Well… what a week!
For the first time in 2 years, it’s starting to feel like March 2020 again.
That indiscriminate selling across the board, people dumping anything they can get their hands on.
Yet as investors, times like this are what we live for.
These are the times where generational wealth is built.
That said – my personal view is that this market crash is very different from March 2020.
And calls for a very different playbook.
Lots that I want to share today, so lets get started.
The Carnage in Financial Markets
Over the past month, the S&P500 has dropped 12%, and the tech heavy NASDAQ is down 16%:
No sector has been spared.
Consumer discretionary has been hit the hardest, while energy and staples have fared the best (but still down).
Looks like the market is pricing in a stagflationary event (recession with inflation), which is not a good sign.
But the story of the week has to be crypto.
Luna, the fourth largest cryptocurrency just 1 month ago, has been absolutely obliterated.
Down from $100 to $0.003 on last count.
A 99% drop, for the fourth largest cryptocurrency.
And this has taken down the entire crypto sector, with BTC at $27,000 and Ethereum at $1800.
How I will invest $1 million in 2022’s Market Crash (as a Singapore Investor)
In times like this, cooler heads prevail.
2 big questions in my mind:
- When to buy?
- What to buy?
When to Buy REITs/Stocks in 2022?
I’ve been saying this since Jan.
To the point where I’m almost sick of repeating it.
But it’s important:
I do nothing until I see the Feds changing their mind.
And when the Feds change their mind, I buy the dip, in size.
Until the Feds change their mind, I see any big rallies as countertrend moves (in a broader decline).
And my clues for when the Feds change their mind are:
- Treasury (or credit) markets break
- Inflation goes away
- S&P500 melts down 20-30%
Treasury (or credit) markets break
Credit markets are actually holding up surprisingly well.
There are early signs of credit stress, but nowhere near the levels required for the Feds to turn dovish.
Don’t hold your breath just yet.
Inflation goes away
The latest US inflation report was… not good.
I’ll save you the details, but the key is that inflation is becoming more entrenched, and more broad based.
Inflation is shifting from goods into services, and core inflation is accelerating.
This is not the kind of report you want to see if you’re betting on the Feds turning dovish.
Feds will need to persist with rate hikes to prevent inflation from taking hold.
S&P500 melts down 20-30%
Interestingly it is this third factor that is the closest to being fulfilled.
The S&P500 at 3930 is now down 18% from it’s all time highs.
Will the Feds change their mind just because the S&P500 is down 30%?
Some of you have questioned this.
You think that the Feds only care about the real economy now.
As long as inflation stays high, and credit markets are functioning, the Feds will ignore equity markets pain.
My view is that all these factors are interconnected.
Unlike Singaporeans where most of our wealth is in real estate/CPF, Americans have a big chunk of their wealth in stocks.
The US stock market has an important signalling effect for the US consumer and business.
If the US stock market is down, it will affect consumer sentiment and business spending. Stock based compensation will collapse.
It’s a vicious cycle that feeds on itself, which will eventually hit inflation and credit.
We saw this in 2000 when the bursting of the Dot Com bubble triggered a recession.
Stock markets crash, and very soon earnings start to follow, then layoffs.
At what level of pain will the Feds step in?
Where I disagree with the dip buyers, is the level of pain required before Jerome Powell steps in.
I don’t think we’re there yet.
You must understand, collapsing equity prices, crushing speculative SPAC and crypto bubbles – this is exactly what the Fed wants.
This is working as intended.
I would be looking for a close to 30% drop in the S&P500 before this is over. 3500 on the S&P500 would be a key level to watch for me.
This is different from March 2020
I think the key difference with March 2020, is that back in 2020 we had the Feds on our side.
Markets plunged, the Feds came in with unlimited liquidity, and you just bought the dip.
This time around, because of inflation, Feds cannot come in so quick.
And without the Feds coming in, how long do equity markets take to bottom?
