sex’

Mehta recalls a decade ago launching the Asian Share Fund with a presentation titled ‘Every generation thinks they invented sex’.

Little has changed with the latest generation of investors, he says.

“This ‘everything rally’ in 2020 and 2021 was premised on shiny new memes and radical technological blockchain breakthroughs. A new paradigm. Yet what has not changed is human greed and fear.

“Excesses, once created, usually deflate over time.”

Mehta says that, as a result, the key skill for investors in 2022 is going to be patience.

“As of now, it would be foolhardy on my part to opine with confidence that this sell off in January in the US is start of a prolonged bear market.

“[But] the confidence that I do have is to suggest that prudence dictates diversification away from momentum-oriented assets.”

So where should investors turn in 2022?

Mehta says he is becoming more optimistic on the outlook for China and intends to increase portfolio weighting over the course of the year.

While market sentiment towards China is negative, it will be one of the few countries loosening monetary policy in 2022.

“In my view, monetary policy will loosen faster than most expect in China,” he says.

Shares in southeast Asia also remain cheap and out of favour, says Mehta.

“That is why I kept adding to our holdings in that region. I still remain convinced that patience in those names will help us in 2022.”

Mehta says the southeast Asian region — with significant stock markets in Singapore, Thailand, the Philippines, Malaysia and Indonesia — has historically been vulnerable to external shocks, “but today that is all relative”.

Elsewhere, valuations for Indian stocks in 2022 will likely face the headwind of higher oil prices but strong competitive dynamics in many industries by dominant firms is an attraction.

“Ultimately, the test as always is whether the stock I own manages to deliver on earnings.”

And how about that whale?

Mehta suggests investors watch three asset classes for signs of trouble: the Chinese property market, the euro, and the private equity and venture capital sector.

“I am not a macro-economist and I have been wrong before, but I’m trying to look back through history and identify where today’s biggest vulnerabilities may lie,” he says.

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

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About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager.

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at January 27, 2021.

PFSL is the responsible entity and issuer of units in the Pendal Asian Share Fund (Fund) ARSN: 087 593 468. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund and Trust are available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.

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