Investing In Turbulent Times
Global markets have been through several roller-coaster rides since the beginning of the year – no thanks to the nagging doubts of whether the US economy would slip into a recession.
Most recent reports seem to indicate that the American economy is looking at a veritable slowdown despite the Bush administration’s version of a New Year Hong Bao through a US$150 billion fiscal stimulus.
The next question on everyone’s mind now is just how long will it last? And what further actions will the Fed take?
But of course, the main bogeyman that has been responsible for the wild mood swings in markets from London to Bombay, and Singapore to New York remains that of the US subprime crisis – one that has led to billions of dollars in write-downs at some of the world’s most reputable financial institutions including UBS, Citi Group and Merrill Lynch just to name a few.
Will the bear rear its ugly head in the Year of the Rat? SIAS spoke to the following market players to find out what they have to say about the investment outlook ahead and what should investors be mindful of in their market strategies.
SIAS: It would appear that the equity markets be it in Asia, Europe or US can sometimes swing 10% – down 6%, rebound 5% – within a short period, even a matter of days. What’s an investor to do in such circumstances?
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MENON: Equity markets will remain choppy and they will continue to be affected by concerns about a US recession and fears that the sub-prime woes may escalate. Those looking to make fresh investments should not try to time markets and attempt to catch the bottom.
Instead, they should spread out their investments gradually over the next few months, as markets may not have bottomed and could weaken further if the sub-prime crisis escalates or if the slowdown in the US economy turns out to be worse-than-expected. Investors should also diversify their equity portfolios (avoid over-investing any specific area, no matter how attractive the fundamentals may seem) and they should consider investing in funds that adopt market neutral strategies. |
Vasu Menon
Vice President
Group Wealth Management
OCBC Bank |
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YOUNG: If you're a long-term investor, nothing in particular. Volatility is normal: It’s the past few years of low volatility that has been unusual. Should conditions deteriorate further, however, the opportunities for mispricing and therefore for picking up stocks cheaply could increase. |
Hugh Young
Managing Director
Aberdeen Assets Management |
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TEY: We advocate stop loss orders for all positions taken in the market. This is especially true of leveraged investments where there is potential to lose a large chunk of your capital unless you manage your market risk stringently. With appropriate stops in place, investors need not worry about catastrophic losses as the stop order will work as a risk management tool to get out of the trade before a violent swing can do damage to your capital. |
Tey Tze Ming
Sales Trader
Saxo Capital Markets |
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YOUNG: If you're a long-term investor, nothing in particular. Volatility is normal: It’s the past few years of low volatility that has been unusual. Should conditions deteriorate further, however, the opportunities for mispricing and therefore for picking up stocks cheaply could increase.
TEY: We advocate stop loss orders for all positions taken in the market. This is especially true of leveraged investments where there is potential to lose a large chunk of your capital unless you manage your market risk stringently. With appropriate stops in place, investors need not worry about catastrophic losses as the stop order will work as a risk management tool to get out of the trade before a violent swing can do damage to your capital.
SIAS: The US looks like heading for a recession. How bad and how long do you think it will take to see some semblance of recovery from the subprime crisis?
MENON: It’s hard to precise about the time frame. The G7 nations, for instance, have said that the total losses could eventually amount to US$400 billion, versus sub-prime related write-downs of more than US$130 billion so far. Hence there is a risk that the crisis may only see some resolution after a few more quarters.
YOUNG: We are still seeing revaluations on credit-related instruments and huge write-downs among banks and insurers. As lending tightens and credit spreads widen we could see some ugly knock-on effects. Household de-leveraging in the meantime could have a prolonged impact on consumer confidence, demand and company earnings. The same risks apply to the UK and perhaps Europe.
TEY: The Fed has been very aggressive in slashing rates to stay ahead of the market. Coupled with aggressive tax cuts and a recently launched stimulus package, a tremendous amount of liquidity has been injected into the US economy. We expect to see its effects kick in around mid-2008, jumpstarting the US economy back towards positive growth.
SIAS: How much of an impact will the US economy and the weakening dollar have on Asian markets and economies?
MENON: Despite theories of decoupling, a recession in the US will have an impact on Asian markets and economies. World financial markets are closely intertwined as international fund managers have globalised their investments and now have significant exposure to Asia and other emerging markets. So if they face the prospects of losses in the US or other developed markets, they will scale back on their holdings in Asia and emerging markets, where they may be enjoying significant gains given the sharp rally in these bourses in recent years.
As for Asian economies, they are in a much better shape today than 10 years ago given their sizeable foreign exchange reserves and stronger fiscal and financial positions. Domestic demand in Asia is also a much stronger growth driver today compared to the past, given rising affluence and greater infrastructure spending in the region. So while Asian economies may slow down if there is a US recession, they may not slip into a recession themselves. In Singapore for instance, the Government is projecting an economic growth of 4% to 6%for this year.
YOUNG: It will be large, to the extent that Asian exporters will be hurt. But Asia has internal sources of growth that may insulate it to some degree.
TEY: We already see the effect of a slowdown affecting Asian economies – weaker numbers have been reported last month (including the lowering of Singapore's forecasted economic growth). Markets are also pricing in a drop in US consumer purchasing power and this has led the indices lower on concerns that business in general is going to suffer.