What happened in 2008?
2008 offers some clues, and it’s not pretty.
In 2008, the S&P500 declined almost 50% over 18 months, with multiple bear market rallies of more than 20% on the way down:
Of course I’m not saying 2008 will repeat.
I’m saying that if the Feds don’t come in and markets are left to play out by themselves, the bottoming out is a very vicious process.
Basically… don’t buy the dip yet…
Long story short – I still don’t think we are at the bottom.
Short term bottom maybe given the oversold sentiment, but the bottom for this credit cycle?
I don’t think we’re there yet.
I’m happy to start nibbling here and there, but I’m still saving the heavy firepower for later in the year, closer to the Fed pivot.
When it is time to buy though, I will be sharing on Financial Horse so do stay tuned.
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Should I Dollar Cost Average?
A lot of you have been asking me whether dollar cost averaging is the right move.
And frankly that’s a personal question only you can answer.
If you have a lot of cash on the sidelines, and you don’t want to time the market, then yeah DCA is a good choice.
For me personally though, I want to maximise my returns, and I’m happy to time the markets.
But frankly I also spend all my waking hours tracking financial markets.
It works for me, but it might not work for you.
What REITs/Stocks will I buy in 2022? As a Singapore Investor…
With timing out of the way, the next question is what to buy.
Buy Opportunistically based on prices
The problem with coming up with a fixed list of stocks to buy, is that you are closing your mind off to other possibilities.
It’s like going into a pasar malam with a shopping list.
I mean sure it works, but then you miss the discarded gem worth $100 going for $1.
It’s not possible to anticipate ahead of time what sells off and what doesn’t.
Of course, you need to do your homework and prepare as best as you can.
But when the time comes, be flexible.
How I will invest $1 million in 2022’s Market Crash
So what I would do is to compile a broad list of REITs / stocks that I am keen to buy.
And as 2022 plays out, I buy what sells-off the most relative to fair value
For now, my broad allocation would be:
- $500,000 REITs
- $500,000 Stocks
FYI the $1 million is a hypothetical number. Feel free to adjust accordingly based on the amounts of funds set aside.
REITs (6% yield is my target)
With REITs my target price is about 6% yields on the blue chips like Ascendas and Mapletree Industrial.
This indicates a price about 10% below current prices.
Frankly I don’t know if we’ll get there, so I’m happy to nibble along the way as I see bargains emerge (just in case I’m wrong).
That said, we haven’t had that kind of liquidity event like March 2020 yet where investors panic sell everything and margin calls are pouring in.
So… there is still time for this to play out.
In an case, the REITs on my watchlist are:
Industrial / Data Center REITs – $300,000
- Ascendas REIT
- Mapletree Logistics Trust
- Mapletree Industrial Trust
- Digital Core REIT
- Daiwa House REIT
- Keppel DC REIT
Retail / Commercial REITs – $200,000
- Mapletree Commercial Trust
- CapitaLand Integrated Commercial Trust
- Lendlease Global REIT
- Keppel REIT
- CapitaLand China Trust
- Starhill Global Trust
For full stock watchlist and my target prices, you can check out Patreon.
Stocks are a little more tricky.
The universe of stocks is so much broader than S-REITs, and it is very hard to anticipate in advance how the price for each sector will play out.
For now, my preliminary views are:
- S&P500 – $100,000
Commodities – $100,000
- Gold Miners – GDX
- Oil (Exxon, ConocoPhillips)
Discretionary Stock Picks – $300,000
- US Growth
- JP Morgan
- US Growth
Some key questions that I wanted to address:
Why $300,000 unallocated?
In the previous version of this article, the $500,000 was broadly split among value stocks.
Then a Patron pointed out that the allocation is too value heavy.
And the more I thought about it, the more I realised he was absolutely right.
There is already a growth to value rotation playing out right now. Investors are dumping growth stocks, and buying value stocks.
