This is probably the most dramatic year I have ever seen!
While we just finished discussing two black swans in the last two months, a few breaking news happened in merely a month. First, the sudden change of Malaysia’s ruling coalition went the former Prime Minister Tun Dr Mahathir had shocked all Malaysians with his resignation. While fellow Malaysians have started adapting to the reality, the second wave of COVID-19 just hit too drastically. At the time of writing, there is over 700,000 COVID-19 cases recorded and over 33,000 people have died from this pandemic globally. However, what was more unexpected – Malaysia has surpassed 2000 COVID-19 cases and recorded hundreds of new cases to date. To make things worse, the 25% collapse of oil price has seen most global stock market indexes plummeting to more than 10% in a single day. By mid-March, the global stock markets have plunged into a bear territory.
To salvage the situation, many central banks over the world have lowered their interest rates. The US did a series of actions within a few days too. First, the Fed had an emergency rate cut of 50 basis points, followed by Trump’s payroll tax cut and a vow to pump in $1.5 trillion into the financial system. On 14th March 2020, President Trump declared a national emergency to free up $50 billion in federal resources to combat Coronavirus.
In fact, if there are so many black swans happening within such a short period, it is not a coincidence. For this reason, we have done major adjustments for our portfolio.
Due to the drastic change of the macro condition, we sold most of the companies except JHM. The reason we’re holding it is because we bought it at a very low price. In addition, JHM has transformed from an automotive LED manufacturer to an aerospace player. Both businesses have very high entry barriers. The portfolio above used to show a gain of 308% but only 201% now. This is because we sold some of the counters at near the cost level to preserve capital. In February, we were entitled for a 1 cent dividend from VS Industries before selling, which is RM300. After the major selling, our new cash level is now at RM389,861.
The reason we increased our cash level substantially is that I felt we have many more unknowns than before. Below are my concerns:
1) We are now at the bear market. A bear market is defined as more than 20% correction from the peak. Based on this, DJIA, S&P 500 and NASDAQ are in the bear territory. However, with 1-2% upside (rebound), it can go back to the bull region again. My take is that DJIA needs to stand above 24000 to stabilise.
2) Do take note that the DJIA rebound of 1985 points on 13th March 2020, has much to do with the Fed’s $1.5 trillion pump-in into the financial system. The rebound will not last long if the fundamentals do not support. With COVID-19 prevailing, we will be seeing lower consumption and disrupted supply chain (China) around the globe. That is overwhelming!
3) Many central banks around the world have also lowered their interest rates in the last few weeks, indicating the global economy is in a bad shape.
4) The highest gold price in the last eight years and the collapse of the oil price are signs of recession.
5) The growing number of COVID-19 cases around the globe besides China (especially US and Malaysia), is worrying. It would seriously hinder economic activities and likely to reduce the global and national GDP for the quarters to come. Same goes to company earnings.
Based on the above, I believe the worst is yet to come. If you plan to hold companies throughout this season, make sure the company’s fundamentals are sound and its prospects remain bright in the long run. If not, you may consider selling on a rebound.
No matter how bad the situation might turn out to be, it will be over and eventually the stock market will go up higher than before because of population growth and inflation. For companies that can survive, they will emerge stronger. Same goes to investors.
In this crucial period, let us take good care of ourselves. Be relaxed and do regular exercise. May great health and sober mind be with you.
Binyuen is the founder of BY Enrich Resources and the author of ‘Life beyond the Comfort Zone’ and ‘Profit from Share Investment’. His books are available in major bookstores in Malaysia, Singapore or online http://www.teybinyuen.com/profitfromshareinvestment