MSWG Weekly Newsletter 06 March 2020 (English)

06.03.2020

Trade with caution in times of uncertainty

With the advent of globalisation, capital markets are hypersensitive to on-going events around the globe.

Amid today’s borderless world, there is great likelihood that every segment of the economy – from the industry player to the most seasoned investor – will crumble under global scale uncertainties such as financial crisis, political turmoil (including war), geopolitical trade conflicts, to name a few adversities.

Of late, even health-related disasters can pose a major setback to stock markets as evident by a spike in the number of coronavirus cases worldwide.

Reacting to concerns of the COVID-19 epidemic escalating to a pandemic level – having already reached the shores of Middle East, Europe and the US – stock markets around the world have been adversely impacted as evident by the Dow Jones Industrial Average which shed 14% on the last trading day of February from its record high of 29,551.42 set on 12 February.

This put the benchmark index on a correction mode which is generally defined as a decline of 10% from a recent high.

Uncertainty is the inability to forecast future events. At the micro level, most companies would predict sales and production trends for the investing public to follow assuming normal market conditions, but increasing level of uncertainty can make these numbers significantly inaccurate.

Domestically, the COVID-19 outbreak is touted to impact the tourism industry, including spending on hotels, retail outlets, transportation, restaurants and the manufacturing sector on the back of demand and production disruptions in China.

Uncertainty at the macro level tends to affect the economy or financial market as a whole. Often enough, this is beyond the control of individual companies nor the investor community.

A good example is the double whammy situation in which local investors have to contend with fragility on the political front as well as fears of the COVID-19 rearing its ugly head on a massive scale.

Whether it is a political turmoil or the threat of war or global recession, it is common for institutional investors to reduce their exposure in stocks deemed risky by moving their funds to other markets or to other asset classes like precious metals, government bonds and money-market instruments.

The sell-off which stems from the re-positioning of large portfolios can cause the stock market to depreciate.

 

Window of opportunity

Although there is bloodbath in the stock market, those who understand why it behaves in such manner will know how to position themselves accordingly. After all, any ensuing sell down does present ample buying opportunity to lion-heart investors who foresee value in the battered stocks.

Below are half a dozen useful tips/checklist for minority shareholders or retail investors to emerge unscathed from investing during uncertain times:

•          Eradicate gambling tendency: Abstain from indulging in risky or speculative stocks.  Apportion the available fund wisely by buying only what one can afford to lose.

•          Have adequate holding power: Often, investors tend to succumb to knee-jerk reactions during times of uncertainty which resulted in their making sub-optimal investment decisions. These can frequently lead to huge losses as well.

•          Stay focused on the long-term: It is important to remember that stock markets are both cyclical in nature and that they can be highly irrational over shorter time periods. Henceforth, uncertainty is a commonplace with downturns bound to occur frequently. Nevertheless, most market setbacks have typically been followed by recoveries, thus enabling the patient and long-term investor an opportunity to reap profits.

•          Maintain diversified portfolios: To mitigate the impact of volatility, build a diversified portfolio with an intelligent spread across various asset classes. A well-diversified portfolio will ensure that sharp movements in any one asset class will have a disproportionate impact on the overall portfolio.

•          Stay disciplined: Create a well-defined financial plan which is capable of absorbing the risk and meeting one’s return expectations over the long-term. More importantly, stay disciplined and follow through the investment strategy without succumbing to uncertainty-induced fear and biases.

•          Pursuing a defensive strategy: Select stocks that are deemed to be recession proof (i.e. those in the healthcare/pharmaceutical sector), high dividend yielding, those that are trading at reasonable valuations (i.e. having low price-to-earnings ratios, diversified operations or conservative balance sheets) or good companies with large share repurchase programmes.

Stock guru and investor extraordinaire Warren Buffett once said, “Be fearful when others are greedy and be greedy when others are fearful”.

 

Devanesan Evanson

Chief Executive Officer

Devanesan Evanson, Chief Executive Officer, ([email protected])

Linnert Hoo, Head, Research & Development, ([email protected])

Norhisam Sidek, Manager, Corporate Monitoring, ([email protected])

Lee Chee Meng, Manager, Corporate Monitoring, ([email protected])

Elaine Choo Yi Ling, Manager, Corporate Monitoring, ([email protected])

Lim Cian Yai, Manager, Corporate Monitoring, ([email protected])

Nor Khalidah Mohd Khalil, Executive, Corporate Monitoring, ([email protected])

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