The purpose I set up this blog of mine is to improve my ability to transfer my thoughts into words regardless whether what I’m thinking is true or false. I hope to effectively convey my thoughts in writing effectively. Here are some of my thoughts…
For the past one week, equities around the world has dropped simultaneously, sparking fear among investors. It caused a 4% drop in my portfolio YTD. Is this a sign for things to come? Is this a good time to buy? Will it drop further to the tune of 2008-2009 or 1997-1998? Or it is just a temporary drop which will quickly recover and the stock market will slowly inch upwards again, reaching new high? Who knows?
However, let’s be logical for a second and look at the historical KLSE chart below:
Look at the very right of the chart above, it is just a minor drop in the grand scheme of things. There is absolutely no reason to panic, not yet. And this is definitely not a good chance to buy unless you sincerely believe that the drop will rebound quickly. According to the historical charts, the three largest drop in KLSE’s history which includes 1997-1998, 2000-2001 and 2008-2009 are around 30-50%. So if you think that a crisis is coming, you will have plenty of chances to accumulate in the future. Even if you think a crisis is not coming, according to “history”, a recession will happen every 8-10 years. Since we are at the end of a cycle, the probability of a recession is high.
Since the change of government in Malaysia. The Malaysia government has removed GST which contributes a lot of tax revenue and reintroduce SST which doesn’t contribute as much. To make up the shortfall of the revenue, the government will have to (a) introduce new taxes , (b) cut expenditure or (c) sell government assets. The new government has cancelled/renegotiate some infrastructure projects. The government is also mulling to introduce “capital gain tax” and seems to open to sell some government assets. In my opinion, option (a) and (b) are not favorable to the equities market while option (c) is neutral/positive.
Malaysian in general has a lot of debt, especially among the civil servants which tend to take on more debts because their pay is lower than private sector. If the government choose to cut expenditure, this might affect the domestic spending thus affecting the GDP. In addition, globally, US is seen to increase its interest rate at a faster pace than expected. To avoid further weakening of the Ringgit and to attract capital to Malaysia, the Bank Negara can opt to increase interest rate. However, such a move will not be popular, since Malaysians are the most indebted household in the region, an increase in interest rate will affect many families. While Malaysia is still a stable country economically, there are cracks in our fundamentals due to excessively cheap money during the past 10 years.
We have also yet to see the true impact of the trade war between US and China. Malaysia is a small country. Ultimately, what will affect our local equities market is what’s happening around the world, especially in China and US. China has their own problem with its debt and economic growth. US has their own problem too with Trump and their economy. Europe has their own problem. Their government and their central bank are running out of options to solve these problems, the only thing they can do is to kick the can down the road and pray that the next generation is capable to solve the problems.
Is this the perfect storm? Is this it? Cracks within Malaysia’s fundamental coupled with a serious economic downturn globally? One thing is for sure, I will continue to hold on to cash for now. For my portfolio, since I’m on 50% cash, if the market drop by 50% in the next 6 months, I will only be down by 25%, which is manageable psychologically. However, if I’m wrong, my returns will be lackluster. It pays to be a contrarian…
