Pressure pushin’ down on me
Pressin’ down on you, no man ask for
Under pressure that burns a building down
Splits a family in two, puts people on streets
I received complaints after last week’s moody Pink Floyd-inspired Dark Side of the Moon title morphed into a saccharine-sweet earworm courtesy of Berlinda Carlise’s La Luna that went on longer than expected. To restore some credibility lost to these readers who fell to my unintended inception, I will not be heading to The Wall just yet. I will stick to Queen or David Bowie for now.
Markets have indeed been under pressure. The confluence of excuses from Ukraine, China’s “Common Prosperity” campaign, Putin-Xi friendship, inflation, stagflation, food and energy crisis — coupled with underwhelming private equity exit IPOs of decacorns and unicorns, rising interest rates, and the trillion US dollar rout in cryptocurrencies following the collapse of the so-called “stablecoin” — Terra Luna in May — certainly makes for a persistent series of bad headlines.
See also: Bitcoin’s Trump-inspired rally is bad news for Korean small-caps
Over the last couple of years, there’s all that cheerleading of all kinds of fluff: meme stocks, Bored Ape non-fungible tokens or NFTs, public listings of companies such as Uber, which came with “health-warning labels” in fine print stating that they “may never make a profit” buried within the prospectus.
The market suffered an initial seizure in March 2020 when the pandemic began to spread. Before long, many market commentators, journalists and pundits have gone a full 180 degrees to become Cassandras and Nostradamuses. No, short of nuclear holocaust, the world isn’t racing to a screeching end in 2022 or 2023. And even if rockets were fired, perhaps — some will survive, at least in The Lord of the Rings’ Middle Earth (aka New Zealand), or sunny surprising Singapore, the safe but boring stores of value with sustainable growth.
Chippin’ around, kick my brains ‘round the floor
See also: That's what friends are for
These are the days it never rains but it pours
Truth be told, for those who joined the jamboree late, circa 2021, and Grab’ed all things Cathie Wood, Elon Musk (and his Twitter shenanigans), Coin -”re”-based, Robinhood, it has been a journey akin to venturing into the Mines of Moria with a perilous descent of up to 70% (or in some cases, near total wipe-out) if they had not cashed in the supernormal profits by 4Q2021.
As headlines now talk about technical bear markets with broad major indices like the S&P 20% off its all-time high on Jan 4 this year, and the Nasdaq 30% off from its peak, even Bitcoin has sunk to below US$30,000 ($41,270), more than half off its US$69,00 double top in 4Q last year as flagged in this column. The fact is, S&P is only back to April 2021 levels, Nasdaq back to October 2020 levels and Bitcoin at levels now last seen in January 2021.
For asset prices careening off a high base built on hype with no intrinsic values, history is laden with lessons from tulips in the 17th century to eyeballs during the dotcom era just over two decades ago.
When markets built on stilts collapse, it could be a far deeper and longer cut. For many believers stuck at higher levels, conditioned on hope of averaging down, beware, as it could still be catching falling knives. For traders, bottom fishing can be a very smelly exercise full of grime and slime, unless one does homework and is nimble and prepared to extract profits from short-term volatility.
For those who believe in asset allocation and are properly diversified, then all these will be just noise in time to come — unless you are investing based on a procyclical bias in allocating more every time something goes up for FOMO reasons, then it’s time to reflect and review.
That’s the terror of knowing what this world is about
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Watchin’ some good friends screamin’, “Let me out”
Pray tomorrow gets me higher
What then does one do now? Is it too low to sell? For me, if your original investment thesis still holds and nothing has changed, be it from a macro or fundamental perspective, to warrant a review, then stick to it and hopefully collect the dividends and coupons.
When valuations normalise, value will be (re)discovered and hopefully nearer-term payouts carries you through. If you are passive and diversified, just remain so and ride the cycle — without being too clever to go allcash, as when markets turn back, you will miss the first and steepest leg up.
If you are over-concentrated, then some re-balancing is probably required, as there are winners and losers in all market conditions. Some are expecting another commodities supercycle to come with inflation and the food crisis. However, if you are only thinking about it now, you are probably late to the trade.
On the other hand, if you realise that you were in on a flutter, following some hype and a crowd, and your investment thesis does not stand up to scrutiny, then it may be probably better to stem the rot, cut and reinvest in new opportunities as they emerge.
As in the case of global markets especially like the US, the tide is still receding — and indices are not even at pre-pandemic levels given the steep covid rally up to begin with. Gravity still has some way to go.
Turned away from it all like a blind man
Sat on the fence but it don’t work
Keep comin’ up with love but it’s so slashed and torn
Why, why, why?
Sell-side research has been hitherto mainly cheery. Yet, as a friend has lamented, they’ve started revising their valuation metrics and target prices — on the tails of the market, sending the share prices down further.
Just look at Grab. Sell-side target prices of this stock has come down consistently since its spac IPO last December by corresponding percentages, with DBS Group Research most notably cutting the target price to US$2.93 from US$5.60 — already half the IPO price. As a contrarian, when the final (bullish) analyst capitulates, it is often a signal for me to buy.
More recently, Chinese markets which have been weighed down since the trade war with America and Common Prosperity are starting to look ripe for a rebase and rebuild after falling up 30–40% off its highs — as I’ve articulated in January. China’s tacit support of its closest friend Russia, however, prompted JP Morgan to go as far as to declare China “uninvestable”. There is evidence of international money which had been pouring in prior from equity to fixed income, withdrawing since March. Even the HSI is not spared a third of its Feb 21 recent high.
As we edge closer towards Xi Jinping’s October coronation for his third term, and as Ukraine and Russia stories meander to the inside pages of the daily press, there is probably relative value to be found.
Since May, each of the rallies triggered by the latest policy announcements by Beijing remains capped (even if for a day it can be up to 8–10%). However, we seem to be in a period of base formation, without lower lows. At the very least, the risk/reward ratio from current levels versus the West appears more favourable.
Finally, seasoned market observers have started to highlight how Singapore cannot continue to be outstanding in its relative performance, where the STI is stubbornly staying above water in the midst of the current storm. The disbelievers dismiss the “anomaly”, claiming the market is doing well only because of our safe haven status. The prophets of doom insist that we will fall down with the rest of the world eventually.
Despite the sale in May of risk assets, the STI continues to hold. Sometime in 3Q this year, the pendulum of news headlines will swing again as global markets (perhaps battered by more bad news) start pricing forward for 2023. As markets eventually climb out of the wall of worry (after rebasing themselves through the summer), those of us that stay in the safety dance of reinvented, sustainable neutrality in the post-Covid Singapore market may yet reap more rewards.
This is our last dance
This is ourselves
Under pressure.
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
