ACCUMULATING WEALTH – Is the crash really coming?

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Just when the Dow Jones Industrial (DJI) started a strong rebound from the last trading day of October and rallied for nearly 2000 points, trend reversal began on 12th November, seeing a collapse of 602 points. The technology indicator Nasdaq Composite Index saw a 2.8% decline on the same day, led by Apple and its suppliers which their future orders have caused alarmed. The crude oil price has fallen from above $70 a month ago to $55 in mid-November. It has entered a bear territory, even though some forecast that oil could breach $100 in year-end. Indeed, the recent volatility has much to do with the market’s concerns of rising rates, slowing global growth and the impact of the trade war between US and China. As of now, many have advocated it’s time to sell everything and wait for the crash so that you can buy back at much lower prices.

However, is the crash really coming? What if it doesn’t and the recent sell down is merely a healthy correction? Before we delve into it, let’s have a look at our portfolio performance in these two volatile months:

Disclaimer:
The companies or strategies mentioned in this article are meant for study purpose only. It doesn’t constitute any ‘buy’ or ‘sell’ recommendation. Please consult your financial professional if you want to make any decision.

The portfolio above has showed a gain of 219% since November 2015, which is a bit lower compared to last month of 228%. We have added a company in our portfolio in November.

Bought RANHILL (5272)

Via its subsidiary SAJ Ranhill Sdn Bhd, Ranhill is the exclusive provider of source-to-tap water in Johor. It holds an exclusive license by the government, which enables the company to complete the cycle of potable water supply services from sourcing and treatment of raw water to consumers, and the maintenance of the water supply. There are four highlights of Ranhill:

  • Its monopoly position of water treatment and supply in Johor state.
  • Attractive valuation at PE of 11 at RM0.99. This is especially so as a utility company with competitive advantage.
  • High dividend yield at 7% (at the time of purchase), paying on quarter basis, is deemed appealing in times of uncertainty.
  • Its growth catalysts include the scheduled rate hike for Johor water, water-sewerage integration, potential Non-Revenue Water (NRW) contract wins.

We bought 45000 shares of Ranhill at RM0.99, which is an investment of RM44550. With the cash brought forward, our new cash level is now at RM3645.

What causes the bear market?

To answer this question, we need to go back to fundamentals, as the stock market is a barometer to the economy. If the economy will do badly, or it has showed signs of deteriorating, the stock market will go down first. So, is the US economy doing badly, or showing signs of worsening?

In fact, it’s quite the opposite. The rate hikes of the US Federal Reserve bank means that the US economy is recovering, and this act is meant to curb inflation to prevent the economy from overheating. Let’s look at some numbers. According to US Labor Department, the US wages hit nine-year high in October and grew at an annual rate of 3.1%. In addition, the US unemployment rate has gone down steadily from 4.1% in January to 3.7% in October this year. This is echoed by its quarterly released GDP, which has grown from 1.8% in January to 3.5% in quarter 3 this year. All these are signs of stronger economy, which has inevitably made the reserve bank to increase interest rate for this and next year.

Technically, the US market is not yet in the bear territory because a bear market is defined as a fall of 20% from the peak. For instance, if the Dow Jones Industrial (DJI) average has ever reached 26951 points as the highest, 20% means 5390 points. So for the bear market to occur, the DJI has to fall below 21560, which we are 3500 points away at the time of writing. I am not saying the bear will or will not come soon. My point is that for the bear to come, I believe the economy needs to show signs of weakening, which we are yet to see.

Conclusion

So, instead of guessing whether the crash is coming, why not be prepared based on the scenarios of ‘yes’ and ‘no’. Let us explore the feasible actions to take in both scenarios in the next issue.