As promised in the mid-week article, here’s our guide to Wuhan Coronavirus for Singapore investors – how to react, what to do, and why the hell are stocks still going up?
Basics: How will Wuhan Coronavirus impact investments?
The impact from the Wuhan Coronavirus will be split into 2 phases:
First order effects – This is the immediate sell-off in financial markets as global investors react to the news. There’s was a lot of uncertainty and fear at the start, which led to a huge sell-off. Gradually, as more news appeared, and investors viewed the virus will less uncertainty, and Beijing seemed to have things under control (and big stimulus started getting unraveled), this sell-off reduced and people started buying the dip. That’s the first part.
Second order effects – The second part comes from knock-on effects to corporate earnings. China is a huge part of the global economy and global supply chain these days. With most of China shut down for 1 whole week post CNY break (potentially longer as they’re unlikely to do a full reopen), most factories in China are shut, impacting global supply lines. Just talk to any SME owner and they’ll tell you how their supply lines are a disaster now. Or take a look at how global car manufacturers are considering a shutdown of their plants because they can no longer get parts from China. These are real world impacts that shouldn’t be underestimated.
The other, potentially bigger impact, is that on consumer and business sentiment. In China, nobody goes out of their house these days, unless it’s to buy groceries. In Singapore, Hong Kong and the rest of Asia, it’s definitely not Wuhan level of bad yet, but just going out these days I’m already starting to see reduced crowds. And let’s not even get started on global tourism. Half empty planes are already becoming the norm.
This is terrible news for all retail, F&B, hospitality and airline players. And don’t underestimate the impact on the other guys like real estate, car dealerships etc. Because when people are afraid and they stop going out, they also stop spending, and they stop making big ticket purchases.
The business owners know this too of course. So with all that uncertainty around, they’re going to dial back on business investment, they’re going to reduce hiring (or even consider asking staff to take unpaid leave), they’re going to be more cautious in awarding bonuses.
This is going to impact consumer sentiment even further, which feedbacks into the loop above.
And the longer this drags on, the worse the second order effects get. This one can spiral out of control quickly, so don’t underestimate it.
Stock markets currently have absorbed the first order effects, but I think they’re way too optimistic about the second order effects.
How to react? Buy, sell or hold stocks?
How to react as a Singapore investor depends on your investment horizon, and your risk appetite.
Long term investor with high risk appetite
I am a long term investor with a high risk appetite, so I’ll share what I’m doing, and you guys can judge if it works for you.
I’ve found it incredibly hard to time the top and bottom perfectly. More often than not, I miss the top, and I miss the bottom, which means that the gains I make by trying to exit the market and re-enter are miniscule (sometimes I even lose money).
Many times when you try to exit, you almost never have the courage to buy back in again because you’re always thinking that stocks can fall further, and once it recovers you’re psychologically resistant to buying back above your original sell-point. Controlling your emotions is the hardest part in this game, and the easiest way out, is to not play it at all.
Because of this, I no longer look to exit positions on the way down. I sit there, I take the losses on the way down no matter how painful they are, and once I am comfortable with where prices are, I start adding to my positions.
I don’t see any reason to deviate from that strategy here.
Of course, asset allocation really, really matters in a time like this, which is what we’ve been saying all the time in our FH Course. 80% of investment returns are driven by asset allocation, so neglect it at your own risk.
My full investment portfolio is available on Patron for those who are interested.
Long term investor with low risk appetite
If you’re a long-term investor with low risk appetite, your original asset allocation should have been tailored to result in minimal losses in a time like this (big allocations to bonds and gold which would have gone up). If so, everything is working as intended.
If it didn’t, then you need to relook at your allocation once all this is over, because it’s not performing at intended.
Short term investor
If you’re a short-term investor, then this is your moment. Short term investors dream for market volatility, because that’s where the big money is made.
Go forth and conquer, all ye short term investors!
When to buy Stocks/REITs?
Ray Dalio has a good article on LinkedIn that you guys should check out if you want more info.
