Dollar Smart: Prowling Tiger, Cowering Markets

By Pan Yong Chuan and Goh Eng Yeow

SINGAPORE — Talk about being caught between a hard place and a prowling tiger.

Just days before the curtains rise on the Year of the Water Tiger which commences on 1 February, Wall Street — the biggest stock market in the world — had been whiplashed by almost daily stomach-churning wild swings in prices.

Even the headline numbers, which show widely-watched indexes such as the Nasdaq Composite, tracking high-flying technology stocks registering double-digit loss this year, fail to do full justice to the conundrum experienced in the market.

Traders are getting mauled big-time. Scratch below the surface of the Nasdaq Composite and you will find that at least half of its 100 constituent stocks trading 20 per cent below their 52-week highs.

Not to mention the misery in alternative investments such as cryptocurrencies where Bitcoin and other cryptocurrencies have fallen off the cliff, losing as much as US$1 trillion in total market value since November.

Yet, talk to some old-time investors and they will say that the pain inflicted during the recent turmoil on Wall Street is nothing compared with the stock market mayhem which they had undergone in previous Tiger years.

Just to jot the memory: 2010 — the previous Tiger year — marked the start of the eurozone crisis with investors agonising over the exposure of European banks to heavily-indebted countries such as Greece and Portugal.

Neither was the Tiger year in 1998 any more of a consolation. That for us in Asia marked the darkest period since the Second World War, as we experienced the Asian financial crisis where millionaires turned into paupers overnight, as businesses across Asia were bankrupted trying to cope with the plummeting Thai baht, Korean won and Indonesian rupiah.

So, going by what had transpired in the previous two Tiger years, we can expect that this coming Tiger year will not be smooth sailing either. If anything, riding on the unruly Tiger can be rough and getting chewed up by the Tiger is a very real and nasty possibility.

Indeed, the problems confronting stock investors have already been well-documented.

Start with a factor that is not far from investors’ mind: the US central bank which has been flooding the financial system with cheap money and keeping interest rates at near zero to keep the economy humming, since a mysterious virus known as COVID-19 struck the world two years ago and caused multiple lockdowns across the globe.

Instead, a different scenario had panned out. Instead of plunging prices triggering a global economic depression as people were holed up in their homes because of the corona virus pandemics, there was a massive supply shock resulting in a shortage of crucial components such as microchips.

This has, in turn, caused inflation to surge to its highest levels in 40 years.

Now the tables have turned. As recently as October, the Fed was still signalling a rate hike in the second half of this year. But with inflation running at an uncomfortably high level, it is planning to drain money from the system and start to hike interest rates as soon as March, depriving of the stock market of the comfortable liquidity cushion it had grown used to.

Not that the Fed is the only concern. Much of last year’s rally on Wall Street was based on the assumption that as the world and the US recovered from the ravages of COVID-19, the economy would emerge stronger causing corporate revenue and profits to soar.

But as investors ponder the way forward, there appear to be a lot less to excite them.

Worse, a reckoning for expensive-looking, unproven businesses looks likely over the horizon as the prospect of higher interest rates dampen their appeal.

Even more established names such as Netflix and Zoom, which had done well in the past two years as people were forced to work from home, have taken a battering in stock price.

Against this dour backdrop, we urge caution in the short-term and to display judiciousness in deploying capital and hedging against possible losses.

No doubt, a stodgy stock market such as Singapore, which is light on technology stocks but heavy on financial and real estate plays, has been more resilient than sexy Wall Street plays.

But just as a rising tide lifts all boats, a receding tide may well expose boats with decrepit hulls – so if turmoil continues to prevail on Wall Street, the contagion is likely to spread to other markets as well.

However, we have not reached the point where one should go to cash.

If anything, staying in cash may be a bad proposition. This is given the alarming manner in which inflation has been rising as it erodes the purchasing power of our savings. And this is one serious problem which is not likely to go away for a while even though we had been used to very low inflation in the past 20 years.

One important lesson from the previous two Tiger years — 1998 and 2010 — is that bear markets do not last forever. Indeed, those who sold their stocks while they were down later found themselves missing on the upside as the market rebounded.

Instead, what we advocate is holding more cash than usual – not just to meet your near-term needs but to give you an opportunity to snap up any bargains that may pop up with the on-going market turmoil in the Tiger year.

As many of the measures we track suggest there are still underlying weaknesses in the stock market, our current game-plan is to play more defensively and to look to invest in what we believe to be critically important businesses backed by real assets, rather than buying aggressively on any dips in stock prices.

From a fundamental perspective, this will include sectors such as shipping, basic materials, precious metals, precious metals and oil & gas – all of which have benefited from the global supply-side shortages, irresponsible monetary policies and attractive valuations - but those potential have not been fully reflected in their share prices yet.

That said, Tiger years have been known to spring surprises and investors must stay prepared to expect the unexpected so as not to get mauled by the marauding Tiger.

In the meantime, stay safe and Gong Xi Fai Cai.

Pan Yong Chuan is a portfolio manager with Ternary Fund Management Company. Goh Eng Yeow is a retired journalist who is now a private investor.