Roundtable - 10th year into the bull market, what’s next?

 

The current bull market has hit the 10-year mark. Will it keep raging or will the bears spoil the party?

1H2019 has been full of caution where we see major indices being turbulent with sharp dive and huge incline. S&P 500 posted their best first half in 22 years and yet closer to home, the US - China trade war is threatening to drag export-reliant Singapore into a recession. What can we expect for 2H2019? 3 respected finance experts offered their views.

Reviewing 1H2019, how has the market performed for you?

Chris: US markets have made all-time highs in 1H2019. In fact, in the last 150 months the S&P 500’s 11 sectors have only all gone up in tandem during the same month twice. Those two months were this January and June! For many of our customers at TD Ameritrade, 1H2019 was very lucrative with the S&P 500 up 17% and now with the US Fed shifting to an easing environment, markets are looking at the bull run to continue.

Nicolas: Investors in US and European markets performed strongly during 1H2019 with major indices up between 15 - 17%. SE Asian indices were mixed with negative performance from Malaysia and just above breakeven in Indonesia. Singapore was up approximately 8% but smalland mid cap companies, on average, seriously lagged once again. Since my focus is mostly in the small and mid cap segment, my performance is really enchmarked agnostic and depends on the performance of a select number of individual companies, example Procurri was up by +14%, and Sunpower Group was up just under +49%. Alliance Mineral did not fare as well declining over 40% as compared to the end of 2018. I continue to like the valuation all three companies going forward.

Seak Eng: With the ongoing trade tensions between the US and China, the world’s two largest economies, and the recent trade tensions between Japan and Korea, stock market movements have become erratic. Investors are also awaiting the Fed’s next move on rate cuts. It is hard to predict the short-term movements. One day, the market is up, and the next day, the market is down. We adhere to value investing principles where we take a long-term view on stock performances. In fact, we find Asian markets to be a rich hunting ground for value stocks. In the last two years, there have been many market commentaries discussing whether value investing is still effective in the current economy. Our proven track record and the existing market data available have shown that value stocks out-perform the market in the long run.

With the macro environment constantly shifting, how should a retail investor manage their portfolio?

Chris: The two biggest weaknesses we see from retail investors are that they infrequently rebalance their portfolios and wait to sell to take profits because novice investors think that stocks will continue to go higher. We tell our clients all the time, that closing a portion of a position to either reduce risk or take profit is a prudent trading style. Markets do not move in a straight line.

Nicolas: I have little idea what the macro environment will be like in 6 - 12- or 18-months’ time so I try to focus my attention on individual companies rather than speculate on the outcome of macro events. Rather than referring to the ‘stock market’ all investor should think of an exchange as a ‘market of stocks’. Some of them will do well, others will perform poorly. The essence remains to pick companies that are attractively valued versus their growth prospects and cash flow generation prospects. One advice for retail investors would be to thread with caution when investing in highflying US IPO’s. During the last twelve months, over 80% of US IPO’s have been lossmaking companies. The last time this percentage was this high was 1999 after which the Nasdaq lost 78% of its value in three years’ time.

Seak Eng: Based on our experience, no matter how sound the research or analysis, there are factors that are simply beyond our control. It is alright for our portfolio to be affected by temporary market weaknesses, as it recovers when market recovers. That is one of the principles that we adhere at AAM as well, where we run a highly diversified portfolio of more than 600 stocks. The other level of diversification comes from our allocation of capital across various markets and sectors. The second principle that we adhere to is value investing, with an importance placed on the concept of margin of safety. The last principle, but hardest to stick to, is avoiding market timing. Human beings are emotional, and the news that we read about every day can psychologically affect our approach to investing. Research has shown that the longer our money stays invested in stocks, the higher the chances of making money and above-market returns. For investors who do not have the resources to invest in 600 stocks or a well-diversified portfolio, they may consider investing in a basket of exchange-traded funds (ETFs) across different countries. They will then be able to achieve some benefit of diversification that is low cost and efficient to manage.

Given this backdrop of rising volatility for 2H2019, what is the sector/market that retail investors can look out for?

