Wednesday, January 20, 2016

Wake Up to Nightmare After SG50 ?

Never have I expected to write an analysis so fast after my annual analysis (Recap 2015 & Looking Ahead 2016) some less than 2 weeks ago.

FTSE STI closed 2,882.73 in 2015 and as of today (20th Jan 2016), STI closed 2,559.77, a drop of 322.96 points or 11.20% for that 13 trading days or at a rate of 24.84 points/day or 0.86%/day.  There is a sense of a 2008 deja vu.

From my perspective, STI 2,700 level is a statistical reference point as to whether Singapore economy will or will not enter technical recession.  For whole of 2015, STI did not fall below 2,700 level and we also narrowly avoided a technical recession in Q3.  However, as of now, the 2,700 level has already been breached and what is the chance of Singapore economy will not enter a technical recession 6 months down the road ?  STI 2,400 level is another statistical reference point (from my perspective) as to whether Singapore economy will or will not enter a real recession.  We are not at that level yet at the moment but nobody know some months down the road will we be there.

Stock market in general is a forward indicator of the economy but some might disagree so let look at the current situation as to whether Singapore will or will not hit technical recession (or even real recession) months later.

1. China just reported a 6.9% GDP for 2015, slight below the projected 7% and no one can deny that the slowing down of the Chinese economy has no impact to the global economy.  Singapore largest trading partner is China and do I need to elaborate further in detail the impact of China on Singapore economy ?

2. The oil crash which started more than 1 year ago also having impact on global economy and not to mention Singapore whereby the O&G and Offshore/Marine sector have been badly hit.

3. A rising interest rate environment after US Fed started its first rate hike last month is never going to be useful to the already slowing down Singapore economy.

4. Singapore Government finally decided to reform the economic model (why the delay in which they should have done it in 2010, well you have to go ask them) is not helping either as we have to go through the "painful" transformation phase.  By now we should know of the 5 key areas Singapore future economy going to focus on but then don't get overly positive yet.   Whether that is the correct strategy is still an unknown.  Do they have the correct vision, ability to think out of the box and execute properly is still very much debatable.

Using a soccer team as an example to the economic model (since majority is familiar to soccer).  Assuming you are the manager of a soccer team, do you want to build a team that is balanced in attack and defense or a team that is only strong in attack but weak in defense or a team that is ultra defensive ?  Relating the defense of the soccer team to the domestic component of an economic model, the defense is used to absorb as much as possible the external shocks that impact on the economy growth.  Now you have to go think about those 5 key areas can they actually can provide that much needed defense going forward ?

After celebrating SG50 last year, are we waking up to a nightmare ?  Something for you to ponder about !

Recalled back in 2010 when Singapore together with rest of the world recovered from the 2008 GFC in which Singapore economy registered almost +15% GDP, doubts started to surface for me whether global economy (and Singapore economy) can really move back to the good old days of pre 2008 GFC.  The most outstanding fact that triggered my doubts was global economy was totally out-of-sync (so as Central Banks monetary policies).  Furthermore, what my eyes saw then in 2010 did not convince me that Singapore was enjoying an almost +15% GDP growth.  Those who I spoke to about my concerns did not agree with me and maybe some think I was crazy then (expected since 70% of Singaporeans think the Government is right).  However, I chose to believe in my own eyes and decided to build a safety net for myself.  Since then, I adopted a cautious approach to global economy and Singapore economy (in particularly the economic model) despite some of the years when global stock markets registered huge gain.  Another was the lesson I learned from 2008 GFC.  Then I did not have any safety net and when global recession hit, I was financially hit too.

From the investment portfolio that I have built up since then with couple of divestment gain and dividend collected together with strategically allocating a sufficient level of cash, my safety net is up.  As of now, I have only about 67% of my initial capital vested and holding 33% of cash.  In addition, the divestment gain adds on about another 11% of cash and the dividend collected is 42%.  As such, the cash holding to equity holding ratio is 1.28 : 1.  Though it is impossible to be totally insulated  but definitely enough for me to cushion any possible global financial crisis ahead even if I have set aside a sum of money for emergency use (the 0.28 from 1.28 is sufficient for 1 year of living expenses).  As for whether I was correct in my assessment in 2010 is immaterial now and what's important is I believe in myself and acted accordingly.  So if you do not have a safety net now, better build up one now, still not too late.

Take a leaf out of Sun Tzu Art of War (孙子兵法) in which Sun Tzu said "故用兵之法,无恃其不来,恃吾有以待之;无恃其不攻,恃吾有所不可攻也" -- Do not hope for enemies will not come and attack but always prepared for their attack.  This is the case, do not hope that another global financial crisis will never come but always prepared for one.

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