Investing with an eye towards recovery

It may be too early to know the full impact of the coronavirus pandemic on markets, so adopt a sound strategy and be cautious

Direct action by global central banks and governments around the world to breathe life back into distressed markets provided a lift to financial markets last week, with Wall Street's main indexes gaining almost 20 per cent.

Can such "big bazooka" financial support sustain a recovery of financial markets? Will it be enough to mitigate a crisis, rooted in a pandemic, which has wiped out some 30 per cent from global financial assets and caused massive joblessness?

The quick answer is, we don't know yet.

We are around three months into the Covid-19 crisis. Many like to compare it with the severe acute respiratory syndrome (Sars) outbreak of 2003. But unlike Sars, which was largely confined to East Asia, this pandemic is a global one that has killed many thousands more people.

In spite of speculation about potential biomedical breakthroughs, nothing concrete has emerged yet. The most optimistic projections are that it could take up to six months before a safe vaccine or cure is brought to market.

Also, while much of Asia is healing, the worst could be yet to come for Europe and the Americas. Incoherent and uncoordinated policy approaches to disease management have seen the United States overtake China and Italy on the infections front. This will impact Wall Street sentiment.

Still, we are seeing rays of hope (or is it optimism?).

In 2003, markets lifted off about three months before the Sars epidemic was brought to an end.

Obviously, some in the financial markets reckon we are seeing a plateauing of the current pandemic and thus betting that markets have bottomed out.

One thing is clear. When this pandemic clears, hopefully six months down the road, the financial system will be flush with liquidity. And liquidity fuels financial markets.

Still, market experts like Mr Terence Wong, founder and managing director of Azure Capital, do not see a speedy market rebound: "The market recovery may not be immediate, like post-Sars, as everything is at a standstill now.

Traders on the floor of the New York Stock Exchange. While much of Asia is healing, the worst could be yet to come for Europe and the Americas. Incoherent and uncoordinated policy approaches to disease management have seen the US overtake China and I
Traders on the floor of the New York Stock Exchange. While much of Asia is healing, the worst could be yet to come for Europe and the Americas. Incoherent and uncoordinated policy approaches to disease management have seen the US overtake China and Italy on the infections front - which will impact Wall Street sentiment. PHOTO: EPA-EFE

"It takes time to get back to normalcy. We are inclined to think it will be a U-shaped recovery, but it won't be a protracted U. It will be somewhere in between a V-and U-shaped recovery."

So the question is, how do we position ourselves for this recovery? Most investors are likely staring at a paper loss of around 30 per cent on their stock portfolio. Those who bought bonds, and are leveraged, could be facing potential margin calls.

During the past weeks, I have sought the view of many market insiders to gauge what investors should do. Here is a composite picture.

Q The markets seem to be showing signs of bottoming out. What should I be doing?

A It is too early to say whether the market is really bottoming out. Many medical professionals fear the next few weeks could see a huge spike in Covid-19 cases, especially in the West. This could spook the markets.

Mr Wong reckons the Straits Times Index (STI) could settle at around 2,360 points, providing an "initial yardstick to enter".

"In the event the situation worsens, the next level to enter is when the STI is at 2,100 points," he added. "In the extreme, worst-case scenario, (enter) when the index hits 1,840 points and price-book ratio hits 0.7 times.

"(The) market is not at the low now, in our opinion. It's vital that investors be disciplined and set target prices to both exiting and re-entering the market again."

That said, prices have corrected so much that many stocks are in deep-value territory.

During a recent interview on Money FM 89.3, Mr Swapnil Mishra, head of private wealth at Kristal.AI, likened the situation to an opportunity to fish from an aquarium, rather than value hunting out at sea.

"During the last 10 years, it has been all about hunting for value, and one had to dig deep into data to find value. Now, prices have corrected so much, it is about value picking, not value hunting."

Q So how do I pick stocks?

A You need a sound strategy to pick stocks that suit your medium-term investment horizon. Avoid those that are under severe financial duress.

Some stocks are cheap because the company may be scaling down or could potentially be out of business. Investors should review the leverage (borrowings), cash flow and business prospects of companies. Buy only stocks of companies that will likely still be around in five years, long after this crisis is over. Q Bank stocks have fallen by up to 30 per cent from their highs. Should I buy? A Yes, the stocks of the three local banks have retreated sharply to decade lows. They do look attractive on a valuation basis. But bear in mind that the low interest rate environment and high liquidity in the marketplace also mean that bank profit margins will be compressed for a while as the profitability on loan spreads narrows. Loan growth could also slow.

In addition, distressed companies may default on loans, thus raising the non-performing loans for banks.

So while bank stocks are attractive, they are medium-to long-term buys. That said, the three Singapore banks are quite well capitalised.

Q What about S-Reits?

A Many investment houses have in recent weeks recommended buys on S-Reits. CapitaMall Trust, Suntec Reit, Mapletree Reits, Keppel DC Reit and many others have found favour after falling by about 20 per cent to 30 per cent from their highs. Many are at their lowest levels since 2008.

But in looking for Reits (real estate investment trusts), evaluate their leverage, book value and tenancies on their properties. Reits with low-gearing, high-interest coverage and stable and diversified client bases should top your list. Financially strapped Reits could make cash calls and cut their dividends over the next year.

