Damned if you do and damned if you don’t. This is a terrible year for many research analysts, market strategists and stock market pundits as they gaze into their crystal balls in a futile bid for better clarity.
A “bear market rally” in July caught most fund managers and private bankers off guard as the 9% rebound in the S&P500 left most fund managers in the cold. With markets in bear territory, they followed the adage to sell in May. For a while, the calls seemed accurate, with news flow looking bleaker and bleaker going into June and worries over the illiquid European summer season in July and August.
Many institutional investors, suffering from their own bouts of “Foho” or fear of holding on, lightened their holdings just when markets were at their lows. Let us also not forget how JPMorgan Chase and Co in March had hurt the feelings of 1.3 billion Chinese by calling China “not investible” — only to reverse their call and play catchup just three months later.
According to Bank of America, only 28% of active fund managers focusing on big stocks beat the Russell 1000 benchmarks in the US. All the main styles of mutual funds — from core to growth and value — underperformed.
Last month, a retired senior private banker asked me whether she should sell all her mutual funds and buy single stocks that appeared to be on the rebound since she felt aggrieved that she was paying fees for negative performance.
For me, that was a real ah-ha moment. Here is another ex-banker who did not believe in the investment products sold by her former colleagues in the industry. Here is a seasoned finance industry professional flying her own money against the face of conventional wisdom of keeping a diversified portfolio, instead concentrating her holdings in single stocks which could theoretically lead to more downside.
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Riding the roller coaster
Back in January, there was palpable optimism as a post-Covid world prepared to reopen for business. It was a time when markets and investors were coming off the height of the 2021 fluff of meme stocks, growth-at-all-cost and platform economy, not to mention the much-hyped bubbles that formed in the darkest corners of unregulated space for cryptocurrencies and NFTs. More glaringly so, the US Fed had warned that rate hikes were impending. Yet, all manner of professionals and pundits were calling for more positive but moderate growth in the values of financial assets, including bonds.
At that time, I did not share that optimism and expressed it in this column. It was clear that all things considered, the Nasdaq (and now the S&P500) was due for a major correction which was similar to the Bitcoin technical break of its neckline of US$48,000 ($66,191). If there was a cyclical recovery, it was the argument that relative value could be found in Asia, Southeast Asia and especially Singapore.
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China, which was on a dip, looked like a good bet too given the anticipated coronation of Xi Jinping in October at the 20th Party Congress. On the latter, it was also a relative value call, political risks aside. After China’s previously much-vaunted tech sector suffered death by a thousand cuts over a torturous 18 months at the hands of Beijing’s mandarins, the gap between valuations in North Asia and the US on its bubble up in 2021 was too glaring to miss.
In a cyclical recovery, commodities, food and energy (even before the Russian invasion of Ukraine in February disrupted supply chains), banking with a rising rate environment, renewables, and real estate are all asset classes that make for sound bets.
In this regard, I was lucky to put my money where my articles proposed since 4Q last year — which was mostly at home. In contrast to the destruction seen in some major markets and asset classes, Singapore is one of a handful of markets that continue to stay in the black. My diversified global portfolio in funds sank in line with the S&P500 although I avoided major carnage because of home bias and sector diversification and did not suffer from Fomo too.
Once the war started and inflation soared, the raising of “risk-free” rates by a more aggressive Fed sank the remaining Tina (there is no alternative) fluff that fund managers were buying into and bankers were selling. In capitulation, it took most investment houses and research analysts about six months to gradually reverse their positive calls on the markets and pandemic darling stocks, eventually completing their U-turn by July.
Adding insult to injury, we had a summer rally that nobody had predicted nor wanted — even if it was probably a bear rally for the West. As I write this column, banks are releasing many cautionary strategy pieces. “Beware the bear rally” and “Optimism over dovish Fed pivot is likely overdone” screamed a few headlines. Having shifted to “underweight” equities in June at the recent nadir of stock prices and having been left out of the July rally, it is next to impossible for investors to U-turn again and risk being caught out once more.
On the contrary
Yes, there are many economic and geopolitical tail risks out there and money is getting tighter and tighter for Singaporeans with floating-rate housing loans, and even more so for car owners when they fill up on petrol.
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It is also true that July’s rally in the US seemed to be triggered by hedge funds with plenty of shorts to cover. With markets sinking further as expected, thinner liquidity, and aided by an overinterpretation of leniency from the Fed, momentum chasers like CTAs (commodity trading advisors) who were risk-off, scrambled to catch up. According to Neil Campling, an equities analyst at Mirabaud Group, an equally weighted portfolio of the 50 most shorted stocks in the Russell 3000 was up 31%! Gravity will eventually take hold if these rallies are built on stilts.
However, the messiness in the geopolitical environment, inflation, Covid shutdowns in China, and supply chain problems facing everything from computer chips to the grains shifting out of Odessa, are starting to be resolved with time. Energy prices have come off the highs seen in 2Q, though worries continue about the European winter without Russia’s gas, even as the eurozone is stockpiling and seeking alternative energy sources.
It is also a truism that markets price for the forward. It is hard to envisage interest rates coming off, even as demand is softening and recessionary fears are starting to seep into newsfeeds — neither of which makes it a compelling case to deep-dive into growth yet.
But as each of these downdrafts create value in real businesses and assets, the mid-year pullback of the Straits Times Index to where it started has created a 5%–10% upside opportunity for investors to pick up quality blue chips like banks that have rebounded. As the results trickle in, it should not be surprising to see cyclical players like commodities-driven Wilmar International or renewable energy firms like Sembcorp Industries (which hit a new one-year-high before National Day) deliver earnings that are above expectations.
For counters that are “undiscovered” or not favoured by the market, I would still invest in them if their business models are intact, have strong cash flows and reward shareholders with dividends — like Del Monte Pacific which I can use to fund another holiday. My guess is as markets climb the “wall of worry” as the year’s issues play themselves out one way or another, it could be the end of 2022 or early 2023 before the analysts revise their posture from “underweight” to “neutral” and “overweight”. When that happens, the market may already have moved so it is probably time to sell again.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