In any case, there are 2 big things to look out for:
Pace of increase of new cases
The first is the pace of increase of new victims each day. The time to start buying is when the number of new cases each day starts to drop relative to the previous days. This indicates that the worst of the virus is behind us, and we’re starting to get this under control.
Bridgewater did up the charts that backtested this strategy for SARS, and it generally seems to hold up.
The next question of course, is how do we know when the number of new cases start to peak?
I’ve set out the China Coronavirus numbers (red is number of new confirmed cases a day, yellow is number of new suspected cases a day) below, and you guys can judge if it looks like it’s peaking.
There’s also some interesting second order thinking involved here, where because everyone is watching for the pace of increase to taper off as their buy signal, it means that the actual buy signal comes way before that. If so, that could explain why stocks have rallied so much.
I’m not so sure if I agree with this though. I think if you’re buying now it’s just blind faith in the ability of governments to control this within the next few weeks. As at right now, it’s just not possible to say which way this will turn. The situation in Singapore or globally could well get worse before it gets better.
Don’t forget that the stock market rallies in SARS came after the Dot Com recession in the 2000s, where stocks had already fallen drastically in valuations. Not necessarily the case here, off a 10 year bull market.
My personal view? I originally shared on Patron that I don’t see this peaking before mid/end Feb to early March, and I’m a pretty optimistic guy by nature. So it’s still really early days, and I think it’s way too early to be calling the peak just yet. And don’t forget the official statistics are the “official numbers”, so a bit of reading between the lines is also required here.
The other thing that cannot be ignored, is the impact of stimulus from governments and central banks. China is bound to roll out big monetary and fiscal stimulus to jump-start the economy after this.
In fact they’re already been doing that by injecting big liquidity into the market.
It’s had a fantastic impact on China stocks so far, and I don’t see any limits on the China government to implement this one. It’s going to come back to haunt them longer term for sure (fueling bubbles and malinvestment), but short term, it still works.
What stocks to buy?
Which stocks to buy depends a lot on how much prices fall for individual counters, and on how long this coronavirus lasts.
It’s still early days, so I won’t go into this in too much detail here. I’ve extracted some broad ideas from the Patron articles here (full list on Patron and on the FH Course – so check it out for more details if you’re keen).
- ETF for broad generic exposure (likely via H-Shares as opposed to A shares)
- Financial Institutions as a long-term growth play (but only long term – short term non-performing loans will go up and net interest income will drop)
- Real Estate as a short to midterm play (given the amount of stimulus the china government will likely inject – both fiscal and monetary, real estate could actually be a surprising winner here, same as the QE playbook post 2008)
- Tech as a long term secular trade – Much of China’s future growth will come from this space
- Hospitality as a rebound play – but only if prices sell off irrationally and valuations look appealing (has not happened yet).
How will REITs react?
Quite a few of you have reached out to ask about the potential impact of the Wuhan coronavirus on REITs as well. I’ll share what we wrote on Patron below:
REITs should be broken up into 3 broad categories to analyse their impact on each:
- REITs with assets located in China or HK
- REITs with assets located outside China, but non-hospitality based
- REITs with assets located outside China, but hospitality based
REITs with assets located in China or HK
Examples: CapitaLand Retail China Trust (CRCT), Mapletree North Asia Commercial Trust, Sasseur REIT, BHG REIT, Dasin Retail Trust
For obvious reasons, this category will be the worst affected. With China in a prolonged shutdown, retail, hospitality and commercial (office) buildings will all be affected. Hospitality will be the worst affected, followed by retail, then offices.
Damage to the REIT’s earnings will come in 2 ways:
- Reduced rental – For hospitality or retail REITs where a portion of the rental income is pegged to sales, lower sales results in lower rental for the REIT. On that basis, office should be less affected. The longer that this drags on, it will also start to affect rental reversions (rental of new leases), and the landlord may also be forced to grant rental waivers to existing tenants to help them tide through this crisis.
- Forex loss – Barring any intervention by the MAS, RMB will likely weaken against the SGD in the short term, impacting earnings of the REIT (denominated in RMB). – Update: MAS has intervened to weaken the SGD, so RMB may not depreciate that much against the SGD.