Chris: Our more seasoned traders have focused on three market driving factors – The Fed, geopolitics and earnings. The first two items will help shape the latter. With the potential for an improving global trade environment, there may be some relative value in industrials, financials and technology stocks. On the flipside of that coin, defensive sectors such as utilities and consumer staples appear overvalued given their poor growth outlooks. The wild card sector right now for us is energy. Rising geopolitical tensions in the Straits of Hormuz, coupled with demand uncertainties have traders and investors monitoring the tensions daily. A major supply disruption could drive oil prices higher. Right now, markets are pricing in that cooler heads will prevail.

Nicolas: I think investors can find good stocks to invest in regardless of one specific sector. Horrible sectors can still produce winners; while hot sectors such as technology can produce enormous failures. With the Singapore market generally having performed poorly during the last 5 and 10 year period, investors would be wise to hunt for value bargains in their home market rather than looking for high-flying risky stocks overseas. The market is a pendulum and while it might be tempting to invest in many US listed technology companies, their valuations are generally much higher than their Singapore listed peers. Some Singapore listed technology companies that deserve investors’ attention are AEM Holdings, Valuetronics and Silverlake Axis. All are reasonably priced, have strong balance sheets and pay solid dividends.

Seak Eng: The Asian stock market is our hunting ground. From late 2018, we started seeing more undervalued and cheap stocks on our radar. We have increased our stock holdings from 620 by end-2018 to 670 as at end-June 2019. The uncertainty and volatility will provide more cheap stocks for investors to consider. Investors should take this opportunity, when markets are at their weakest, to increase their exposure to equity investments. They may experience some unpleasant volatility short-term but will be rewarded handsomely in the longer term. It is a very simple equation, where your cost is low, you will have more upside in the future. We do not invest in specific sectors; however, we do see more value stocks coming from Hong Kong, Korea, Malaysia, Japan and Taiwan.

REITs has been a popular asset class in the recent years. However, the big question is if REITs is overvalued and will they remain as an attractive buy for 2H2019?

Nicolas: REITs are a fantastic instrument for Singapore based investor to get efficient exposure to the property space. The REIT sector was up 20% in 1H2019 as interest rates dropped. The answer as to whether REITs will remain attractive depends on the long-term movement of interest rates and how aggressive these REITs are geared. My personal preference would be to invest in REITs that have little forex exposure and have most of their assets in Singapore.

Seak Eng: REITs will remain a popular asset class as investors generally prefer to receive stable dividends which are much higher than fixed deposit rates. Investors do need to take note that long-term stock performances are driven by valuations. If valuations are stretched, the future performance might be on the lower side. We see that REITs in Singapore generally are not as attractive in terms of yields with the discount to its asset value. We could find similar yield with better discount to asset value in other countries. Investors should consider investing in some small to mid cap stocks with a support of good fundamentals, with low gearing ratio. It should give them better overall returns (yields plus capital gains) in the long run.

With so much uncertainty in the market, what are some advice you have for investors to weather-proof their portfolio for the immediate future?

Chris: Utilizing capital efficiency by taking advantage of leveraged instruments, like options or futures on US exchange-traded products for example, can require less capital per trade. If used correctly, options and futures positions can help to insulate your portfolio from short term market movements.

We always promote education as your best investment and at TD Ameritrade Singapore, we are committed to educating our clients by providing them with award winning education on how to use our trading platforms and products at no cost to them.

Nicolas: Reading annual reports, attending annual meetings and get to know the companies you invest in and dollar cost average when buying into an investment. Stocks are not there to make you rich quickly but are excellent to grow your wealth over time given you are diversified over 15 - 20 companies. Where possible, one should favor companies with a long-term track record of paying dividends as this is the only return you are sure of.

Seak Eng: Investors should be very clear with their objectives. They need to have a long-term view when it comes to investment. If they hope to make quick profits in stock markets, it is akin to going to a casino and placing bets: the chances of losing money is huge!

We have done a study at AAM, where we demonstrate that the longer an investor stays invested in stocks (a diversified portfolio), the higher the chances of making profits. We looked at the S&P 500’s past performances. If you have a 10 years view and stay invested for any given 10 years, the chances of losing money is very little -- almost zero. If you have a 20 year view and stay invested for any given 20 years, you would not lose any money. This is one of the secrets not many investors pay attention to.

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