It seems like the mood everywhere is very sombre now.
The vibe we are getting is that, everyone is bunkered up and staying at home. Social activities are limited to friends meeting at home. For out of home activities, it is mostly limited to supply runs as opposed to leisure activities.
We wanted to share a bit more thoughts about the current situation of the economy.
Our thoughts are a bit all over the place now and hopefully documenting it down will help us focus our thoughts, and subsequently give us more resolve in either deploying our cash now or holding on a bit longer.
Has The Market Sufficiently Price In The Demand Shock?
Speaking to some of our friends who have been investing too, the overall consensus is that the current market correction rewrote how we should be investing.
Without knowing what the “new normal” is, it is hard to “price” equities now.
The situation that we are dealing with is a demand shock, where people are no longer spending money. The image above illustrates this perfectly – everyone is adopting a “wait and see” behaviour.
Has the demand shock been priced in? Exactly how do we price this and how much of a discount should we apply to the current stock price level?
Finding A New Normal
While we have a shopping list of REITs that we are eyeing, but the truth is that, our entry prices are all over the place, the entry prices have been triggered a few times.
Even if there is a clear entry price strategy with sufficient margin of safety, taking into account the discount towards the NAV, we still don’t feel confident to enter into any trades.
We let emotions get to the better part of us, because we are trying to navigate uncharted grounds and a new normal here.
We also think that working class and small business owners will suffer the most in this current situation.
We are already hearing Facebook posts sharing from small F&B owners where their 2020 plans are all thrown out of the window – a sharp contrast from a hopeful start to 2020 to now a devastating state of struggling for survival every single day.
A Lot Needs To Go Right For Economy To Rebound
In order for the economy to rebound and things to go back to normal, a lot of things need to go right:
- Virus needs to be contained, and this means that a vaccine should be successfully tested and developed.
- The economy should not have taken too much a hit before the virus is contained
- Consumer needs to feel safe and ready to go about their previous consumption pattern
- Consumer should not have taken too much a hit before resuming their consumption pattern
- Global trade and travel demand needs to be restored
There is a lot of “if and only if” situation for the economy to go back on track.
Instead, the economic signs that we are seeing now:
- More job cutting measures
- Airlines shut down (SIA)
- More countries on lockdown (India, UK, Australia, Thailand, Malaysia)
- Global travel demand is zero
- Businesses are encourage to work remotely
What we expect to happen next:
- Credit card defaults
- Mortgage defaults
- Companies needing loans for operating cost
Earlier today, the STI Index rebounded a 5.76%, a much needed good news for all investors.
However, is that the mark of a rebound?
While some level of FOMO might be toying with us, when we sit down and look at the signs around us as mentioned above, I think we’ve decided to let this play out just a bit more.
For some more context, in 2008, STI dropped more than 50%. So far, the STI has only dropped 30%. A lot of people shared that this crisis felt different and worse than the one in 2008 – so to think that the rebound today is a recovery is really quite a stretch.
While the US government (and soon the Singapore government) had announced more quantitative easing and economic stimulus package, I really think that it may do more harm than good if it is overdone (like in the case of US).
The problem right now is, even if the government is giving free money for everyone to spend, this might not necessarily lead to the desired spending.
Instead, it might lead to more unspent money in the “system”, and when the money equilibrium is achieved, will lead to hyperinflation and cash will become worthless.
There is a very real possibility that this will happen in the US, and the effect of that will trickle down to Singapore’s economy.
Knowing this, we really need to rethink about our financial goals and to see how we can safeguard ourselves and minimise any potential impact of that.
The truth is, there is no right answer to this, and we are just about as clueless on this as we are on the near future of the economy.
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