Be nimble amid wild swings in stock markets

Financial experts offer retail investors tips on timing and structuring their portfolios in a volatile environment

The way markets have melted in the first week of 2016, retail investors should be bracing themselves for a bumpy ride ahead.

The optimism that usually greets a new year was sorely missed. Shares worldwide started crashing on Monday and kept sliding, with a modest recovery on Friday.

By the time the battered Singapore bourse staggered to a close on Friday night, the Straits Times Index (STI) had lost 131 points or 4.56 per cent, ending at 2,751.23.

While the bashing meted out would have rattled many investors, the new year is still an opportune time to reassess your portfolio, learn from mistakes and whip your financial affairs into order.

Financial experts say volatility has become the "new norm".

Mr Vasu Menon, senior investment strategist, wealth management Singapore at OCBC Bank, says the key concerns for markets this year will be the pace of interest rate hikes in the US and the extent to which China will slow down, especially in the first six months.

Higher rates than expected in the United States or a sharper downturn in China than expected could unleash a great deal of volatility.

 

  • OCBC's Vasu Menon suggests beginners think about investing through unit trusts that are invested in equities.



    Ms Chung Shaw Bee says UOB prefers sectors such as financials, technology and healthcare.


    Mr Albert Tse of Schroders advises investors in their 40s to 50s to start scaling down risks.
     



    DBS' Marc Lansonneur says investing through regular savings plans is a disciplined approach.
     



    DBS' Yeo Kee Yan notes that the prospect of higher interest rates will continue to weigh on the market.
     



    Ms Carmen Lee of OCBC recommends selecting stocks to ride out the near-tomedium- term horizon.

On the brighter side, Mr Menon expects markets to improve in the second half of this year and offer better returns than last year, once the US Federal Reserve policy becomes clearer and China stabilises. That in turn will benefit commodity prices and emerging economies.

Ms Chung Shaw Bee, UOB's head of wealth management, Singapore and the region, advises retail investors to be selective, saying: "We remain overweight in equities over fixed income, with European equities as our main overweight. We prefer sectors such as financials, technology and healthcare."

Mr Albert Tse, head of intermediary distribution (South-east Asia), Schroders Singapore, believes stocks should generally benefit from attractive valuations relative to bonds.

"Although interest rates have started rising, dividend stocks will likely continue to be favoured, given the low inflation environment. Companies with strong financial fundamentals and low costs of production should also benefit as profit margins come under pressure, given the slower rate of economic growth in many countries."

Mr Tse adds that although the sluggish global economy will likely still weigh on Asian stock markets, he continues to find opportunities in firms that can tap into the region's growing trend of urbanisation and the rise of the middle class.

DBS' chief investment office believes a global recession is unlikely because the US economy continues to grow, and although China slows, its growth of around 7 per cent is "still pretty decent". Meanwhile, banks are sitting on more reserves than they need.

So while the variables point to a turbulent year, DBS advises retail investors to stay nimble.

"For emerging market and Asia ex-Japan equities, they are already cheap relative to cyclical highs but risk getting cheaper. There will be opportunities to buy the dips later in the year as prices and currencies weaken further," it says.

The uncertain market environment also means investors can benefit by buying gradually into markets instead of timing investments.

Regardless of your age, instead of chasing highs and lows, consider spreading your investments out on a monthly basis, perhaps by investing through regular saving plans.

Mr Marc Lansonneur, DBS head of investment products (Singapore), says: "Such plans help retail investors invest in a disciplined manner and offer a wide range of products from a minimum monthly investment of $100."

Mr Menon encourages beginners to consider investing through unit trusts that are invested in equities.

"No doubt, these unit trusts may cost you more in terms of fees than buying individual stocks, but they can also be less risky as unit trusts typically invest in a diversified pool of stocks, selected by professional fund managers," he says.

Meanwhile, rising interest rates continue to provide higher returns for fixed and structured deposits and Singapore Savings Bonds.

Tips for retail investors

20-40 age group

Time is generally on your side as your investment horizon should easily be more than 10 years, so you can afford to ride the market's ups and downs.

That means you can put more of your money into riskier assets such as equities, as opposed to safer options such as bonds.