It’s not possible to accurately quantify the earnings impact because it depends on how long this Coronavirus drags on, and how severe the measures are. So in the short term, trading will probably be heavily sentiment driven, with vicious falls or rises based on news coming out of China.
But back to our piece over the weekend, as long as the coronavirus is eventually contained, earnings will eventually recover, and this may prove to be a good buying opportunity.
Of the S-REITs that fall within this category, I really like CRCT because of the high quality assets and strong sponsor backing. I may look to pick some up if the price drips further.
REITs with assets located outside China, but non-hospitality based
Examples: CMT, CCT, MCT
The biggest question will be whether the country the assets are located in will have a big outbreak of Wuhan Coronavirus.
If yes, the analysis in part 1 will apply – and big sell-offs will follow.
If not, then the REIT’s earnings should be relatively more stable. Share price wuk still be impacted due to the global risk-off sentiment, but the sell-off should not be as severe as those in categories 1 and 3.
For example, REITs with assets in Singapore (MCT, CMT, CCT), have experienced sell-offs, but nowhere near the extent of the China REITs. But if the virus spread to Singapore and gets out of control, the current sell-off will look like just a warmup.
For now, my views are that we will probably not see the virus spread big time to any country outside of China/HK, but of course this can change any time. Update – I think this view is changing quickly. I now think there are non-zero risks this could spread in a bigger extent outside China. Singapore in particular could be at risk.
Given the mild price declines in these REITs so far, I see better opportunities in categories 1 and 3. Update – This has definitely changed, I’ll probably need to come up with a Warchest list for Singapore REITs/stocks as well.
REITs with assets located outside China, but hospitality based
Examples: Far East Hospitality Trust, Ascott Residence Trust
Hospitality REITs will likely be hard hit because of the hugely reduced global travel.
Most Hospitality REITs have rental income pegged to a proportion of sales, so as sales declines, so will the REIT’s earnings.
It’s again impossible to predict the true impact on earnings (goes back to severity and timing of the shutdown), so such REITs are likely to be traded heavily on sentiment.
As an investor prepared to take long term positions in hospitality REITs, I like the current opportunity as a way to add to my exposure in hospitality REITs. Ascott Residence Trust is probably my favourite pick for now, again because of the sponsor, and diversified portfolio (for me personally, not a trade recommendation).
Why are stocks going up?
It’s important to note that stocks do not reflect the economy in the short term. Short term, stocks can go up, even when the economy is going down.
For a truer picture on how the real economy is faring, we need to take a look at bonds and commodity prices.
WTI Crude, Natural Gas, and Copper are set out below, none of which are looking too great. The 18% collapse in crude is particularly troubling, the oil sector barely even recovered from 2015, and we’re already looking at what is potentially a big demand shock. This will be one to monitor in the days to come.
Bond yields have also dropped, but seem to be recovering in recent days, so that’s interesting. Could this indicate that markets are confident of the recovery? This seems to be backed up by the general recover in cyclical stocks like semiconductors.
Closing Thoughts: What am I doing in this Wuhan Coronavirus time?
To be really honest, there’s just so much to unpack from this Wuhan Coronavirus that it’s not possible to cram it all into one 2500-word article. It’s a complete course in economics, psychology, and investing, and that’s even before you account for the uncertainties in what’s going on out there.
Do note also that this article is written as at today, and will not be updated going forward. I constantly share updated thoughts on Patron, so do check that out as well. If you bought the FH Course, we’ve also added quite a few of the Wuhan Coronavirus related Patron articles in there (under a new module 3.1), and will be updating it going forward, so do check back regularly.
Personally though, I view this as a buying opportunity. I’m not looking to sell on the way down, but I’ll look to buy if stocks start hitting valuations where they look attractive, over the next few weeks / months. If they never hit the point where they’re attractive, then I just go back to investing in the same way I did before all this started.
As at right now though, I think stocks might just be a tad too optimistic on the outlook. I think they’re not fully pricing in the potential second order effects in play, and the potential that this can result in a slightly longer shutdown of China (or the potential that this spreads).
But we’ll see…
What do you guys think? Buying opportunity, or time to sell? What counters do you like? Share your comments below!
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