BT: Market crash: Hold on to your hats (23 Jul 2008)
MONEY MATTERS
Market crash: Hold on to your hats
For the patient and disciplined investor such trying times also represent excellent opportunities to pick up bargains
By WONG SUI JAU
MOST people in the investment world hate the words 'market crash'. It's everything that investors want to avoid. But because markets move in cycles, bear markets are inevitable - and we are in a bear market right now. The US financial crisis that started with the sub-prime problems has reached a new level, with the US Federal Reserve having to assemble a rescue plan for Fannie Mae and Freddie Mac, two of the largest mortgage lenders in the US.
The continued rise in oil and commodity prices has caused inflation to surface as an additional problem, especially in Asia. Markets have corrected sharply since October 2007, when some were at or near historic highs. As at July 8, all markets shown in Table 1 have crashed by more than 20 per cent over the eight-and-a-half months. Some markets, like China and India, have fallen more than 40 per cent. What should investors do?
A good idea is to look back at history - to keep things in perspective. There have been massive sell-downs and crashes in the past, caused by some event or another. Table 2 shows some notable market crashes and the recoveries that followed.
Panic and risk missing out on the recovery
Investors looking at Table 2 will note that during most of these market crashes, economies were going through recessions, the Asian financial crisis, and in the case of the US, World War II. But despite how gloomy things might have seemed at the time of the crashes, the markets recovered, and the subsequent recoveries resulted in those markets going up 100 per cent or more.
Therefore, it is important that investors do not panic and dump everything they hold when they are caught up in a market crash. The impulse to sell in such circumstances is understandably high. In all the cases mentioned here, some major crisis/war/recession that had happened. It gave common investors all the reason they needed to scream 'sell', resulting in massive drops.
However, a very important point to note is that the crash has already happened. Markets are already down by more than 20 per cent, some as much as 40 per cent. If investors sell out now, they will be selling at market lows.
Furthermore, psychologically, it would be very difficult to re-enter the market any time soon if investors sell out now. Such investors who choose to quit now are likely to stay in cash until markets are well into their recovery phase - when most of the best buying opportunities would have already passed them by.
While it may seem difficult, investors need to be prepared to withstand market volatility, and it is during uncertain times that volatility is highest. But for the patient and disciplined investor, such trying times represent excellent opportunities to pick up bargains.
When everyone is so worried or panicky over something - in this case, the Fannie Mae and Freddie Mac saga and the ongoing US financial crisis - fear overrides reason. It no longer matters that stocks are undervalued or markets cheap, because the overriding desire is to unload everything you own.
As such, the buyer has all the power and the seller is powerless. In times like these, stocks and equity unit trusts are all available at bargain prices. But investors are no longer considering whether companies (and indeed the stock market) will recover and how they will fare one or two years later. They are simply concerned about the huge drop in the value of their investments - which they cannot avoid in any case because it has already happened. Panic selling crystalises any losses that you have already incurred. Three months later, or even one year down the road, if stock markets have stabilised, investors may still be fearful and put off re-entering the markets, though by then, markets may have fully recovered all previous losses.
Seize the buying opportunities
The US is the largest economy in the world and its financial markets are the biggest. As such, any time the US sneezes, all other markets are affected. But the impact of the fallout may not be uniform across global markets. The ongoing US financial meltdown and economic decline are a good example. Most Asian financial institutions are not holding massive, potentially bad loans on their books, nor are they facing the kind of credit crunch that some of the US financial institutions currently face. In fact, investors who have experienced such crashes before will know the current situation may throw up good buying opportunities.
Most Asian markets have been beaten down severely and are trading at very attractive valuations. For example, at the start of 2008, Asian markets, as represented by the MSCI Asia ex-Japan index, were trading at almost 17X forward PE ratio for 2008. As at July 18, that forward 2008 PE ratio had dropped to 12.7X.