That said, the sharp selldown on many S-Reits had little to do with fundamentals. Mr Mishra reckons many investors were forced to sell in order to cash up. S-Reits, as a whole, do look oversold and attractive if you are looking for good and stable yield.

Q What about travel and hospitality sectors?

A Anyone reading The Straits Times in recent days would know how badly airlines have been impacted. Singapore Airlines (SIA), one of the strongest players in the world, has now obtained a shareholder bailout amounting to $15 billion.

The shutdown of borders and travel restrictions have hit the aviation sector very badly and it will take a while for a recovery to kick in. The fate of many players will depend on their cash flows and how long it will take to tackle the pandemic.

So it is best to avoid the sector for now. But now armed with cash and capability, companies like SIA can emerge stronger and dominate the marketplace in, say, two to three years. The stock could then attempt to regain its previous levels.

Q Are technology stocks a good buy?

A The crisis has taught everyone the meaning of the term business continuity planning. Many companies and entities have split their employee teams to reduce the risk of group infection. This means more than half are working from home or elsewhere. To do this, you need connectivity. To have connectivity, you need technology.

Mr Kelvin Tay, regional chief executive of UBS Global Wealth Management, sees opportunity in stocks with earnings relatively "resilient to virus scenarios, like companies exposed to the 5G roll-out in Asia, and global quality stocks".

So yes, look at companies that are supporting this new normal. They can be those that deal with end-user products or systems, suppliers of components, and even semiconductor chipmakers. There are several of these listed in Singapore.

Q What about healthcare and consumables?

A Market experts like Mr Tong Hoe Sng, head of wealth management at Aura Group, reckon that given the uncertainties brought on by the pandemic, this is a segment that will gain increased attention over time. Providers of healthcare services and makers of products such as gloves, masks and disinfectants will be in demand for the foreseeable future.

"In good times or bad, people will always seek out their doctors when they feel unwell," he noted.

Supermarkets, which fall under consumables, are also good defensive plays. As Mr Tong noted, every time there is anxiety, people queue up at supermarkets for essentials.

Q What about the property market?

A Wealth in Singapore is closely tied to the health of the property market.

The price of physical property, and thus stocks of property companies, depends on the overall health of the economy. Property prices often correlate with the amount of liquidity in the stock market. The higher the liquidity, the higher the propensity for property prices to rise.

On the other hand, if the Singapore economy does not recover its previous robustness, or the stock market continues to remain sluggish, the property market could continue to be weighed down.

First-quarter gross domestic product (GDP) sank 2.2 per cent, according to advance estimates by the Ministry of Trade and Industry, and the Government projects a worst-case scenario of a 4 per cent economic contraction this year. These are not exactly the most promising conditions for the property market.

Mr Wong is bearish on the near-term prospects for real estate.

"Going forward, we believe that property prices should weaken based on our discussion with the management of property companies here. Our view is that if Singapore sinks into a recession, the appetite for big-ticket purchases like property will diminish."

Q What about diversification into regional stocks?

A Geographical diversification makes sense. But that said, it is tricky to stock-pick around the region as data is only now emerging on who is most impacted by Covid-19.

That said, companies that are positioned to serve the Asean demographic comprising around 650 million people will emerge stronger once this crisis is over.

It is challenging to try to identify who they are, but Mr Mishra reckons one way is to screen stocks that are components of the FTSE Asean Value Fund.

"The FTSE Asean Value Index picks and screens companies by sector and is a good proxy for investors who do not do primary research," he said.


Despite the relief rallies, it could still be a very bumpy ride for the next few months.

But, as Mr Tay noted, central banks across the world have rolled out their entire great financial crisis playbook in a matter of days, while governments in many economies have unveiled packages worth about 10 per cent of annual GDP.

He added: "It is impossible to predict the exact market bottom, but given the speed and scale of the sell-off and the monetary and fiscal response, the rebound, when it comes, could be swift and violent, particularly if we see signs of containment of the virus in Europe and the US.

"At the February 2003 and March 2009 market bottoms, 21 per cent and 35 per cent of the S&P 500's gain over the next two years happened in just the first two months."

Still, bear in mind that this pandemic has taken a heavy toll. Many jobs have been lost and many may never be recovered if companies are also decimated. There could be huge demand damage in the economy.

We simply don't know how long this pandemic will last. We don't know how many companies will be totally demolished by this. We also don't know the total social cost of the pandemic.

Also, commodity prices, led by oil, are depressed. This will impact economies and companies down the supply chain.

So be cautious. Nibble into value. Don't use all your bullets.

Mr Vasu Menon, executive director for investment strategy at OCBC Bank, recommends doing dollar-cost averaging, or buying a little at a time as the price weakens to bring down your average holding price.

"For those looking to bargain hunt, it is best to buy gradually and not be too aggressive. Hold more cash than you normally would," he said.

"Sentiment is very weak at this juncture and markets can overshoot on the downside from time to time as investors overreact. Such price action can offer opportunities to accumulate gradually for those with a strong risk appetite and a medium-term horizon."

Finally, remember, you may be 30 per cent down. But this is only a paper loss. It is not a realised loss unless you sell now. When the market rebounds, you could be back in the black. So don't panic. Think strategically. Think long term.

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A version of this article appeared in the print edition of The Straits Times on March 30, 2020, with the headline Investing with an eye towards recovery. Subscribe