Less Predictable Market Ahead

Foreword from ShareInvestor

This article “Less Predictable Market Ahead” by Lorna Tan was first published in The Straits Times on 29 Apr 2018 and is reproduced in this blog in its entirety.

Five tips for retail investors to avoid potential landmines and manage volatility

After a year of low volatility and high returns, retail investors find themselves navigating a far less predictable market this year with potential landmines seemingly scattered in every direction.

The roller-coaster has already kicked into gear, as Ms Carmen Lee, head of OCBC investment research, notes.

“The Straits Times Index (STI) kicked off 2018 well to clock a 6.1 per cent gain till its peak on Jan 24,” she says.

But a broad-based market correction in late January dragged stocks lower before a rebound that was then stopped in its tracks by uncertainties arising from escalating trade tensions between the United States and China. These tensions seem to have been the key focus of the market in recent months, especially after a few rounds of tit-for-tat proposed tariffs.

As of Friday, the STI closed at 3,577.21 and is up about 5.1 per cent for the year.

Ms Chung Shaw Bee, UOB’s head of Singapore and regional, deposits and wealth management, says the move to higher interest rates, while potentially adverse for equities and bond markets in the beginning, is a sign that the global economy is recovering.

Emerging equities, emerging market local currency bonds and US financials have all performed well so far this year. However, as Ms Chung notes: “Volatility is likely to continue into 2018. Geopolitical tensions, conflicts, high inflation and government policy missteps can potentially create uncertainties in the markets.

“These issues/risks, however, should not derail the current global recovery momentum. Corporate earnings remain strong, employment remains robust and most global economies are still in an expansionary mode.”

Mr Geoff Howie, market strategist at Singapore Exchange, notes that the STI has done well relative to other markets although 2018 has been highly eventful for global equities. “The impact of these events has seen the region, as gauged by the MSCI Asia Pacific Index, decline 1 per cent over the first 16 weeks of this year. However, the STI, buoyed by the three banks, had generated a 5 per cent gain over that period.

“Over the 10-year period through to April 16, the STI generated a total return of 58 per cent, compared to a 56 per cent return for the MSCI Asia Pacific Index.”

The Sunday Times highlights five tips to help retail investors navigate the uncertain market.

1. Make Volatility Your Friend

The return of volatility was the big story of the first quarter and it was natural that many investors were unnerved by the occasional wild swings, says Mr Vasu Menon, vice- president and senior investment strategist for wealth management in Singapore at OCBC Bank.

“However, just because stocks were down in the last quarter does not mean that market fundamentals have deteriorated,” he notes.

“Volatility can work in investors’ favour, as long as they keep an eye on the longer-term picture and leverage upon it as part of a disciplined investment plan, while staying diversified across various asset classes.”

He expects three more 25-basis point interest rate hikes in the US this year, which works out to an increase every quarter. This is fairly gradual and should not derail stock markets.

Mr Howie says traders – who are very different from retail investors – might capitalise on the short-term swings of the more volatile stocks. “A handful of STI stocks – Yangzijiang Shipbuilding, Golden-Agri Resources, Genting Singapore, Venture Corporation, CapitaLand Commercial Trust – averaged daily trading ranges of more than 2 per cent over the first quarter of this year,” he says.

2. Diversify, Diversify, Diversify

Mr Menon suggests that investors should have a combination of equities and bonds in their portfolios, with the exact mix depending on factors such as their risk appetite and personal circumstances. “Equities will provide the kicker while bonds serve as a portfolio stabiliser.

“Over the past decade, investors have reaped super-sized returns during the bull market in bonds. Going forward, investors need to refocus on bonds for its more traditional role as a means of providing consistent cash flow in the context of capital and wealth preservation.”

Volatility has returned for equities and it is here to stay, so investors need to come to terms with this and also moderate their expectations as the strong gains of 2017 are unlikely to be repeated this year, Mr Menon adds.

Mr Kean Chan, manager, macro research, at FSMOne.com, also advocates a diversified approach of owning both fixed income as well as equities. Aggressive investors can afford to have more equities compared with their fixed-income exposure while conservative investors should have more bonds than equities.

“Within both segments, it’s vital to ensure sufficient geographic diversification. For example, within the equity portion, exposure has to be spread out across developed markets like the US and Europe as well as emerging markets and Asia on top of Singapore,” Mr Chan adds.

“This ensures that risks are spread out and investment opportunities around the world are captured.”

Mr Hou Wey Fook, chief investment officer at DBS, advises investors to adopt a long-term investment horizon and maintain a well-diversified portfolio – one with an asset allocation that suits their risk profile. Asset classes should include bonds, equities, cash and gold.

3. Apply Dollar-Cost Averaging

Mr Howie says heightened volatility was always on the cards for 2018, so it is time for more prudent risk management – that is, don’t put all your eggs in one basket.

“The philosophy of diversification over assets and sectors or segments can extend to timing the marketas well. For instance, rather than lump-sum investing, investors may choose to dollar-cost average, that is, commit fixed dollar amounts to an asset or segment at fixed regular intervals,” he says.

Ms Chung adds that dollar-cost averaging is a disciplined approach. When markets are up and the price per share increases, you buy fewer shares per dollar invested. When markets are down, you purchase more shares per dollar invested.

“The benefit of drip-feeding your investments is that you reduce your risk of mistiming the market and also save on the time and effort to monitor market movements because your purchase cost is averaged out over time,” she says.

Mr Chan recommends using a regular savings plan as a means to apply dollar-cost averaging. This is because at this point of the cycle, it’s vital to be selective when it comes to adding exposure. “Expected returns for Western developed markets are low, whereas valuations are more compelling in Asian markets as well as the emerging market space, and investors can consider employing dollar-cost averaging in these areas when market conditions are volatile.”

4. Factor Risks In Portfolio Construction

Mr Daryl Liew, head of portfolio management at Reyl Singapore, says that with markets likely to remain volatile, investors should factor in volatility when constructing their portfolios. “Besides diversifying across different asset classes, investors should also consider factor risks. For instance, conservative investors concerned about a possible trade war should probably avoid export-driven companies whose stock price may be more volatile under current conditions, and instead focus more on domestic-oriented companies with more certain cash flows.”

5. Rebalance Portfolio

Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore), explains that rebalancing asset classes to their target allocations in a portfolio involves selling over-exposed assets (due to increase in value) to acquire assets that have declined.

“Instinctively, investors tend to panic-sell once the market falls. However, historical data shows that over the longer term, financial markets have risen despite short-term fluctuations,” he says.

“Though markets do not always follow the same recovery paths, the periods after market corrections are often critical times to be exposed to them. Rebalancing ensures that there will always be some assets that are up which help to bring down the level of risk for the portfolio. As the market goes up and down, keeping investors updated through a consistent portfolio review will help them make more rational decisions.”

Mr Chan of FSMOne.com adds that if there is higher volatility, investors can take the opportunity to rebalance their portfolios, and to use any opportunity to buy attractive areas in the market.