Q1 Debrief and Q2 2019 Outlook for Singapore Investors


As all Patrons will know, I publish a quarterly outlook for all Patron members, where I run through the top observations for the coming quarter, and discuss key recommendations for asset classes that may outperform.

For the benefit of all readers, I’ve extracted the entire Q1 2019 outlook below, together with some follow up thoughts, in the hopes that we can all learn from this, and improve our investing insights in future.

I’ve also set out a brief summary of my second quarter (Q2 2019) outlook below. The full article is available on Patron at only 2 bucks a month (all proceeds go into the running of this site and the creation of new content), so do consider signing up if you are keen.


Financial Horse Quarterly Outlook for Q1 2019

Welcome to the first Financial Horse quarterly outlook for the year. If you have any comments or feedback at all, I’m always happy to hear them ([email protected]).

Key observations for Q1 2019

  1. Yield curves are a mess at the short end – The yield curves at the short end (1 to 7 years) for Singapore and the US are incredibly flat, and inverted at some points. The traditional recession indicator (being the 2s10s curve) remains mildly positive, which would indicate we have about 12 months left before a US recession (inversion of the 2s10s curve typically precedes a recession by about 12 months).

    However, a flat/mildly inverted yield curve (even if its limited to the short end) is not to be trifled with, and leaves me a lot more cautious on the market outlook over a 1.5 to 3 year timeframe.

  2. REITs are looking very strong – The US market is currently pricing in almost no rate hikes for 2019. Because of this, bank stocks have been trading poorly, and S-REITs (especially those with stable underlying cashflows) have been trading very well. Market sentiment over REITs has been quite bullish as well.

    Unfortunately, I think that the market may be overly discounting the pace of rate hikes, and REITs are not necessarily recession proof (in a recession, rentals will be affected). So while there remains good opportunities for underpriced REITs (eg. Keppel KBS US REIT), I am growing more cautious on REITs that are fully priced by the market, and trading at a premium to book value (eg. CCT, MCT, CMT). Such REITs are still a great long term investment, but the price matters greatly, and if you buy them at a premium, the returns over the short – mid term may be less than stellar. As a general note, I stand by my rule not to buy a REIT trading at a premium of more than 15% to book value, regardless of how bullish the market may be.

  3. Economic data from Asia is mixed – US economic data continues to remain strong (although the US financial markets are starting to price in a recession). In Asia, economic data (eg. China PMI, Singapore GDP growth) are starting to show signs of weakness. China’s plan to curb deleveraging looks to continue in 2019, which will place a ceiling on how much Asian stocks can rise.

    A huge potential catalyst in the short term is going to be the results of the trade war negotiations. It is becoming clear to both the US and China that there is no winner in a trade war. A resolution on the trade war (eg. China makes some concessions on IP, US extends the trade war moratorium slightly to finalise negotiations, and both parties can claim victory to their domestic audience) can easily move stocks up 10 to 15%, perhaps more for those with large trade exposures.

  4. Market sentiment matters Market sentiment matters greatly. If the US stock market fails to recover, and market sentiment is broadly negative, it can quickly become a self fulfilling cycle. Eg. Investors are less likely to fund new debt issuances, leading to higher interest rates and lower liquidity, which places greater strain on companies, slowing the pace of growth and new investments into production. Negative sentiment also affects hiring, spending, and new investments, which affects corporate earnings, etc.

    I don’t think we are there yet, and the latest remarks from Jerome Powell on the Fed being “flexible” going forward were well received by the market. However, another policy misstep by the Feds, or poor communication, can accelerate this late stage cycle.

  5. US rate hikes a big question mark – How many hikes will there be for 2019? The official commentary from the Fed is projecting 3 hikes, but they also said that they are willing to be “flexible” if there is weak data. However, the financial markets are predicting no rate hikes in 2019, and policy easing in 2020. I’m not convinced the markets are right on this one.

    I remain sanguine on the state of the US economy, and I still think there’s at least about 12 months of economic expansion left in this cycle. Companies are not displaying the reckless abandon and insane balance sheets that they displayed in previous end stage cycles. As long as the Fed does not overtighten into a quick recession, this narrative may continue to play out, albeit at a slower rate.

