Expect wild swings from the Fire Monkey

Investors need to adopt animal's traits to ride volatility in the new year, say financial experts

As the Year of the Sheep draws to a dismal end, investors who have been fleeced will be only too glad to welcome the Red or Fire Monkey Year tomorrow.

And no wonder. The stock market in January recorded the largest one-month drop since August last year, falling 6.7 per cent. As at end-January, more than a third of the 30 constituent stocks of the Straits Times Index (STI) have lost at least 10 per cent of their market cap in the heavy selldown since the start of this year. So it's no surprise that investors are looking forward to the Chinese New Year with hope and anticipation.

The Sunday Times Invest highlights what's in store for retail investors in the Year of the Monkey, an animal that is usually seen as the embodiment of trickery.

Fire Monkey Year

Fengshui experts say the Fire Monkey Year is symbolised by the element of fire sitting on top of metal, which has the capacity to bring conflict. Some say the fire is relatively benign and there is enough water to withstand the heat, while others believe that the elements denote a high level of danger with relentless challenges.


The Fire Monkey Year is symbolised by the element of fire sitting on top of metal, which has the capacity to bring conflict. Some say the fire is relatively benign and there is enough water to withstand the heat, while others believe that the elements denote a high level of danger with relentless challenges. PHOTO: BLOOMBERG

For the uninitiated, the elements of wood, fire, water, earth and metal, coupled with the yin-yang concept, form the basis of Chinese astrology.

Mr Gabriel Yap, veteran investor and executive chairman of investment firm GCP Global, says people born in the Year of the Monkey tend to be fast learners, great opportunists and smart. To outwit the monkey, investors have to be doubly smart, quick-witted and decisive in making investment and trading decisions.

He also warns that the Monkey Year will not be easy for investments. After all, the monkey is a mischievous, smart and wily animal so retail investors need to "outsmart" it to do well.

"Do expect world events impacting stock markets and investments to change sharply and quickly, like the agile monkey," Mr Yap adds.

Like the proverbial monkey, markets look set to swing from one post to another on the back of a confluence of factors, including uncertainty about China and the US Federal Reserve and falling oil prices, says OCBC senior investment strategist Vasu Menon.


With the ongoing market volatility, gold continues to be the choice ''safe haven'' investment. PHOTO: BLOOMBERG

Mr Bernard Lim, Columbia Threadneedle Investments' executive director and senior fund manager, believes that focus on a company's fundamental outlook anchors long-term investment success. And a few characteristic traits of the monkey such as wit and versatility combined with a disciplined investment approach would help to seize timely opportunities.

After all, volatile stock prices are usually viewed as opportunities, particularly if you are comfortable with the earnings outlook.

Mr Lim adds that while equity markets and the prices of certain commodities like oil may continue to remain choppy in the near term, many past market meltdowns have shown that a disciplined investment approach eventually rewards investors. This is especially so for those willing to invest for the long term while withstanding the emotional strain of near-term price volatility.

The annual CLSA Feng Shui Index report said that metals and water-related industries will strengthen in the first half of the Fire Monkey Year.

"Not only silver and gold, but autos, financials, gaming, transport and machinery sectors all prosper. However, after a reasonable start, things turn upside down for oil and gas, utilities, technology, telecoms and Internet as the monkey runs amok in the final quarter," said the tongue-in-cheek report.

Sweet spots & investment trends

SHARP AND QUICK MARKET SWINGS

Previous Monkey Years in 2004, 1992 and 1980 have seen "monkey business" in the capital markets, recalls Mr Yap. They have coincided with sharp turning points that called for shrewd and sharp, opportunistic investors.

Unlike this Year of the Sheep, when markets did well in the first six months of last year only to give way to underperformance in the second half, Mr Yap expects greater and more frequent market swings in the Year of the Monkey.

He says the source of these swings will originate from fickle-minded market participants relating to how fast and how much United States interest rates climb.

An analysis shows that the fastest climb in US rates was in 1999, when they were lifted by 175 basis points over a period of 12 months after recovering from the Asian financial crisis a year earlier.

There were three occasions in the first half of 1999 when the STI experienced wild swings. By July, it was down almost 11 per cent before staging a 1,000-point rally in the last six months, closing at nearly 2,550 at the end of the year.

In the 2004 Monkey Year, the STI's turning point came from the double whammy of the long decline from the 2000 Internet bubble and Sars in 2003, which saw the STI plummeting 45 per cent, from 2,140 to 1,225 points from April 2000 to March 2003.

Back then, the catalyst was the US raising interest rates to 5.25 per cent from 1 per cent over a period of 25 months, a rise of 425 basis points.


  • GCP Global's Mr Gabriel Yap says to outwit the monkey, investors have to be doubly smart, quick-witted and decisive in making investment decisions.


  • OCBC's Mr Vasu Menon says markets look set to swing from one post to another on the back of factors, including uncertainty about China and the US Fed and falling oil prices.
  • Columbia Threadneedle Investments' Mr Bernard Lim swears by a disciplined investment approach amid stock price volatility.

  • DBS Bank's Mr Yeo Kee Yan suggests that investors look at opportunities among the Singapore Reits.

  • FPAS' Mr Steven Ong expects the Monkey Year to bring large swings in sentiment as restless investors seek a clear sign on market movements.

Like the playful monkey, the STI had wild swings in 2004, starting the year at 1,764 points and shooting up almost 200 points by April. It then crashed 200 points to 1,700 on May 17, before staging another great swing to close the year at 2,066, a bumper 366 points up in 12 months, recalls Mr Yap.

