FORTUNE FAVOURS THE PREPARED
As of 9th Mar 2020, the US S&P500 has declined by 19%1 from its recent peak on 19th February 2020.
At the headline level, this decline is due to the COVID-19 which is threatening the supply chains. China today accounts for 17%2 of the world’s GDP and around a third3 of the goods manufactured globally. Hence, when China is not able to produce the necessary raw materials and components, the rest of the world runs out of goods to sell. When trade stops, payment also stops; and companies run out of cash to pay their employees.
In addition, oil prices crashed by more than 30%1 at the same time after Saudi Arabia (the world’s 2nd largest oil producer4) announced a price war against Russia (the world’s 3rd largest oil producer4). This would be detrimental for the oil majors and even more so for the shale oil producers, which have higher production costs5.
What magnified the effects of the above are the frothy asset prices and excessive leverage caused by the repeated stimuli administered by the global Central Banks. Unicorn has been very cautious of these frothy asset prices all this while as we understand that leverage is a double-edged sword as it could multiply your wealth or deliver brutal cuts. To us, the most important thing is to protect your wealth against this double-edged sword when a possibility of the latter arises.
We are happy to share with you that we have successfully done so during this market melt-down.
How has our portfolio done?
The portfolio had performed well in 2019 with our VIPS, UIIS Growth and UIIS Income-Yielding portfolio garnering 8%6, 7%7 and 7%7 respectively.
Besides growing your wealth, protecting your capital is of utmost priority as the steward of your wealth.
From the start of the year till 11th Mar, the MSCI All-World Index has declined by 14%1 (SGD terms), while your VIPS portfolio has risen by 3%6. This is an outperformance of 17%.
The resilience and outperformance are the result of our choice of assets as follows:
Gold: Risen 10%1, SGD terms
What is ahead?
There will be a greater squeeze to the global economy.
It takes around 40 days8 for vessels to sail from China to the West. As such, the supplies that the global companies are enjoying now were from the shipments that had left China before the lockdown. The lockdown started just before the Chinese New Year holidays at the end of January9. This meant that the real supply shortages would kick in only later this month. This may cause the second wave of tsunami-like supply chain disruption, resulting in another round of market correction.
Central Bank medicine (read money printing), which resuscitated the stock market every time it fell ill in the last decade, may prove futile this time round. If cruise holidays are free today, would it entice you to go on a cruise? Your answer is most probably a “No.” Similarly, people would not start travelling and companies would not start producing immediately just because interest rates have been lowered or that the taxes have dipped. This was evident when the S&P500 continued its sharp decline1 despite a large emergency interest rate cut by the Federal Reserve on 3rd Mar10. It had failed to generate any excitement in the market.
In the most unfortunate event of a prolonged supply chain lockdown, a probable outcome is a credit event like the Great Recession during 2007-2009. This is because debt levels today are more than double of those in 200711 and a greater proportion of them are of poor quality. Many companies would default due to depressed cash flows and higher interest rates (charged on poorer quality companies), causing the banks to withhold lending subsequently, and the cycle could perpetuate.
The virus that is causing the current epidemic always appear to be the deadliest and the most frightening one. However, across history, viruses had come and gone. Over time, we adapt – our immunity becomes strong enough to fight it, a vaccine is found, or the virus itself may even persist – but when people treat it as a part of life, normalcy resumes. We think this will pass, but the crunch may be ahead of us, rather than behind us.
How would you take advantage of this market situation currently?
You should adopt the Dollar Cost Averaging (DCA) strategy.
This is a disciplined, investment habit that will enhance your portfolio significantly. You put your investment portfolio on autopilot which will enable you to put a fixed amount of money into an investment at regular intervals, i.e. monthly. If the market drops, your pre-set amount goes further, buying you more shares than the month before.
If the market goes up, your money buys you fewer shares. This system prevents you from either investing in the market just when it seems most attractive (and is actually most dangerous) or refusing to buy more after a market crash has made investments truly cheaper (but seemingly more ‘risky’). DCA is the type of strategy that prevents your emotions from interfering with your investment framework12.
The resilience of your portfolio puts you in an enviable position, as you can now look forward to taking advantage of the growing discount in equities.
What actions are we taking?
We are currently monitoring the situation daily. When the time is right, we will act with conviction, but currently we advise staying watchful.
During more turbulent times like now, we will step up our communication with you to keep you abreast of the situation, our decision-making processes and the actions we are taking.
Some of the factors we are looking at currently are:
- Speed of the COVID-19 spread
- Severity of the supply chain disruption
- Cracks developing in the credit markets
- Valuation of the funds and ETFs we are monitoring
Do speak to your Unicorn consultant if you have further queries.
Note: We will increase the frequency of our communication with you to weekly during the current turbulent times. We will continue to communicate monthly with you during usual times.
6.Fundsupermart.com, estimated returns, net of fees, based on Unicorn’s recommended funds
7.Based on actual clients’ statements
10.The Washington Post
12.The Intelligent Investor
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