Published May 21, 2008


Go ahead, don't wait for clear skies

Take the longer view and pick up good investment bargains now in anticipation of a recovery


MARKETS have been quietly recovering, but few seem to be aware of it. Volumes on the Singapore stock exchange are very low, and there have not been any major announcements that would lead people to think: 'Yes, the worst is over and markets are going up from this point on!' On the economic front, everything bad happening to the US economy and in particular, its finance sector, is still happening.

However, over the past few weeks, markets have been recovering (see chart). The main reason is that a lot of the bad news has already been factored into the market. Furthermore, there are increasingly good bargains to be had. So, rather than wait for clear skies before venturing back, it is better to take the longer view that recovery will eventually come, and pick up good bargains now in anticipation of it.

As the table shows, many Asian markets have risen by 15 per cent or more over the past few weeks. Yet, the backdrop of this rise has been the same news that has been driving markets down since October last year. The US economy is still going into a recession, if it isn't already in one. Large banks from Europe and the US alike are still declaring billions of dollars' worth of provisions due to sub-prime loans. Oil prices continue to climb higher and higher. And the US property market continues to fall.

But all this is old news by now. The markets have largely factored in weak US economic data. For instance, when the US reported weak GDP growth of 0.6 per cent in the first quarter, the market was actually relieved that it wasn't the negative number many had expected. The actions of the Federal Reserve have created a floor for US financial firms. By moving to bail out Bear Stearns, the Fed has effectively declared that there are certain financial institutions that are too big to fail. While this is likely to pave the way for greater regulation of US financial markets, it at least bolsters the public's confidence in the sector in the immediate term.

Asia's economic data releases so far have also shown that despite a significant slowdown in the US, this has not had the serious impact on Asia's growth that many had feared. For example, Singapore's Q1 GDP was above 7 per cent, a very high figure against the backdrop of anaemic growth in the US, which is one of Singapore's biggest export markets. And Singapore's job creation in Q1 was even higher than in Q4 at 68,000.

I believe the US economy will continue to decline. Even if it didn't fall into recession in the first quarter, it will likely do so in the second quarter. However, increasingly, investors no longer have any high hopes on the US economy and most fully expect a recession. That's why I believe the market has factored in most of the bad news already.

I am reminded of a similar situation back in 1990, during the savings and loan crisis. At that time, US financials also went into a tailspin, while Asia's growth remained strong. Asia's markets then had dropped more than the US's (just like now) but staged a strong rebound shortly after they bottomed out. I believe we are in a similar situation. The key thing is that one shouldn't wait until all the bad news stops before going back into the market because by then, markets would have risen substantially (as the table shows). Even in the absence of any particularly good news, there has been a recovery of 15 per cent or more in the markets in the past two months.

Another key reason why now is a good time to take the plunge is that news on the economic front can hardly get any worse. When the full picture of the financial mess in the US initially emerged, there was shock and markets reacted accordingly. However, today, all this is old news. Higher oil prices? US economy going into recession? Financial turmoil and a housing market slump in the US? Investors have heard it all repeatedly in the past few months. Things would have to get monumentally worse for investors to be any more surprised at the state of the US economy.

And initially, there was the assumption that a slumping US economy would definitely hit Asian economies, and badly too. So Asian markets actually fell more than the US market from the start of the year till March. However, as Asian economies continue to grow despite the stumbling US economy, investors here are gaining confidence that Asia might be spared the worst this time around. Hence, the initial fear of US contagion has brought markets here to low and attractive valuations, yet economic growth and earnings growth remain resilient.

The valuations of most Asian markets are still very attractive. Markets like Singapore are trading at 13 to 14 times 2008 price-earnings (PE) ratios. Thailand is trading at 11 to 12 times 2008 PEs, and Taiwan is trading at 14 times 2008 PEs. And Asia is still expected to generate high growth over the next three years. We favour Thailand, Taiwan and Singapore equity markets at this time due to their attractive valuations and robust earnings growth.

But Asia is not the only place to find bargains. The US and European financial sectors, at the epicentre of the current financial crisis, are now looking increasingly attractive from a valuation point of view. US and European financial stocks are going at bargain prices right now and hence, global financial funds that have a larger exposure to US/Europe financials look very interesting. It would seem very risky to go into these financials, which are still writing off billions of dollars. But I draw parallels with the Asian financial crisis in 1997. At that time, Asian banks were sold down to very low levels as the entire sector, regardless of individual company health, was deemed to be sick.

When the Asian financial crisis was over, the surviving banks rose tremendously because investors realised that these were resilient and didn't deserve to be sold to the low levels that they were brought to then. Today, we have a similar situation in the US and Europe. As measured by price-to-book ratio, many of the banks in Europe and the US are trading at around 1.3 times. The last time they traded at levels lower than that was during the savings and loan crisis.

This means bargains exist there. Global financial funds, being well diversified, would ensure that the fund manager doesn't put all its money into just one bank, which might later go bankrupt. The survivors from this current crisis would come out all the stronger, and would see substantial earnings growth subsequently.

What other area has been bashed down due to the sub-prime debacle? It's high-yield bonds. Again, these have been bashed down by negative association with sub-prime-related debt. So any high-risk debt instruments, like high yields, are trading at very low levels. The spreads between interest-free rates and high yields are at some of their widest since 2003. Yields of US and European high-yield bond funds are around 7 per cent in Singapore dollar terms. Given the extremely low interest rate environment we are in right now, this would be extremely attractive. The only thing holding back most investors is the fear that they may fall even further.

However, for those who can take a longer-term view, this is a good time to pick up such high-yield bond funds cheaply. Because when the US and European economies start to recover, and the worst of the sub-prime related fears have blown over, investors will start to realise that many of these high-yield bonds should be worth more. Such a recovery would give investors who scooped up such bond funds not just a high yield but also capital gains when bond prices bounce back and boost the value of the bond funds.

In conclusion, while many investors may still be waiting for the skies to clear, that is not necessarily the best strategy. The best gains are made from going into markets when they are low and bad news is prevalent (like now). Waiting for clear signs that the worst is over may mean that you won't participate in a large part of the market recovery. So, it is better to take a long-term view. Ask yourself, will the US economy always stay so bad? If you believe that it won't, that things will be much better in two years' time, and that valuations now are attractive, then don't wait to invest into the markets. Volatility can be expected to persist, especially in the short term. Don't be afraid of it, for it is usually during such times that the best bargains are to be found.

Wong Sui Jau is the general manager of, a division of iFAST Financial Pte Ltd