If The Ghost of August Is Real, What Should You Do? [IOTW: 17 Aug 18]

• Over the past 30 years equity returns for the month of August in Asia ex Japan tend to be in the red
• Following negative returns during the ghost month, equity markets often bounce back in the month of September
• As fortune favours the bold, investors who invest into Asia ex Japan right now stand to gain an upside of 10% and 20% by the end of 2018 and 2019 respectively

August is an important period of the year for the Chinese as they prepare for the annual ghost festival that falls during the period from middle of August to September. The festival is an occasion of celebrating and appeasing the hungry ghosts that roam around as long as the gates of hell remain open.

Believers who stick to the tradition believe that making important decisions in the presence of the dead is inauspicious, often preferring to defer doing so until the spirit of the dead has departed.

Do such cultural beliefs have an impact on equity markets?

Studying the monthly returns of the MSCI AC Asia ex Japan Index in August dating from 1988 to 2017, empirical data tells us that perhaps there is something seasonal about August. Two-thirds of the time investors are likely to suffer a negative return during August, with median and average losses ranging from 4%-6% respectively.

Chart 1: August Tends To See More Red Than Green

Even if we exclude periods of turbulent markets resulting from the onset of financial crises such as the Asian Financial Crisis (1997-98), Dot com bubble (2000), and the Great Financial Crisis (2008-09), the results show that markets still tends to be in the red 60% of the time during the month.

What about the month September? Certainly the ghost of August is more believable if markets magically turn around after the gates of hell have closed.

Chart 2: Markets Often Bounce Back After August

Contrastingly, September tends to see more instances of positive returns than negative, recording positive returns 63% of the time, with median and average gains ranging from 3%-5%.

In instances when markets close on a negative note month-on-month, empirical data suggests that markets have a 68% probability of seeing positive returns in following month, and only a 32% probability of falling further by end-September.

Returns in the following month	If markets recorded losses in August	If markets recorded gains in August
Positive	68.4%	31.6%
Negative	54.5%	45.5%

While the ghost of August appears to ring true more often than not based on the empirical results, we believe there are likely to be other factors aside from mere cultural superstition that can help better explain the phenomenon.

Without a crystal ball in our hand, it would be difficult to tell how the performance numbers for this year will turn out. Regardless, investors need not fear the ghost of August as they may use it in their favour to invest in markets at much cheaper valuations.

Fortune Favours The Bold

Currently the MSCI AC Asian ex Japan Index is currently trading at a discount of 12.8x compared to our estimated fair valuation of 14.0x, representing an upside of ~10% and ~20% based on estimated earnings by the end of 2018 and 2019 respectively.

Chart 3: Asia Ex Japan Is Currently Trading At A Discount

With the regional market having taken a beating so far as a result of China’s slowing growth and the ongoing trade tensions on top of worries of contagion from Turkey, investors have been cautious of entering the Asian equity markets at this juncture.

However if you cast away the short term negative news cycle, and look beyond towards Asia’s longer-term growth story, investors can expect to be richly rewarded for taking action when valuations are cheap and sentiment is poor.

Chase The Ghost Of August Away With These Funds

For investors who wish to gain exposure to Asian equity markets with a more domestically oriented posture, they may consider the PineBridge Asia ex Japan Small Cap Equity A USD, a fund on our Recommended Funds List that we like for its track record and risk management. The fund aims to invest primarily in small-cap companies that generate a majority of their revenue domestically, which can help to absorb any shocks from short-term volatility resulting from trade-war tensions.

As the Chinese market tends to constitute a majority of the index, many funds tend to be heavily exposed to both the onshore and offshore markets. Those preferring lesser exposure to China may consider the First State Asian Growth A Acc USD, a conservative manager that we continue to like despite it falling off the recommended funds list for 2018. Overall the fund’s total exposure to Chinese markets stand only at 22.5% as of end-July 2018, a conservative number when comparing with other similar funds on our platform (~35%).

If you are one with a longer investment horizon and can stomach higher volatility, you should definitely consider growth-oriented funds like Schroder Asian Growth Dis SGD, another incumbent on our recommended funds list. Across five-years the fund has been able to achieve the strong risk-adjusted returns consistently over its other peers. As the investment team prefers to invest in growth oriented companies underpinned by secular and long-term fundamentals, investors should expect higher volatility when including the fund in their core equity portfolios.

The Research Team is part of iFAST Financial Pte Ltd.