SIAS: How about oil and commodities prices and their impact on costs and inflation, and hence market performances in Asia and elsewhere?
MENON: Inflation may rear its ugly head due to higher energy and commodity prices and investors should not ignore this risk. If inflation picks up when economic growth is slowing down – an economic phenomenon called stagflation – it will pose problems, especially for central banks, which may need to cut interest rates to stave off a recession. A combination of higher inflation and slower growth will be bad news for equity and bond markets, but it could augur well for precious metals like gold which is seen as a hedge against inflation and which tends to do relatively well when there are uncertainties looming in the horizon. Investment in soft commodities, whose prices are rising, is also something to consider as a hedge against inflation.
YOUNG: Inflation is rising across the region, and corporates are finding it harder to pass costs on. That will affect earnings and growth, particularly in commodity importing countries. But for Asian markets, where we have seen compound annual growth of 30% for the past five years, a pause is probably desirable anyway.
TEY: Oil and soft commodities have been fuelling inflation worldwide and will be a difficult hurdle for many countries in Asia facing high inflation coupled with lower growth prospects. In poorer countries, food inflation could become a problem and this is a risk that can lead to unrest or political instability. In the markets, we continue to see commodities going higher and investors should consider diversifying part of their overall portfolio to include commodities, if only as an inflation hedge.
SIAS: One would assume the banking and financial sectors would not be good sectors to invest. Which sectors or stock markets in Asia and elsewhere would see as safer bets for this volatile period?
YOUNG: I don't share that assumption. The bank model in Asia is one of traditional deposit taking and lending. In the developed world, banks have moved into an agency role, hence their involvement in credit-backed securities. There are traditionally safe areas like utilities, but everything comes down to price.
TEY: We do not see this as a good time to buy stocks. For our clients, our advice is to take defensive positions and staying either market neutral or on the short side. Investors can use new instruments like Contracts for Difference (CFDs) or even futures to hedge themselves during volatility or even profit from the current bear market.
SIAS: We are seeing falling export numbers out of Singapore. How serious is this and which sectors are likely to feel the impact?
YOUNG: It's not serious to the extent in that the government has money to spend and Singapore has made strides to diversify its economic base into services and higher value-added areas like biotech industries.
TEY: The Monetary Authority of Singapore (MAS) has a policy of allowing gradual appreciation of the Singapore dollar as a way of combating inflation. This rising strength of the Sing dollar has made it more difficult for exporters and that is why we are seeing poorer numbers. We expect this trend to continue and it should become even more challenging for exporters in the months ahead. We see no signs of change and as we are facing inflation on the high end of the scale, we do not expect any changes in the medium term.
Sectors who are based in Singapore, and have their costs in Singapore dollars, and are dependent on export markets (US bound exports, for example) will be adversely affected by a rising Singapore dollar. Sectors like technology manufacturing, semiconductor and PC component manufacturers will be most affected.
BONDS / CURRENCIES/ COMMODITIES MARKET
SIAS: How much of an impact will the lingering subprime crisis have on global bond markets?
MENON: In the short-term, volatility and uncertainty in equity markets due to the sub-prime saga may be mildly positive for bonds, as an increase in risk aversion could result in funds seeking safer havens in selected fixed income instruments like government bonds and high grade corporate credits. In the bond universe, we also see opportunities in local currency denominated Asian bonds, which could benefit from the region’s promising growth prospects and stronger currencies.
SIAS: Do you expect more interest rates cuts on the US Fed front?
MENON: If you look at the 2-year US Treasury yield, it’s currently hovering around 2%. So the markets are expecting the Fed to cut rates further. I won’t be surprised if the Fed cuts rates by another 50 to 100 basis points this year.
Falling interest rates can actually be positive for bond investments given the inverse relationship between interest rates and bond prices. However, there is a risk that if inflation picks up significantly in due course, this could hurt bond markets as higher inflation will curb the ability of central banks to cut interest rates and in fact, they may even have to reverse course and raise rates in future.
TEY: I think the cuts will ebb at 2.50% given the most aggressive scenario. Do note, however, that these cuts under a scenario of deeper liquidity freeze will not bear the expected results, with the US yield curve already showing signs of flattening.
SIAS: How about the currency impact on bonds in the foreseeable future?
MENON: As mentioned earlier, in the bond universe, we see opportunities in local currency denominated Asian bonds, which could benefit from prospects for stronger currencies in the region.
SIAS: With the greenback on the back pedal, what currencies look like safer bets?
MENON: Currencies are hardly safe bets as foreign exchange markets are very volatile and investors should be mindful of the risks before they take the plunge. However over the medium-term, Asian currencies look like an interesting proposition given the region’s promising growth prospects and because they are generally deemed to be undervalued. Prospects for the Chinese currency to appreciate further should also augur well for other Asian currencies in the medium-term.
TEY: We are bullish on Southeast Asian currencies especially the Singapore dollar, Hong Kong dollar and the Japanese yen.
SIAS: How about gold and other commodities as a hedge or investment?
MENON: We remain positive on commodities, especially soft commodities and precious metals like gold; which stand to benefit from supply shortfalls and healthy demand.
TEY: Gold looks solid as do agricultural commodities, especially corn and wheat.
Important Information
The information provided herein is intended for general circulation and/or discussion purposes only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. |
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