On a historical basis, this is at the lower end of the forward PE valuations for Asian markets, and investors who choose to buy into Asian markets (via Asian equity funds) during times of low valuation have historically made very good returns when recovery comes about..
It is easy to forget in the midst of all the negative sentiment that in reality, Asian economies are fundamentally sound and that many economies are expected to post healthy growth rates this year, even with a possible US recession. For example, the Singapore economy is still expected to grow 4 to 6 per cent this year and at a similar, if not higher, rate over the next five to 10 years.
Even in the US, investors can pick out selective bargains, despite the doom and gloom surrounding the economy and the market. The average price-to-book value (PB/V) of US financials has fallen from a PB ratio of more than 2.0X to around 1.0X. The situation we are seeing now is similar to what happened during the peak of the Asian financial crisis, where many Asian financials fell to similar PB levels. But when economic recovery took place, the surviving financials delivered substantial gains to those who dared to pick them up during the 'bad' times. While it may be too risky to select individual financial stocks currently, a global financial fund that holds dozens of financial stocks would be well-positioned to benefit when the current US financial crisis blows over - which it eventually will.
Investors can expect plenty of near-term volatility in the coming days. There will likely be more bankruptcies, bailouts, and write-offs ahead as the US financial crisis unfolds. However, the entire US financial system is too large and too important to simply collapse completely. Eventually, the market recovery will occur. And when it does, the US financials and banks that survive the current crisis will post significant gains.
In conclusion, hold on to your hats and don't panic. Be disciplined and remain diversified in your investments. Making an investment decision in a moment of panic or haste will probably lead to regrets later on.
History shows that stock markets have always experienced big crashes due to various crises - and have always bounced back again. Despite all the recent volatility, or perhaps even because of all the worries and fears the stock market is currently experiencing, now is not the time to quit from the market. It is the time to stay in it.
Wong Sui Jau (CFP) is the general manager of Fundsupermart.com Pte Ltd, a division of iFAST Financial Pte Ltd. No action should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Please read our disclaimers.
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
Market crash: Hold on to your hats
For the patient and disciplined investor such trying times also represent excellent opportunities to pick up bargains
By WONG SUI JAU
MOST people in the investment world hate the words 'market crash'. It's everything that investors want to avoid. But because markets move in cycles, bear markets are inevitable - and we are in a bear market right now. The US financial crisis that started with the sub-prime problems has reached a new level, with the US Federal Reserve having to assemble a rescue plan for Fannie Mae and Freddie Mac, two of the largest mortgage lenders in the US.
The continued rise in oil and commodity prices has caused inflation to surface as an additional problem, especially in Asia. Markets have corrected sharply since October 2007, when some were at or near historic highs. As at July 8, all markets shown in Table 1 have crashed by more than 20 per cent over the eight-and-a-half months. Some markets, like China and India, have fallen more than 40 per cent. What should investors do?
A good idea is to look back at history - to keep things in perspective. There have been massive sell-downs and crashes in the past, caused by some event or another. Table 2 shows some notable market crashes and the recoveries that followed.
Panic and risk missing out on the recovery
Investors looking at Table 2 will note that during most of these market crashes, economies were going through recessions, the Asian financial crisis, and in the case of the US, World War II. But despite how gloomy things might have seemed at the time of the crashes, the markets recovered, and the subsequent recoveries resulted in those markets going up 100 per cent or more.
Therefore, it is important that investors do not panic and dump everything they hold when they are caught up in a market crash. The impulse to sell in such circumstances is understandably high. In all the cases mentioned here, some major crisis/war/recession that had happened. It gave common investors all the reason they needed to scream 'sell', resulting in massive drops.
However, a very important point to note is that the crash has already happened. Markets are already down by more than 20 per cent, some as much as 40 per cent. If investors sell out now, they will be selling at market lows.
Furthermore, psychologically, it would be very difficult to re-enter the market any time soon if investors sell out now. Such investors who choose to quit now are likely to stay in cash until markets are well into their recovery phase - when most of the best buying opportunities would have already passed them by.
