Date: February 22, 2020
First published in Business Times on 22 February 2020
Markets trade on fundamentals over the long run so holding on to your positions makes the most sense
The Covid-19 virus outbreak has complicated an investment scenario that was already difficult to read. On the one hand, there was some cause for optimism after the US and China signed a Phase One trade deal in mid-January, even though many observers very quickly came to the conclusion that the agreement is more of a truce with temporary suspensions of bilateral tariffs than a lasting, meaningful pact.
Then there were nascent signs that Singapore’s electronics exports might have turned a significant corner and looked poised to rebound, albeit modestly. This was borne out by semiconductor data from South Korea and Taiwan that showed an improvement in the final quarter of 2019. Meanwhile, assurances from the US Federal Reserve in its January Federal Open Markets Committee meeting that US interest rates would be held steady for the foreseeable future added to the marginally positive investment outlook.
As such, hopes were high at the start of the year that the Singapore market could add to the 5 per cent gain the Straits Times Index recorded in 2019 (or 9.4 per cent with dividends re-invested). Indeed, early optimism enabled the index to rise sharply during the first three weeks of January.
Hopes of a positive 2020 are now under threat, as the virus outbreak could cast a major pall over the global economy if it grows into a global pandemic.
Global markets have sold off, and in Singapore estimates for gross domestic product (GDP) growth this year have been lowered to about one per cent or even lower by several investment houses.
Singapore companies are already impacted by the Covid-19 outbreak. Many companies today have operations in China, and there are many China-based companies listed in Singapore.
The Singapore Exchange will allow these listed companies to delay their full-year results for up to two months on account of the coronavirus outbreak.
The extension means firms that fulfil certain criteria have until June 30 to hold their annual general meetings and approve financial results, as many auditors face difficulties in finalising the audits due to measures placed related to the virus outbreak.
How is the Covid-19 scenario different from Sars?
China, the second largest economy in the world, today accounts for 16 per cent of global GDP. There have been many reports lately of what a China slowdown means for the world economy, so there is no need to delve into the subject in any great detail. Suffice to say that if China suffers, the rest of the world will feel the impact.
In 2003, when China was the sixth-largest economy in the world, the Sars virus claimed 774 lives worldwide and shaved 0.5 to 1 percentage point off China’s growth. This time, the impact may be more severe.
Services play a bigger role in the Chinese economy compared to 17 years ago, and account for more than 50 per cent of China’s GDP today. The shutdown in China is likely to see consumer spending fall, affecting the services industry.
To mitigate this, China has already implemented fiscal and monetary policy measures. These include tax concessions for companies that are directly affected by the novel coronavirus, such as those operating in the tourism and catering industries. Companies that manufacture medical supplies and medicines are exempted from taxes and will even receive subsidies.
The Chinese government injected 1.7 trillion yuan (S$338.5 billion) into its financial markets via reverse repos on Feb 3 and 4. The central bank, the People’s Bank of China, has also set up a 300 billion yuan special re-lending fund. Money from the fund will be channelled via approved banks to key enterprises, which will receive loans at a rate of 100 basis points (bps) below the loan prime rate.
The Ministry of Finance will subsidise half the interest expense for these key enterprises.
It is important to take a step back and put the present situation in its proper perspective. The initial, knee-jerk reaction might be to sell everything. For some investors, this might seem the logical course of action. Before you do so, however, it is important to bear in mind the following.
First, no one knows how long the crisis will last – it could be many months before the spread of the virus is curbed. But we can assume that it will eventually be brought under control. After Sars in 2003 and H1N1 in 2009, health authorities all over the world and especially in Asia are better prepared than before to deal with such epidemics. So the only real issue is how long it will take.
Second, fear and uncertainty have created ample opportunity for short-term traders, especially short-sellers. The volatility exhibited by Asian markets in the first week of February, when prices rose sharply after China announced stimulus measures but fell just a few days later, should not be seen as “bargain hunting” or “profit taking”. Rather, it should be seen as traders indulging in concerted short-covering and then resuming short selling.
Faced with such volatility, what should investors do? In our view, the most important thing is not to panic. After the government raised the Dorscon level to orange, we have seen plenty of panic buying of food, face masks and medical supplies. There is worry that if the level is raised to red, then total chaos would reign.
Trying to trade in such conditions and trying to time the market when the situation is fast evolving would not only require tremendous skill but also luck. Unless you possess both, the advice has to be not to try your hand at attempting to buy the dips and sell into strength, but to remember that if you have bought quality, then holding on to your positions makes the most sense.
Put differently, even though there will be short-term distortions – a situation made worse by the regular circulation of fake news – that create what might appear to be tempting trading opportunities, it is best to stick to quality because over time, fundamentals do matter.
It might seem a cliché to some, but buying and holding good quality stocks – blue chips that pay steady dividends and have strong balance sheets – will ensure positive returns in the long run.
SIAS’s experience has been that the biggest losses are sustained when investors allow emotion to dictate their financial decisions, particularly fear and greed. This is true of all the crises that the local market has endured over the past 20 years – the collapse of Clob International 20 years ago; the dot-com bust of 2000; Sars in 2003; the S-chip debacle of 2004-2008; and the US sub-prime crisis of 2008 onwards. Hopefully, this time will be different.
- The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)