This means that as 2022 goes on, if I do absolutely nothing, my allocation to value will go up, and my allocation to growth will go down, simply due to market movements.
If I then add another 1 million to value, I would be very heavily overweight value.
Will Value outperform Growth this decade?
Now this really is the million dollar question.
I’m hearing from institutional fund managers that all the “smart” money is moving from growth into value.
And when institutional money moves like that, it usually plays out over years, not months.
The added complexity, is that even though the S&P500 may bottom out when the Feds turn dovish, growth stocks may not necessarily bottom out.
You see the S&P500 is made up of 500 stocks. If the increase in the value portion of the S&P500 outperforms the decrease in the growth portion, then the index as a whole may bottom, but individual growth names may not bottom out just yet.
The macro backs it up too, because if this decade is indeed a higher rates / inflation volatility regime, then value should outperform growth.
Whatever the case, I dont think there is a need to decide now.
Let things play out, and reassess in Q3/Q4 this year.
Watch if inflation is sticky, if interest rates will come down. Then make the value vs growth decision.
Hence I left this $300,000 open for now, but I included some names that I am keen on.
If you are keen you can view my updated stock watchlist and price targets on Patron.
Why buy Commodities – Aren’t commodities at a high?
My view is that by the end of this short term cycle, we’ll see commodities prices come down as well as global economic growth slows and inflation comes down.
But in the mid term, all that underinvestment into capex and emphasis on ESG will come back and haunt us.
Setting us up for further shortages as this decade plays out.
In other words – I would buy the dip in commodities. If we get one.
Gold is a bit of a hunch for me.
You can read my full views on gold here.
But the long and short is that in March 2022 when the US confiscated Russia’s USD foreign reserves, the whole world sat up and took notice.
Including a whole bunch of countries that may not necessarily be fully aligned with the US foreign policy.
The previously unthinkable red line in the sand was crossed, and this is not something you put back in the bottle.
In a decade of deglobalisation and lack of trust between countries, what is the true neutral asset?
Gold, commodities, and maybe Bitcoin.
But it doesn’t need to be one or the other.
All 3 can potentially benefit.
In any case, rising real rates are not going to be good for gold in the short term, so I can patient with this one.
If I am right this will be a decade long play.
What about China stocks?
What I will say, is that China is on a completely different credit cycle from the west.
The analysis above applies for everything outside of China, but very much less so for China.
For China, it all goes back to the CCP’s policy.
They’ve talked a lot about easing and stimulating the economy, but so far we’ve only had a trickle of liquidity.
Actions talk, so the time to buy for China is when the real fiscal / monetary stimulus starts.
Some may argue that the stimulus is never coming, because the CCP is afraid of inflation.
If so, then the decline will be a painful one and it is not a buying opportunity.
I’m a bit more sanguine, and I think we’ll start to see some easing as we head closer to the Party Congress. Whatever the case, will share views on Financial Horse as and when I see the signals play out.
These are momentous times in markets… but it is just money
After the recent collapse in Luna prices, there are a lot of talk about people wanting to take their lives.
Now this goes without saying, but money, is just money.
No amount of money is worth taking your life over.
Live to fight another day, and you can always build back stronger.
If you feel too stressed, just log off, and take a walk.
Come back a few days later after you’ve cleared your head.
Closing Thoughts: Will Fundamental Stock Picking work? Macro is King?
A lot of you have asked if fundamental stock picking works in times like this.
Personal view – Yes, a time will come for stock picking.
But for now, macro is king.
When the Feds are raising 50 bps each meeting and QT is starting next month, you really just want to stand aside and let things play out.
Play defensive, preserve capital.
When the time comes, then stock pick.
If you are keen, you can see my full portfolio breakdown and how I am positioned, as well as my REIT/stock watchlist with target prices on Patreon.
As always, this article is written on 14 May 2022 and will not be updated going forward. Latest thoughts (and my stock watch and personal portfolio) are available on Patreon.
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