STRAITS TIMES INDEX (STI)

TOPSY-TURVY

Not only silver and gold, but autos, financials, gaming, transport and machinery sectors all prosper. However, after a reasonable start, things turn upside down for oil and gas, utilities, technology, telecoms and Internet as the monkey runs amok in the final quarter.

'' THE TONGUE-IN-CHEEK ANNUAL CLSA FENG SHUI INDEX REPORT


High-quality bonds signal a company's ability to repay its commitments, making for more stable investments in these uncertain times.

Mr Yeo Kee Yan, vice-president of equity research at DBS Bank, says that its view for an STI inflexion point around 2,500 continues to take shape.

"Whether or not this level is the 'ultimate bottom' remains to be seen. But we think the odds have increased for a short-term U-turn leading to a counter-trend rally in the weeks or month ahead," he adds.

If DBS' 2,500-point level doesn't hold up, the STI could slide to 2,350 before stocks hit bottom.

Historically, a January pullback is an opportunity to buy as prices tend to have an upward bias heading towards April and May, the period when many stocks go ex-dividend.

"My view is that a bear rally over the next three months should be capped below 2,900. Beyond this, much depends on macro developments such as the health of the China economy, how fast or slow US interest rates increase, currency swings and oil price," adds Mr Yeo.

EQUITIES

Despite the financial market volatility, economic fundamentals seem reasonable. Major economies like the US, Europe and Japan are improving. Even China doesn't look like it will see a hard landing as the government has significant resources and policy tools to prevent one.


Surprises likely, so don't try to time the markets

Stock markets in Asia ex-Japan are also starting to look interesting after a 30 per cent sell-off from the peak last year. Japan is another region worth keeping an eye on as easy monetary policy and improvements in corporate governance should augur well for stock prices in the medium term, says Mr Menon.

GOLD

The Chinese New Year is typically associated with buying gold as the colour symbolises wealth and happiness. And with the ongoing market volatility, gold continues to be the choice "safe haven" investment.

Mr Steven Ong, chief executive of Financial Planning Association of Singapore (FPAS), says the scamper to safety could be a global theme in 2016. "The demand for gold as a safe haven could drive gold prices upward. Even as I am writing this, gold has just pushed above $1,100 on safe-haven buying," he says.

He expects the Monkey Year to bring large swings in sentiment as restless investors seek a clear sign on market movements on the back of China's continued slow growth and falling commodity prices.

ROBUST STOCKS

Mr Ong believes investors will gravitate towards major blue chips and large-cap companies with good track records and decent dividends.

High-quality bonds will also be on their radar as investors seek resilience and sustainable business models, especially in these volatile times. Mr Yeo likes Venture Corp for its strong balance sheet and dividend yield. Besides, it is a beneficiary of the strengthening US dollar.

Analysts expect a dividend of 50 cents a share when the firm releases its annual results later this month. That would translate into a "solid" 6.4 per cent yield following the recent share price correction.

Mr Yeo also expects short-covering and bargain-hunting to lift rig builders Keppel, SembCorp Marine and SembCorp Industries as well as bank stocks UOB and OCBC as oil prices stabilise and the fear of a collapse to US$20 a barrel fades.

High-quality bonds signal a company's ability to repay its commitments, making for more stable investments in these uncertain times.

Real estate investment trusts (Reits) with reasonable yields are also possible investment targets. Mr Yeo suggests that investors look at opportunities among Singapore Reits (S-Reits). This is because further upside can be seen, given increasing market expectations that the Fed will delay further rate hikes.

While Reit funding costs rise in tandem with higher interest rates, S-Reits usually hedge against this risk by having a high proportion of fixed-rate debt. Among S-Reits, DBS believes that A-Reit, Magic, MLT and FCT offer the best upside, supported by strong fundamentals.

Tips to retail investors

BUY GRADUALLY

The monkey is a tricky and playful animal, promising surprises, twists and turns in the year ahead, so you need to be careful with investments and avoid timing the markets or being too aggressive.

Mr Menon reminds investors that while equities are looking interesting after the recent sell-off, it doesn't mean that markets will recover and rise in a straight line.

To outsmart the monkey, the best strategy could be to buy gradually over the next six to 12 months instead of timing markets. "Instead of being fearful and distracted by the swinging monkey, investors with a medium-term horizon and good risk appetite can capitalise on the market swings to buy gradually on significant dips," he says.

STAY NIMBLE

Adapt quickly to market conditions and diversify your investments to manage risks. At the same time, resist the urge to swing from investment to investment if results are not immediately positive, says Mr Ong.

Do not speculate and do not rush into the equity market without careful planning. Ask yourself why you are investing. What is your time horizon? What is your risk tolerance?

Prudence is key in the Year of the Monkey as there is too much uncertainty facing China, Europe and the emerging markets.

WORK SMART

Now is a good time to start a financial plan or, if you already have one, continue building up streams of passive income that will exceed living expenses in the future.

Mr Ong says: "Accrue worthy assets, mitigate risks with careful allocation and start a systematic plan."

As the year will likely be marked by "wide swings", Mr Yeo advises that the key is to stay clear during the down swings and be alert and decisive to catch the inflexion point for the upswing. For investors, it's better to stick to yield.

High-quality bonds signal a company's ability to repay its commitments, making for more stable investments in these uncertain times.

A version of this article appeared in the print edition of The Sunday Times on February 07, 2016, with the headline 'Expect wild swings from the Fire Monkey'. Print Edition | Subscribe