Will there be a market correction?
The corona virus has caused a decline in business worldwide, hence the world economy failing is not unprecedented. Singapore’s earnings expectation has been announced to have fallen by 42% in Q2 of 2020.
One would assume that the market would react to this news. However, the market moves by looking at expectations. Essentially, the market predicts how the economy could move and moves ahead of reality. As such, the news of a 42% decline in GDP will not cause any visible market correction.
How much should I invest in the market?
Currently, over or under investing are both equally bad.
The current market situation is very fragile and is being held together by the Quantitative Easing (QE) conducted by the FED. This temporary patch could be strong enough to prevent the collapse of the stock markets if continued.
However, if the FED were to increase the intensity of the QE, we might run the risk of there being rapid and prolonged inflation. This will not occur in the short term, but it could possibly occur in a couple of years.
Currently, people will be more likely to save their money as the economic outlook is still harsh. However, in the long term, after the pandemic has subsided and the economy starts to look up again, consumers will start to purchase and spend more. As such, the increase in demand for goods will lead to producers pushing up prices, causing a possible inflation.
The negative effects of over investing:
If you are over invested and the stock market drops another 30-40%, there will be several repercussions.
Firstly, your portfolio will be volatile, meaning that the prices for your stocks will vary even more. Secondly, you will also have no money to buy the stocks you want when the prices are much lower than it is today.
The negative effects of under investing:
If you instead try to save money and under invest during this economy, there are also 2 possible backlashes that could occur.
Firstly, since the FED is currently conducting QE at such a massive scale, there is a very real prospect of your cash savings depreciating quickly due to inflation. When inflation occurs, the average prices for goods will increase. Subsequently, the same amount of money you have might not be able to buy the same amount of goods it could previously, meaning that your cash has depreciated in value.
Secondly, since we still have low interest rates, many investors will be borrowing money to purchase a small class of quality stocks. This pressure will cause the prices of stocks in this quality class to rapidly increase, especially after Covid-19. Furthermore, the increase in earnings of these companies will also naturally cause an increase in the share price. As such, if you were to keep waiting for the economy to stabilise and for prices to come down, you might eventually never buy the stocks.
My own current portfolio makeup
Currently, I am half invested in stocks while Gold and Cash make up the remaining 50%. I do not suggest that you follow me as you might have a different tolerance towards volatility and a different financial situation. As such, it is better if you have a personalised portfolio that suits your preferences.
I recommend that you engage a professional. Or, if you want to craft your own portfolio, you should have a clear understanding of your own tolerance towards volatility, your financial situation and volatility of assets that you are interested in.
Is investing in Singapore a good idea?
80% or more of Singaporean companies are cyclical growth companies. As such, they need economic growth to spur their earnings. However, economic growth does not seem to be in the horizon anytime soon. Furthermore, the last decade has also seen the slowest post-recession growth after WWII.
I think that the coming decade’s growth will have the same trajectory or possibly be even worse. Cyclical growth companies will not give us exponential returns in this future slow growing economy.
I, personally, do not invest in Singaporean companies. However, if you do choose to do so, you must ensure that you are extremely selective as there are many value traps out there.
 QE: The introduction of new money into the money supply, typically through printing money and buying bonds, by the central bank. In this article, we will focus on the QE conducted by the FED.
 Cyclical growth companies: They often sell discretionary goods. Hence, they follow the economy closely. Their stock prices increase when the economy does well but decrease when the economy faces a recession.
 Value traps: Stocks that are valued very cheaply and seem like an attractive buy. However, these traps often continue to drop further in value after investors buy into the company.
If you have any questions about your personal investment portfolio or want to learn how to better reap the opportunity you are now having, feel free to reach me via firstname.lastname@example.org or 8221 1200.
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