Singapore (11 April 2020) –The recent blood bath in the global stock markets on back of the Covid-19 pandemic has yet to run its full course, making it necessary for investors to make fresh assessments of their long term investment prospects
The pandemic is a once-in-a-100-year crisis and with some 4 billion of the world’s population are in some kind of a lockdown, it makes it almost impossible to fully gauge the pandemic’s total impact on stock markets worldwide. Just as none of us alive today is able to describe what happened in the Wall Street Great Crash of 1929 and the ensuing Great Depression of 1929-33.
Source: Poems.com.sg
Covid-19 sent the Dow Jones Industrial Average (DJIA) on a tailspin – it collapsed 35% to 18,590 points on March 23 after opening the year at 28,868 points. It has since reclawed some losses to close trading on 9 April at 23,719 points. The Dow Jones Islamic Market World Index (DJIM) mirrored the fall shedding a whopping 28% to 3,111 points on March 23, before paring losses to 3,788 points.
The Great US Recession of 2008 arising from the US subprime mortgage crisis will likely pale in comparison to what’s coming up in the months ahead.
The US economy is expected to shrink by double digits in the coming quarters, while Singapore, heavily dependent on trade and services, could show a negative growth of up to 5%-6% this year, worse than the initial official forecast of up to -4%. It is estimated that some USD3-USD4 trillion has already been lost from the world’s total USD 80-90 trillion GDP. The World Trade Organisation has also warned that world trade could shrink by as much as one-third.
Impact On Singapore’s Key Growth Sectors
Analysts have yet to forecast Covid 19’s impact on Singapore’s key growth sectors such as banking and financial services, property, manufacturing, retail and tourism. When they release their latest earnings forecasts on listed companies – especially earnings of blue chips in the weeks ahead – we can expect another plunge in the market.
Many of the world’s key industries are now in limbo. Airlines have grounded their planes – Airbus is cutting one-third of its plane production – tourism and hotels are nearly dead. Schools, most offices, malls, shops, restaurants and eating places are as good as closed.
Roads are clear of traffic as trains, buses and taxis ply almost empty. Unemployment is rising steeply to levels not seen in decades and companies will struggle to keep afloat let alone show any kind of profitability. Social distancing, if prolonged, will certainly create havoc on the economy.
Many companies may go bankrupt and losses are expected to litter the market when quarterly and annual reporting seasons start soon. Dividends are bound to be slashed as corporate earnings prospects in a year or two are bleak and uncertain.
Long term investors who rely on dividend income may even choose to dump their blue chip shares during market rebounds as they think they could buy them again later at much lower prices. In Britain it is estimated that about USD 60 billion of dividend payments are in doubt.
Straits Times Index Could Sink Further To 1,500-1,800 Points
Source: Poems.com.sg
Looking at the market crashes in 1987-88, 1997-98, 2000-2003 and 2007-08, the average 50%-60% plunges on the Straits Times Index (STI) during those times are scary reminders of how low the market can sink to in the weeks and months ahead.
Unless Covid-19 suddenly disappears and life goes back to normal soon, the STI is unlikely to recover to its pre-Covid-19 days of around 3,100-3,200 points this year, or even in 2021.
The STI’s recent 32% fall from near 3,252 points at the start of the year to 2,233 points on March 23, is barely half of the magnitude of the earlier crashes. If we measure from the highs of 3,600 and 3,400 points in 2017 and 2019, following the market’s recovery from the Global Financial Crisis of 2007- March 2009, a 50%-60% crash could bring the key market barometer to as low of 1,500-1,800 points, before the market finally bottoms out.
Long term investors would be better off delaying their dollar cost averaging purchases as there will be ample opportunities to do so in the months ahead.
After all severe bear markets like during the Asian and Global Financial Crises lasted as long as 15-18 months. We are now barely a few months into this cycle. But once the current severe bear market runs its course by mid-2021, it should return to its long term uptrend.
When To Begin Dollar-Cost-Averaging
Investors in their 20s and 30s could channel part of their long term savings into stocks adopting a dollar cost averaging approach ie., increasing their purchases on steep market falls.
This approach has always worked as evidenced by the market uptrend in the past 40 years since I tracked the market in my jobs as central bank investment officer, financial journalist and stock market analyst.
Although dollar cost averaging was not practised widely in the 80s and 90s, it is now a must for investors due to the ever changing and evolving market conditions, especially in the digital age when market-affecting news travel so fast.
Small investors with SGD20,000 to SGD50,000 to put into stocks have no other choice but to stick to leaving the money invested and not touching it for 10-20 years. They can forget about short-term trading, even if they make quick profits initially, as at the end of the day short-term players always get their fingers burnt.
In fact, the days of making double or triple profits by long term investors may be over judging by market behaviour in the last 20-30 years, and now Covid-19.
Investors now and in the future will have to focus on better-yielding stocks paying steady annual dividends averaging 3%-5% to beat inflation and low deposit rates. Capital preservation, ie., not losing the money invested can be taken care of by active dollar cost averaging.
US, Singapore Stock Markets De-Coupled
For the first time in history our market no longer moves in tandem with the US stock market ie., Singapore no longer follows the US in hitting new highs at the same time Before the US banking crisis and the Great Recession of late 2007 to early 2009, Singapore stocks tracked Wall Street closely reaching new highs around the same time.
In early 80s, followed by the 1987 crash, the 1998- 2000 Asian crisis, the dot.com crash, the 2003 Iraq war, Sars topped off by the Great US Recession of 2008-2009, both the Dow Jones Index and STI hit record highs and lows at the same time.
The Arab spring beginning 2010 followed by the Eurozone crisis coincided with the broad consolidation of the Singapore market, while Wall Street recovered fast and broke its previous pre-crash 2007 high, above the14,000 points about five years later.
The election of Donald Trump as President of the United States saw the Dow surging from 18,000 points to record consecutive highs above 29,000 points, only to be wiped out by Covid-19 pandemic. The current strong rebound to 23,000 is temporary and we can expect the Dow to crash again to below 18,000 as the full extent of the pandemic is felt.
Confidence In Singapore
On the other hand, notwithstanding the pandemic, big investors should still remain confident that the Singapore market continues to be a safe haven in the long term.
The number of millionaires and billionaires in Singapore have been increasing before this crisis and a sizable portion of their money are invested in stocks for the long term. The Republic continues to attract foreign investments of above SGD15 billion last year despite the stagnant economy.
Every year, Singapore is invited to the G-20 summit although it does not belong to the richest 20 club. But our strong economy and solid reserves give assurances to long term institutional investors from these countries.
Political stability and absence of any significant social disruption, relatively low unemployment, low inflation and a country where everything works are considered by them when making investment decisions on Singapore. These unique qualities should return after the global pandemic is over.
Small investors should share the same confidence as fund managers, who are always on the lookout for big price falls especially in big capitalisation stocks led by government-linked companies, to add to their portfolio. Low interest rates are expected to continue for years to come, which is another positive factor for stock prices as returns from bank deposits continue to languish below 1%. -/-
