I recently chanced across an article by Turtle Investor where he described what he would do with his robo investments if the market crashed (Spoilers Alert: He would sell bonds and buy equities). It got me thinking, we have emergency plans for fires, earthquakes, aeroplane emergency landing, why not one for our investments? Where is the colourful brochure that tells investors what to do in the event of a 20% or 50% crash in share prices?
The persistent flattening of the yield curve is starting to look quite worrying. An inversion of the 2s10s US treasury yield curve has preceded every single one of the past 5 recessions, and with the fed on its crusade to raise interest rates, we may be getting to that point sooner than we think (Macro Tourist has a great post here with even more curves).
Siyrce: US FRED
However, no one can predict the exact timing, or the cause of the crash. The next best alternative is to prepare for it.
I have prepared a personal list of 10 stocks that I will buy when the next recession, and market crash, inevitably comes around. The assumptions I used are as follows:
1. Blue Chip Stocks only – The stock must be a blue-chip stock. In a market crash, no one knows which of the smaller operators will survive, and you want to stick with the bluest of the blue chips. If it is temasek linked, even better.
2. 5 to 10 year holding period – The anticipated holding period will be 5 to 10 years, purchasing deep into a market crash and holding until signs that the next cycle is nearing its end. This requires the company to have a sound business model and good investment moat.
3. The world is your oyster – Any stock exchange or asset class is acceptable.
With the technicalities out of the way, let’s dive into the shopping list!
DBS Group Holdings Ltd (D05.SI)
When the market tanks, there is no stock that gets clobbered harder than the bank stocks. Expect to see DBS/OCBC/UOB hit huge, double digit declines as investors worry about slashed interest rates and bad debts. At the same time, this means that the potential of gains is the highest for bank stocks.
Of the 3 local banks, I like DBS the most as detailed in a previous article. They have done very well under Piyush Gupta, and I believe their massive overhaul and modernisation of their back end will reap massive dividends in the future. This digisation and automation of their back end will allow them to keep their bottom line low, and place them in a strong position to rebound from the recessionary depths.
Worst case: Its not called the Development Bank of Singapore for no reason. This bank has strong ties with Temasek (and the government), and is unlikely to ever go bust.
CapitaLand Mall Trust (C38U.SI)
The granddaddy of all S-REITs. CMT was the first REIT to be listed on the SGX, and as they say, the rest is history. Singapore has become one of the deepest and most diverse REIT markets in the whole of Asia since then, but none of them come close to competing with CMT in the retail space.
My personal take is that CMT is by far the best retail REIT you can buy on the market, hands down. All its assets are well situated next to an MRT, and it holds classic Singapore icons such as Plaza Sing and Raffles City. It is also managed by (in my opinion) the best retail operator in town, CapitaLand. I haven’t built up a large position in CMT because I never thought the entry price to be attractive, but with gems like this, sometimes you just have to bite the bullet. In a market crash though, this REIT is one of the first I will be looking to pick up.
CapitaLand Commercial Trust (C61U.SI)
Another no brainer for me. This is basically the CMT of commercial office properties. It holds a good portion of the CBD, and its recent addition of Asia Square Tower 2 is pure icing on the cake. In a market crash, commercial real estate prices can really dive, and picking up this commercial REIT on the cheap will make you a lot of money when the cycle eventually rebounds and office rents pick up.
Mapletree Commercial Trust (N2IU.SI)
MCT is less straightforward. It’s a bit of a hybrid between CMT and CCT as it holds retail, business park, and office buildings. I really like Mapletree as a developer and operator, and I really like the assets and long term potential of this REIT (read here). However, one can always skip this if you have already purchased CMT and CCT. If I were to skip this, I will replace it with a global hospitality REIT, of which Ascott Residence Trust is a solid choice.
Ascendas Real Estate Investment Trust (A17U.SI)
While we are shopping for REITs, let’s pick up some industrial land on the cheap as well. Ascendas REIT is one of the largest operator of industrial land in Singapore, with more than S$10 billion AUM and 130 properties. Temasek backed as well, so no need to worry about any liquidity issues.
In a market crash situation, you want to stay away from the smaller operators such as Viva or AIMS AMP, as you never know when they may face liquidity issues and do a massively dilutive equity fund raising.
I am going to cheat a little here. I really like the telecommunications space. I view it as a utility that will generate solid yield in the years to come. However, this space is a bit too murky for now, given the upcoming entry of a new market participant. A lot of these players have unsustainable dividend payout ratios with declining cash flow, and it is only a matter of time before they start cutting dividends. I also suspect that we may see some consolidation in the years to come.