While it may seem difficult, investors need to be prepared to withstand market volatility, and it is during uncertain times that volatility is highest. But for the patient and disciplined investor, such trying times represent excellent opportunities to pick up bargains.
When everyone is so worried or panicky over something - in this case, the Fannie Mae and Freddie Mac saga and the ongoing US financial crisis - fear overrides reason. It no longer matters that stocks are undervalued or markets cheap, because the overriding desire is to unload everything you own.
As such, the buyer has all the power and the seller is powerless. In times like these, stocks and equity unit trusts are all available at bargain prices. But investors are no longer considering whether companies (and indeed the stock market) will recover and how they will fare one or two years later. They are simply concerned about the huge drop in the value of their investments - which they cannot avoid in any case because it has already happened. Panic selling crystalises any losses that you have already incurred. Three months later, or even one year down the road, if stock markets have stabilised, investors may still be fearful and put off re-entering the markets, though by then, markets may have fully recovered all previous losses.
Seize the buying opportunities
The US is the largest economy in the world and its financial markets are the biggest. As such, any time the US sneezes, all other markets are affected. But the impact of the fallout may not be uniform across global markets. The ongoing US financial meltdown and economic decline are a good example. Most Asian financial institutions are not holding massive, potentially bad loans on their books, nor are they facing the kind of credit crunch that some of the US financial institutions currently face. In fact, investors who have experienced such crashes before will know the current situation may throw up good buying opportunities.
Most Asian markets have been beaten down severely and are trading at very attractive valuations. For example, at the start of 2008, Asian markets, as represented by the MSCI Asia ex-Japan index, were trading at almost 17X forward PE ratio for 2008. As at July 18, that forward 2008 PE ratio had dropped to 12.7X.
On a historical basis, this is at the lower end of the forward PE valuations for Asian markets, and investors who choose to buy into Asian markets (via Asian equity funds) during times of low valuation have historically made very good returns when recovery comes about..
It is easy to forget in the midst of all the negative sentiment that in reality, Asian economies are fundamentally sound and that many economies are expected to post healthy growth rates this year, even with a possible US recession. For example, the Singapore economy is still expected to grow 4 to 6 per cent this year and at a similar, if not higher, rate over the next five to 10 years.
Even in the US, investors can pick out selective bargains, despite the doom and gloom surrounding the economy and the market. The average price-to-book value (PB/V) of US financials has fallen from a PB ratio of more than 2.0X to around 1.0X. The situation we are seeing now is similar to what happened during the peak of the Asian financial crisis, where many Asian financials fell to similar PB levels. But when economic recovery took place, the surviving financials delivered substantial gains to those who dared to pick them up during the 'bad' times. While it may be too risky to select individual financial stocks currently, a global financial fund that holds dozens of financial stocks would be well-positioned to benefit when the current US financial crisis blows over - which it eventually will.
Investors can expect plenty of near-term volatility in the coming days. There will likely be more bankruptcies, bailouts, and write-offs ahead as the US financial crisis unfolds. However, the entire US financial system is too large and too important to simply collapse completely. Eventually, the market recovery will occur. And when it does, the US financials and banks that survive the current crisis will post significant gains.
In conclusion, hold on to your hats and don't panic. Be disciplined and remain diversified in your investments. Making an investment decision in a moment of panic or haste will probably lead to regrets later on.
History shows that stock markets have always experienced big crashes due to various crises - and have always bounced back again. Despite all the recent volatility, or perhaps even because of all the worries and fears the stock market is currently experiencing, now is not the time to quit from the market. It is the time to stay in it.
Wong Sui Jau (CFP) is the general manager of Fundsupermart.com Pte Ltd, a division of iFAST Financial Pte Ltd. No action should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Please read our disclaimers.
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
posted by mrmoon at 6:30 AM
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