20 January 2016
Are You Ready For The Chinese Snowball?
By David Kuo, Director, Motley Fool Singapore| 20 January 2016
The warnings are coming in thick and fast, as the stock market tumble continues apace around the globe.
George Soros has compared the current climate to the global financial crisis that battered markets in 2008.
Soros highlighted China’s economic woes. He said “China has a major adjustment problem. He also warned that China is transferring its problems to the rest of world by devaluing its currency.
Cataclysmic
Royal Bank of Scotland has joined the fray by pointing out that China has set off a major correction and warned that it is going to snowball.
It warned investors to prepare for a “cataclysmic” year, as the giant Chinese snowball takes us into unchartered waters.
And what is the banks advice?
It is to sell everything except high-quality bonds. Their justification for the drastic call is that now is a time to consider the return of capital rather than the return on capital.
The UK bank and Soros are not alone in their pessimism. UBS has cut its exposure to the stock market on a “six-month tactical horizon”.
Naysayers
I am sure there are lots more naysayers out there who will try their best to out-bear each other and out-scare many investors, in the process.
But are conditions in the global economy really that catastrophic?
From where I am sitting, there are no signs that the world is falling apart. The US economy is growing; Europe and Japan are recovering, and China is still expanding, albeit at a slower pace.
Sure the stock market has dropped. But market falls are not uncommon.
Major corrections happen from time to time. Peter Lynch, who is one of the greatest investors of our time, once said: “A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.”
Sad indictment
But it is, nevertheless, a sad indictment of those in the financial industry who invariably try to overegg the pudding.
It likes to overplay when markets are rising and overdramatise when markets are falling. That is how it makes waves, makes headlines and makes money out of unsuspecting investors.
But investors need to look past the hyperboles and focus on the things that matter.
Of course markets have fallen. That is part and parcel of investing. It would more of a surprise if it continually rose and never corrected.
A market fall is also one of the reasons why investors, such as you and I, are paid more for taking on the risk of investing in shares.
If we are unable to tolerate risk, then we should leave our money in the safety of a bank account instead.
Rollercoaster
However, the price we pay for sheltering in the safety of a bank account is a paltry return on our money, rather than a long-term return of around 7% a year. That is how much the Singapore market has returned on average for patient investors.
It is quite possible that global markets could fall further. But that simply gives all of us an opportunity to buy more of the stocks that we like at better prices.
It is very easy to get caught up emotionally in the stock-market rollercoaster. But investing is never about blind optimism or abject pessimism.
Investing, as Warren Buffett pointed out, is about forecasting the yield on an asset over the lifetime of the asset. Speculation is forecasting the psychology of the market.
As investors, we will enjoy good times and we will also endure difficult times. In tough times the market’s first instinct is to assume the worst.
But the smart investor will always ask whether a company will be bigger, stronger and more profitable in five or ten years’ time. It can take time for the growth to be reflected in the share price. But we are rewarded for our patience.
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