COMMENTARY

Recession looming? Don't lose sleep over it

In gloomy times, it is good to own shares in companies that make things which people can’t do without or can easily afford.
In gloomy times, it is good to own shares in companies that make things which people can’t do without or can easily afford. PHOTO: EUROPEAN PRESSPHOTO AGENCY

Look for hotdog, french fries and Aspirin shares in the stock market

The word on the street is that Singapore could be heading for a recession. However, not all economists agree. They rarely do. There are some who believe that the pressing question is not whether we are about to go into recession but rather how deep or how drawn-out the recession could be. Then there are others who reckon that the strength of consumer spending could go some way to help Singapore avert a full-blown economic downturn.

But as investors, should we be worried by a possible contraction of the Singapore economy? The answer is probably not. Firstly, Singapore's economy has not contracted for two successive quarters yet, which is the definition of a recession. We won't know until the preliminary numbers are available around the middle of this month. Even then, we can't be absolutely certain of a downturn until the final numbers are announced at the end of next month. And secondly, a recession is not something that we should ever lose sleep over.

Mr Peter Lynch, probably one of the best investors of our time, once said: "The thing to remember is that we've wriggled out of every recession since the one that turned into the Great Depression." He was talking specifically about the US. But his insights into the impact of recessions on stock markets could apply to Singapore too.

Singapore experienced its first post-independence recession in 1985. Prior to the decline, Singapore's economy had been growing at 8.5 per cent per year. But despite the impressive pre-recession growth rate, Singapore's economy still suffered a contraction. The causes of the downturn at the time were several- fold. Some were external, while others were domestic in nature. But Singapore bounced back, swiftly.

Singapore slipped into recession again in 1998, following the Asian financial crisis in 1997. This time, the downturn was caused by a drop in oil exports and a contraction in the financial sector. What's more, a slump in tourism, a decline in retail activity and falls in the food and beverage sectors didn't help. But again the economy recovered. Singapore slid into another recession in 2008, when a slowdown in consumer demand in both the US and Europe hit our manufacturing sector. But guess what? The economy recovered again, thanks to some serious money-printing by a number of central banks.

We could be set for some tough times again. This time it could be a fall in exports, a slowdown in China and a disappointing performance from our construction sector that could cause the economy to shrink. But it is important to remember that the economy operates in cycles. It always has, and it always will. If we do experience a recession, then it would be the fourth in 30 years, which is pretty much par for the course. Most economies experience a downturn about once in every seven years.

There are many theories as to why these cycles occur. Often the theories are moulded to fit the situation in an attempt to shoe- horn an explanation as to why these slowdowns happen. But as investors we should never get too hung up with theories; that is something for academics to work out among themselves. Instead, we should accept the fact that these things will happen at various points in time. They will end at other points in time too, which is the more important thing to bear in mind.

The Singapore stock market could get battered. That is almost a given. But it is in beaten-down markets that we are likely to find bargains. In an overpriced market, there is never anything worth buying. So as investors, we should always prefer the former. There is something else to consider too. Over the last three decades, our Straits Times Index has risen over threefold, which equates to a compound annual return of 4 per cent, before dividends are included. When re-invested dividends are included, the return is a not-too-shabby 7 per cent per annum, even after we consider the 20 per cent drop in the benchmark index over the last four months.

It is vital to remember that investing is a long-term commitment, which means that there will be times when our investments could do well. There will be other times when our investments could underperform. In a balanced portfolio of shares though, there could be some stocks that do well even if the economy is faring badly. Some people call them defensive stocks. Others call them income shares. I like to call them my "hotdog, french fries and Aspirin" shares. These are shares in companies that make things which people can't do without or can easily afford. There are plenty of those types of shares in the Singapore market. I think they are good shares to own in both the good and the not-so-good times.


• This is a regular monthly column on stocks and investing by Mr David Kuo, the chief executive officer of The Motley Fool Singapore.

A version of this article appeared in the print edition of The Straits Times on October 03, 2015, with the headline 'Commentary Recession looming? Don't lose sleep over it'. Print Edition | Subscribe