Investments: What happened? What's next and why?

What the frick happened?

In the span on 1 month, the:

• MSCI World Index dropped by 30%

• MSCI AC Asia Ex Japan dropped by 23%

This sell-off is largely caused by inflated valuations over the last few years (I wrote about it here), which was finally “triggered” over the fears of the fundamental implications that Covid-19 may have on global economies.

For clients: What now? What should you do?

For clients whom I’ve said no to investing, my recommendation still stands. Focus on your short-term plans before concerning yourself with long-term investments.

For clients who have done their financial planning and are investing with me, our long-term strategy remains intact. This article is written for you guys specifically in follow up of what was mentioned in our chat.

Moving forward, I will be conducting 3 phases of buy call to average down our position and take advantage of the current situation. The details of when and how much will be PMed to you directly. As to the why and what’s next, you can refer to the following analysis below.

For technical analysis, you can refer to another article here. We'll only zoom in to fundamentals in this article.

Long-term strategy remains unchanged

Moving forward, the long-term strategy of our investment operations remains unchanged.

Granted, short-term developments such as this will without a doubt be a painful experience to go through, but looking from the perspective of global developments, I personally believe that Asia region will be a net gainer from this episode which will translate in better performances in the long-run (read more about Asian Century here.).

As Asia becomes more interdependent, the value created within Asia will stay within Asia rather than being exported to the western economies per how things were in the past. With developments such as trade wars, protectionism policies and now this pandemic issue, I believe that the growth of Asia will be focused on inter-region trade and development and hence less reliant on the western influence.

That being said, we shall not neglect nor discount the strength of western economies which is why our portfolio allocation shall remain unchanged (focus on Asia but has global exposure).

I urge all of you to stay strong during this period and commit to our investment strategy. Given that your short-term commitments should have been catered from as per our previous financial plan, the only thing that can hold you back now is yourself. Remember the stock market is a device for transferring money from the impatient to the patient. Provided you do things the right way.

If you need a review of your financial plans in lieu of changes to your current lifestyle or responsibility, do remember to drop me a text and we can go over the numbers again to ensure the relevance and alignment of our investment strategy.

What’s next? What can you expect?

Covid-19 and its impacts

Global outspread of Covid-19 will lead to a global supply and demand disruption. Currently, the global supply chain is recovering – with China’s economy functioning at 80-85% of normal levels, measured by the China Economic Recovery Index. However, global demand is and will be facing growing pressure caused by weak consumer confidence.

As a result of this supply-demand dynamics, the weakening of economies will be largely driven by weak demand and consumption as opposed to supplying chain disruptions. Based on a situational analysis performed by Bloomberg Intelligence, the estimated 2020 GDP growth is as follows:

Looking at the global developments, my personal sense for the virus development is that it is inching towards the widespread level but has yet to become a global outbreak – not yet (hopefully not).

$30 Oil and its impacts

For net importing countries facing slower growth, the decrease in oil prices frees up part of the budget to spur of fiscal spending. This will help cushion the potential economic impact caused by the virus.

For net exporting countries facing slower growth, the government faces a domestic choice between slower growth and a wider budget deficit. Countries would probably opt for the latter which may result in currency depreciation in the long run.

Consumers will benefit in the short run via lower household expenditure on fuel. However, in the long run, domestic petroleum producer’s poor performance may knock on to employment, financing and industrial activity around the sector and may result in spillover effect into other industries.

Furthermore, the virus itself may impede consumption that would otherwise benefit from the dip in oil prices. Hence, it is unlikely that struggling economies will experience recovery from increase an in domestic demand driven by oil prices.

Possible recession and its impacts

The probability of a U.S. recession has crossed 50%. That's a flashing orange warning sign, reflecting the potential for the compounding impact of the coronavirus, oil price war and slumping markets. In the months ahead, as the effects of the virus start to show up in the economic data, the model probability may rise higher still.

If the US does indeed slip into recession, global demand may be badly affected thereby resulting in spillover effect to the other countries. Countries who are reliant on the US will, without a doubt, be badly affected.

Moving forward, policymakers will without a doubt deliver fiscal stimulus (a.k.a government spending) of magnitude large enough to impact headline GDP as well as aggressive monetary-policy actions, including extraordinary measures to maintain liquidity and support critical lending channels. Though, one may question the sustainability and effectiveness of either measure.

For fiscal measures, short-term expansionary policies may prevail but the consequences to the national budget may be undesirable or even unsustainable.

For monetary measures, one can only question the effectiveness of such measures given that the interest rates were already at low levels before the financial markets tanked as well as the plausible diminishing effects of quantitative easing, given that it is actively used to boost market confidence during the 2008 Global Financial Crisis.

Looking at the current dynamics across the different regions, I speculate that fiscal stimulus is critical and will be the main focal point of policymakers attention on top of the usual asset purchase. But with oil prices now at low levels, the sustainability of a mid-to-long-term fiscal stimulus may not be sustainable - for net oil exporters at least. Only time will tell.

For non-clients and readers

In times like this, I urge you to seek advice from your own advisor before making a rash decision towards your own investments.

Should you need any help or second opinion on your financial and investment planning, feel free to contact me directly at 9234 7537 or drop me an inquiry here.

You can also join my telegram channel to receive first hand updates: https://t.me/joinchat/AAAAAFVEzUiPA4IgQEm4vA

Daniel is a Licensed Financial Consultant with MAS, who specializes in retirement and investments planning. Find out more here.

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Source (Bloomberg intelligence):

• GLOBAL INSIGHT: Virus Cost - Modelling a $2.7 Trillion Pandemic

• CHINA INSIGHT: Economy 80-85% Back to Normal, Progress Slows (2)

• U.S. REACT: Fed Engages Aggressive Crisis Management Plan (5)

• Global Eco 2020 Outlook, Revised

Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore