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Amid all the wild moves in financial markets, stocks have especially borne the brunt. Even financial markets that are typically very stable, such as US government bonds, have seen large moves of the likes we have not seen since the global financial crisis.

Investors have rushed for safety and sold riskier assets like shares and found there are few buyers around, exacerbating the situation. Volatility begets volatility.

Eventually markets will find their balance. But for now investors are glued to their screens and are uncertain about what to do.

In such an environment it is best to return to investing basics. In its simplest form, investors in stock markets are buying businesses. They receive dividends from the profits that these companies generate. It is not just profits generated in the current year that matter but also profits in future years. In fact, the value of most companies lies ahead. But because something in the future is less valuable to us than something we can hold in the present, we discount these dividends back to today at prevailing discount rates, a metric that accounts for the time value of money and risks involved.

In the near term, the trajectory of stock markets depends greatly on the extent to which COVID-19 and its global spillover can be contained. But investors would be wise to remember that while we do not know how big near-term growth concerns will be, the long-term outlook is still intact. Discount rates are also coming down, another long-term positive for equity valuations.

This is the time to take the wide view and revisit long-term themes in markets, like demographic trends such as the growing group of Chinese empty-nesters whose children have left home, single-person households or growth in second tier-cities in ASEAN and India. We also know that technology will be different in the future and that 5G and data usage will continue to rise. These themes do not change, even with all the swings in stock prices we see on our screens today.

First published 17 March 2020.

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