Covid-19 update : This time is different?

The market has dropped 30% in less than 1 month.  Speed of the fall is the fastest in modern history. Everyday, I am opening new accounts of new investors. The recent trading volume is the highest I have seen in my period as a remisier. Everyday, optimistic retail clients are buying but shares has been falling almost daily.

Optimistic view:

  • Warm weather reduces infections by summer
  • Virus mutates and dies out (like SARS and MERS)
  • Remdesivir, originally developed for Ebola; and Chloroquine, an old anti-malaria drug; and a few other antiviral medicines, including a vaccine just announced by China, may defeat the Covid-19.
  • Co-ordinated decisive actions by countries contain spread
    • 1 month Lock down
    • vigilance and rapid response with contact tracing
    • 8 weeks social distancing
    • aggressive quarantining of exposed
    • health care products such as ventilators and mask are effective managed
    • hospitals not overwhelmed.

Pessimistic view:

I was initially an optimist, but I have now become a pessimist. Here are my reasons:

  • President Trump does not seem to be concerned about Covid-19. He is vague with plans to contain the virus.
  • Some experts say US is 8 days behind Italy on similar trajectory. They may have the highest deaths soon.
  • Some estimates that unprecedented border shutdowns across the world may take out half the world’s carriers. Global recession is now baseline forecast.
  • It is doubtful western countries have the political will to carry out draconian policies to stop the spread. China and Singapore now has mainly imported cases. The world as strong as its weakest link. As long as there are countries still suffering, border controls and social distancing will continue to be in place. This seems to be a perpetual cycle.
  • VIX, which also known as the fear index, continues to be the highest for past 10 years.
  • Recently, as equities fall, gold prices have also fallen, and US Treasuries bond prices have also fallen. USD is now at 1.45. Cash is now king.
  • Liquidity crunch has affected local bond markets. Banks are not willing to buy bonds. Investors of local corporate bond are stuck. Silver lining is that SGD corporate bond valuation are still high. How long will this last?

This time may be different. The corrections of the past 10 years were made-man. US-China trade war, crude oil crashes, were decisions made by man. Fiscal and monetary policies such as reducing interest rates and bond buying quantitative easing that has worked in the past, is not stopping the spread of Covid-19.

Covid-19 is a natural disaster and not engineered by human. As long as Covid-19 is not stopped, many companies will continue to suffer very poor earnings. I encourage you to watch this presentation by Vee, a very experienced global macro hedge fund manager, on his view of current market.

In the long run of 10 year time frame, be optimistic. But in the short run, be pessimistic. We got to survive the short term pain first in order to thrive. Here is my advice for this current market:

  • If you are bullish on stocks, slow down your dollar cost averaging. What is cheap now may be cheaper soon.
  • If you are holding bonds, it is very tough to exit now in this liquidity crunch. Plan your finances such that you can tide through one year.
  • Cash is king, if you are leveraged in your investments, be extremely  prudent and conservative in your deployment of money. Make sure you have enough to meet margin calls in worst case scenario.

I wish you safe investing and please take care of your health.

  • I'm a remisier with Maybank Securities, and as a bonds and REITs investor myself, I guide my clients to build resilient bonds and REITs portfolios. If you like to be guided, please open a trading account to become my client; It's free!