"Spread your fresh investments into markets over the course of the year to enjoy the benefits of time diversification. Also, don't throw all your eggs into one basket, and spread your investments across asset classes like equities and bonds," says OCBC's Mr Menon.

By doing so, it is possible to grow your wealth despite changes to the investment landscape if you invest prudently and exercise patience.

Mr Lansonneur wants to encourage younger retail investors to leverage on the power of compounding.

"If you have savings, start by learning about investment products and strategies and begin to invest - even in small amounts - on a regular basis," he says.

"Your investment time horizon is longer and, thanks to value compounding, time really is money so you can take advantage of this."

Mr Patrick Lim, associate director at financial advisory PromiseLand Independent, offers the example of a 25-year-old who starts investing a modest $100 per month.

Assuming the investment yields 6 per cent annual returns, he will realise a lump sum of $185,700 at age 65. If he delays investing until age 35, then the same 6 per cent returns will yield $94,800 at 65, down by nearly half.

If you have enough risk appetite, you could have more exposure to risky assets like equities, but always ensure you can afford to bear the losses in worst-case scenarios.

Investment options to consider include local and overseas shares, unit trusts (mixed assets, European equities, government bonds), exchange-traded funds, and fixed and structured deposits.

41-59 age group

As you enter your 40s, it is prudent to start reducing your investment risk. You are likely to be shifting the mix towards a balanced portfolio and determining investments that will offer you yield and steady, passive income.

Mr Tse says: "You should be mindful of mixing asset classes and scaling down risk that you may have taken in the previous two decades. In view of this, investors may want to consider a robust multi-asset portfolio that takes advantage of market opportunities while actively managing risk at the same time."

Depending on the life stage of the retail investor, stock dividends should continue to be re-invested.

Mr Apelles Poh, senior financial services director at Professional Investment Advisory Services, says: "Investors should start to take less risk, and tweak their portfolios to more dividend-paying funds rather than growth funds.

"With higher earning power and less liabilities, investing in a property that can yield rental income may be a good option."

60 and above age group

Wealth preservation is key at this stage. Bonds and other less risky assets that are more stable and offer yield will provide relative peace of mind as you get older.

Mr Poh suggests going for less risky fixed-income products. Still, investors in this age band could live a further 30 years into retirement, so having 30 to 40 per cent of your portfolio in equities would be a good hedge against inflation.

Mr Lim says you should ensure all debts have been cleared or almost cleared and no new ones taken on.

"It is also timely to decide whether you would like to continue working. The longer you put off your retirement, the shorter would be the time horizon and the resources required in one's golden years."

Next, review your estate planning, which includes re-nominating the beneficiaries of your Central Provident Fund money, especially if one has married or remarried, making a will as well as a Lasting Power of Attorney. This kicks in if you are mentally incapacitated.

As the premiums of Integrated Shield hospitalistion plans become higher for older individuals, you may want to consider a downgrade to more affordable B1 plans that will be available soon this year, adds Mr Lim.

Outlook for STI

The STI fell 14.3 per cent to 2,882.73 last year, led by price falls of key stocks in the oil and gas, real estate, Reit and banking sectors.

Mr Yeo Kee Yan, vice-president of DBS equity research, says the prospect of higher interest rates, the risk of more earnings disappointments in the last quarter of 2015 and the uncertain outlook continue to hit equities.

Furthermore, history shows that the initial one to three months are negative for equities once US interest rates start rising.

However, a decline in the STI to 2,650 to 2,700 in January and February, which is already occurring, is a good opportunity to buy.

OCBC's head of investment research, Ms Carmen Lee, says the weakening economic outlook means firms could revise their earnings forecasts downwards this year. As such, she recommends selecting stocks carefully to ride out the near-to-medium-term horizon.

"Opportunities exist to accumulate quality stocks as recent cuts in earnings have already taken into account slower corporate earnings growth ahead... The region is not in danger of entering a recessionary period as in previous crises," she says.

A version of this article appeared in the print edition of The Sunday Times on January 10, 2016, with the headline 'Be nimble amid wild swings in stock markets'. Print Edition | Subscribe