    If so, Fed rate hikes may surprise to the upside, and bank stocks may outperform.

General Recommendations

How to invest in Q1 2019 is dependant, as always, on your personal finance situation. If you need the cash in the short to mid term, stick to high quality, risk free investments like SSBs. If you can afford to lock up the money for a longer period, stocks have fallen a great deal from where they were in early 2018, and the valuations are a lot more attractive now.

On a general note, these are the investments I like for Q1 2019:

  1. High quality short term bonds, or high quality yield stocks – High quality short term bonds like SSBs or Temasek Bonds, or high quality yield stocks like Netlink trust, continue to remain attractive.
  2. More cautious on REITs – I’ve become more cautious on REITs because a lot of them have appreciated significantly. I don’t think the market justifies REITs trading at such a large premium to book.
  3. Financial Stocks – I quite like bank stocks as a contrarian play. DBS is trading at a 5% yield, and a 25% premium to book. The P/B ratio is quite close to its historical average, and the high yield makes the stock look very attractive. If the Fed rate hikes do surprise to the upside, there could be price appreciation for bank stocks, which coupled with the high yield, could make for great returns.
  4. Too early to go into China – While I really like the Chinese market long term, I think it’s still too early to go in. The China deleveraging process isn’t complete, and there’s still too much uncertainty. A positive trade war outcome may cause stocks to jump, but until the domestic problems are resolved (or at least closer to being resolved), I would not go in fully.


Financial Horse Debrief

Q1 2019 was defined by one event – Jerome Powell’s declaration that there would be no interest rate hikes in 2019.

Pretty much everything else flowed from this, including the inversion in the yield curve (3s10s), and the subsequent massive rally in anything that is tied to global yields (that’s everything from bonds to REITs to yield stocks), as well as global stocks. That’s how powerful the US economy is.

Despite the inversion in the yield curve, I remain sanguine on the global economy, and I don’t think it’s going to turn out as bad as everyone says. My preferred investment strategy for now remains the “Barbell” approach that I wrote on previously, so do check that out for more details.

Economic data from Q4 2018 and Q1 2019 was poor, and do support the entire global slowdown narrative. However if you listen to what some of the business executives are saying these days about their Q2 earnings, it seems that we may see a mild pickup in Q2 2019. Despite what a lot of commentators are saying, I don’t think it’s fully clear that the rate hikes from the US Federal Reserve in 2018 were significant enough to cause a global recession.

High quality bonds and yield stocks, REITs, and Financial Stocks all did well in Q1 2019 because of the reasons above. In fact, Q1 2019 was so bullish that as long as you held a stock portfolio, you probably made money.

Where I turned out to be wrong, was on the timing of China’s recovery. I had expected the China slowdown to continue at least into Q1 2019, so the massive stimulus package from Beijing, and its resulting effects on investor sentiment, caught me by surprise. As a result, I wasn’t as heavily exposed to China in Q1 2019 as I would have liked.

Taking a step back though, I think that if you’re a long term investor, all this is really just noise, and you’ll be a fool not to build at least some exposure to the second largest economy in the world. China is going to become a dominant power in a bipolar world dominated by US and China, and as an investor today, you really need to be ready to ride China’s growth in the coming decades.

A big problem with getting exposure to China though, is that there is no good and easy way to do it. Unlike with the US market where a simple S&P500 index gets you exposure to the biggest and best companies, the Chinese market is still in its early days, which means things aren’t as efficient as they should be. And in inefficient markets, passive indexing does not work well when compared to active investing (the opposite is true in efficient markets). You can get exposure to China via the China A50 Index, the Hang Seng Index, or Singapore/US listed China stocks, but none of them are perfect.

I’ve also set out a brief outline of my second quarter (Q2 2019) outlook below. The full article is available on Patron, so do consider signing up. Otherwise, the outline should give you some idea of the general direction of my thoughts! Good luck with investing, and all the best in Q2 2019! 🙂


Key observations for 2Q 2019

Rate hikes are off the table

No US Recession in 2019

Emerging markets to have a better 2019

China still a question mark

Yield plays have had a huge runup, but opportunities remain 

Own technology disrupters

General Recommendations

Be selective on yield stocks

Tech disrupters

China exposure

Till next time, Financial Horse, signing out!

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