I thought the title – The Perfect Storm, after an favourite old movie of mine, was the most apt way to describe this recent crisis. Furthermore, earlier last week, Sequoia Capital sent out a memo to the leaders of its investment portfolio companies warning them of the Black Swan of 2020 and to ensure that they are ready for it.
What initially started with a thinking that the coronavirus would just be mostly contained within China has started spreading outside of China now. As can be seen in the chart below, the number of new cases in China has somewhat peaked already on 4th Feb with 3,887 new cases and has gradually started dwindling down to 44 cases 7th Feb. Looking at the trend, one would notice that the increase has pretty much plateaued in China.
I have written quite extensively on my thoughts on the coronavirus, which can be found in the earlier articles:
However, this is where things look more worrying and the reason why market risk started escalating once again. The number of cases outside of China started rising rapidly starting with Europe and South Korea and now USA as well. Furthermore, news such as the US being extremely slow in rolling out diagnostic testing for the Coronavirus does not help either.
Now, here’s the important bit and the reason for this perfect storm.
Talks at the OPEC+ meeting last Friday collapsed, where both parties are no longer willing to curb production limits of 2.1 million barrels per day. Over the weekend, Saudi Arabia slashed its selling price of oil by $8 to the US, Europe and Asia. This resulted in Brent crude oil prices sinking 21.3% to $35.58 per barrel. US crude oil prices plunged 24.6% to close at $31.13 per barrel, after diving as much as 30%.
With supply increasing due to the fall out at the OPEC+ meeting, and coronavirus-related demand losses increasing, the short-term base case to oil prices is quite weak.
Tackling This Crisis
In this volatile market, everyone is fearing for their health and the probability of a recession now. However, how should you be tackling this market? In this article, I wanted to share 3 guiding principles I have.
Focusing on business fundamentals. The reality is that business rarely changes on a day-to-day basis – unlike the stock market. Prices fluctuate greatly in any given period of time, but in the long run, they always converge on the underlying fundamentals of the business. Therefore, invest in businesses that have fortress-like balance sheets, proven generators of profits and free cashflows and cheap valuations.
Understanding of market history. Having an understanding of past cycles, it gives us reassurance that in the long history of investing, the current one we are facing is just another blip in the cycle. The parallels between what we are seeing in the market today, with that of the sub-prime mortgage crisis of 2007/08, the slowdown in China in 2016, US China Trade War in 2018 are clear for those willing to connect the dots. While history may not repeat itself, they often rhyme.
Since 2010 when I first started my investing journey, these significant events have transpired that is worth noting.
- The first ever downgrade in the history of the United States of America of its credit rating from AAA to AA+ by Standard & Poors in August of 2011.
- Meltdown of Singapore listed Blumont Group, Asiasons Capital, and LionGold Corp which lost S$8 billion in just three days of trading in October 2013.
- Oil prices crashing from $112 per barrel in June 2014 to $48 per barrel in January 2015, due to the slowdown in oil demand from China and India; and Saudi Arabia pumping out supply in hopes that countries such as US and Canada would be forced to abandon their more costly production methods.
- The inflation of the Chinese stock market bubble, and its subsequent crash. More than 30% of the value of the A-Shares listed on the Shanghai Stock Exchange was lost in less than one month in July 2015.
- The stock market rout during the month of January 2016. The Hang Seng Index fell over 35% to 18,319 in February 2016 from the high of 28,442 set in April 2015.
- The Shanghai Stock Exchange also fell close to 25%, from 3,539.18 to 2,655.66 in the month of January 2016.
- The US China Trade War in 2018, where at its peak USA slapped tariffs on US$550 billion of Chinese imports and China slapping tariffs on US$185 billion on US imports, before tensions started de-escalating with the signing of the trade deal phase 1.
- The Hong Kong Protest, which was triggered by a controversial bill that would allow the extradition of fugitives to Mainland China, sparked pro-democracy, anti-government protest for more than 6 months.
Staying Invested In The Markets. This is something that I can never stress enough, which is the age old argument of timing the market vs. time in the market. While many have the logic of selling out when the times gets tough and buying back when the negativity has cleared. This would be emotionally more relaxing; however, your investment returns in the long run would take a hit.
The three columns represent the total returns of a $1,000 investment beginning in 1989, 1999, and 2009, and ending December 31, 2018 in the S&P 500 index. Row 1 shows the investment if left untouched for the entire period shown above; Row 2 shows the investment if it was pulled out during the 10 top-performing months; and Row 3 shows the investment if it was pulled out during the 20 top-performing months.
To end of this article, I would like to share some wisdoms of Peter Lynch, who managed the Magellan Fund at Fidelity Investments between 1977 and 1990. During this period, the fund averaged an annual return of 29.2%, which was greater than twice the return provided by the S&P 500 in the same period.
Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they’re going to be higher or lower in two to three years, you might as well flip a coin to decide.
Ultimately, as investors we can only choose to be investing in either a good outlook or a good price, but never both!
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