I need more time to observe how this space plays out, to see which of the 3 will survive, and emerge stronger. I plan to buy the winner. Readers of Financial Horse stay tuned, because once I locate a winner, I will be writing an in-depth article on this.
Alibaba Group Holding Limited (BABA)
I recently wrote a long article professing my love for Jack Ma’s Alibaba. The demographics of this company’s core markets just blow me away. With the proper execution, the potential for this company is limitless. A lot of its relatively younger ventures such as AliPay, AliCloud, E.Lema, all need time to grow to maturity. I would love the opportunity to accumulate on the cheap.
Tencent Holdings is another very solid tech company in the China space. Its Wechat app seems to have almost unlimited usage. Personally I prefer Alibaba as I think the road ahead is a lot clearer, but I can totally understand if readers would prefer to pick up Tencent instead. That is perfectly fine.
Alphabet Inc. (GOOG)
In the US tech space, Google is my number 1 choice of the FAANGs. I always felt Amazon was slightly overhyped, and it is only a matter of time before gravity catches up (because Blue Origin…get it?). There’s a lot of talk about how Amazon and Facebook search are slowly replacing Google search, but I think such talk is premature. Google still controls Android (more than half the smartphone market), Google Maps, YouTube, DeepMind and self-driving car company Waymo (which is way ahead of its competitors). There’s still a lot of room to monetise their other core functions. However, I do acknowledge that there is always the risk of a radical new technology replacing search entirely, and it is vital to keep an eye on this stock to ensure that Google is actively innovating, and not sitting on its laurels.
I think it is fine for now, and the recent pullback in share price actually provides a great entry point into Google, if you were so inclined.
I am going to cheat a little here again. As Singaporeans, it is hard for us to keep track of US counters on a day to day basis, and the US markets are far more volatile than the sleepy SGX-ST. A bad quarterly results can easily see your share price tank 20%. Spare yourself the headache, and admit that you cannot beat the market. Buy the SPY if you are inclined towards the broad US market, or QQQ if you are more tech inclined. Or better yet, buy both, take 5 years off, and make massive profit. Alternatively, if you want to use ETFs to create a buy and forget investment portfolio, check out a simple portfolio I created here.
This last choice may be quite controversial for some. I have to admit, when I first learnt about Cryptocurrencies, I was highly sceptical as well. Virtual currency via a distributed ledger, and authenticated via the cloud? Who would want to hold that?!
But a lot of successful investing requires having an active imagination, and spotting trends before they happen. You can say what you want about crypto, but if you had bought S$10,000 worth of ether in early 2016, you would now be retired instead of reading this article (its now worth S$6.5 million).
A lot of people thought paper, or fiat currency, was lunacy when it was first introduced. Look where we are today. There is a lot of appeal in a borderless currency that is not answerable to any government. Just look at the recent moves where countries such as Iran are banning cryptocurrencies when faced with a depreciation in the local currency. In the next recession, a lot of citizens in smaller countries may move money into crypto to escape rampant domestic inflation, and you may see cryptos really take off.
It’s a dangerous space for sure, but at the end of the day, investing is about risk vs reward. If you put 0.1% of your net worth on cryptos, your downside is limited, but if crypto takes off, the rewards are limitless. Browse the full list of cryptos here.
My personal thoughts are that we may be nearing the end of this economic cycle. With the amount of debt accumulated in global financial systems, rising interest rates will raise interest repayments and make it harder to finance debt, eventually triggering a wave of default that will reset the financial system. Economic recessions are a healthy part of the business cycle, to clear out the excesses and pave the way for future growth. Unfortunately, in the previous financial crisis, the Feds shortcut this process with artificially depressed interest rates for many years.
No one knows when or what will spark the next recession. The inversion of the yield curve gives investors about a 12 to 18 month warning. The yield curve has not inverted yet, so we are at least 1 to 2 years away from such a crash. There’s some talk about how central bank manipulation of interest rates has destroyed the yield curve as an indicator, and that there may be no need for an inversion to trigger a recession. I leave it to the reader to determine the veracity of such claims, but I personally am not a believer.
Either way, it is vital that we as investors start preparing for what to do when the next financial crisis comes. You do not want to be caught unprepared when it happens.
Thinking about setting up an ETF portfolio instead? Check out the simplified Financial Horse portfolio!
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