Market risks more scary than before

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Are markets really scarier now than before? Or have we conditioned ourselves to believe so? Companies still function and operate whether the economy is doing well or not - it's up to the investor to sift them out!

Business Times - 03 Oct 2011

Hock Lock Siew
Market risks more scary than before


By R SIVANITHY

WITH stock prices down sharply this year, it is tempting to buy into claims that 'value is now emerging', especially in the local market where the Straits Times Index has lost about 20 per cent so far in 2011.

This idea of emerging value has been circulating for some weeks now, accompanied by calls for investors to consider 'bargain hunting'.

It is true that if stocks were a 'buy' two months ago before the European debt crisis erupted anew, then they must be all the more so now that prices have plunged by as much as they have.

However, prudence dictates that before buying, investors should bear a few points in mind.

First, the recommendation that investors start picking up stocks stems from most experts' belief that there won't be a repeat of the Great Financial Crisis (GFC) of 2008 and so investors can buy the dips with confidence because a recession isn't likely.

Really? Recall that these are the same experts that failed to predict the GFC in the first place and who glossed over Greece's debt problems when they first surfaced more than a year ago, together with those of Portugal, Ireland and Spain (remember the PIGS?).

Even as recently as mid-July, Singapore strategy reports made little reference to Europe as a potential problem area, nor was a slowing US economy seen as a factor. Instead, the focus was possible policy changes after the May General Election and how the economy might be affected.

In under two months, all this has changed. There is therefore good reason to be sceptical when expert observers speak bullishly and glowingly of economic and market prospects.

Second, banks are today better capitalised than before 2008, tighter controls are now in place and besides, governments and central banks stand ready as lenders of last resort if things really get hairy.

These arguments lie at the heart of the confidence underlying much of the 'buy' calls. Problem is, there are signs that markets are slowly coming round to the idea that confidence in officialdom may well be misplaced.

Confidence to stay invested - and complacency engendered - started from the US Federal Reserve's Tarp (troubled assets relief programme) to its two rounds of 'quantitative easing' to 'Operation Twist' announced two weeks ago, the latter to depress long-term interest rates.

Also falling in this category is Europe's somewhat fragmented and patchy rescue of Greece, which so far appears to have bought some time but is threatening to disintegrate at any time.

With each bailout though, the lasting impact on risky assets has been getting progressively smaller, a sure sign that confidence in governments and central banks is waning. This is all the more because conventional policy options have been exhausted and there are significant political barriers to adopting unconventional tools.

Many observers have also noted that a fundamental problem is an absence of strong and credible leadership out of the crisis and that without such guidance, major problems could lie ahead.

Third, valuations are now 'cheap' and so stocks are worthy of a second look, especially those which might be described as 'defensive'.

Certainly, this argument has been used for some local blue chips to good effect - Singapore Airlines, UOL, SingTel and SingPost spring to mind as a few beneficiaries in the past fortnight, their prices having held up well amid pressure elsewhere.

The biggest problem, however, with many expert calls is that while plenty of consideration is given to potential returns, not enough is allocated to risks. Every 'buy' call typically zooms in on the money that can be made and this usually occupies more than three-quarters of the report but a discussion of risk is usually confined to one paragraph, if at all.

So here's a final thought: if the GFC of 2008-9, which was brought on by threats of banks going bust, saw the STI plunge 56 per cent from a high of about 3,400 at the start of 2008 to below 1,500 some 15 months later in March 2009, then what might be the possible loss now if a fresh financial crisis were to unfold, given that this time, it's not banks but governments that are threatening to go bust?

HOCK LOCK SIEW

By R SIVANITHY

My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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