Bailout vs Stakeout

Make your move on the Bear market

Asian economies have weathered some pretty nasty financial crises in the past 10-15 years. In the early months of the U.S. credit crisis, Asian economies appeared spared with no outright bankruptcies or rescues of major financial institutions. In fact, Asian economies were at an all time high with government reserves at comparatively healthy levels, including China at $1.9 trillion and Japan at $996 billion.¹

However, the U.S. credit crisis has since proved once again that Asia has not severed its umbilical cord from the U.S.

Asia is deeply linked to the U.S. especially in trade exports to the US. With the slowing down of the Western economy, global investors’ cash shortage and pulling back from any markets deemed risky, Asian economies began to show signs of vulnerability by the last quarter of 2008. Across Asia economies slowed down. Liquidity dried up. Markets fell.

In Malaysia, the government has adopted a range of moves to support domestic financial systems. The mini-budgets were aimed at pumping money into financial markets and providing fiscal stimulus to bolster economic growth and halt declines in the local stock market.

Nevertheless, economists are still upbeat on Asia. They believe, once the crisis stabilises, Asia’s reserves and current account surpluses may recover more strongly than other emerging markets. That’s something we can all look forward to but for now, what do we do?

Wait and see or strike while it’s hot?

Warren Buffett, one of the world’s shrewdest investors in an article he contributed to the New York Times, “Buy American. I am.”, states his famous simple rule which dictates his buying: “Be fearful when others are greedy, and be greedy when others are fearful.”²

While we may not trade as fearlessly as Buffett, we can learn from his wise sayings and employ 3 timeless investment strategies that are especially useful for the bear market.

1. Stay Calm

“The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.”²

The cycle of market emotions happens at every high and low point of the market. When the market does well, investors get a high. But now, the market could be at the low point, with a lot of uncertainty. Uncertainty creates fear, which breeds panic and negative sentiments. But the market could also be at the point of maximum financial opportunity.

Because of the negative sentiment, you may feel that a cash-only portfolio would be better. Though cash may offer you a sense of security in this environment, don’t forget that inflation will eat into your purchasing power in the medium-to long-term and may not help you to reach your financial goals.

We would like to caution investors to not bail out on their investment goals because of panic or fear. While we cannot predict what would happen, history has shown that markets always bounced back.  

Equities Can Outperform Cash In The Long Run

2. Rebalance Your Portfolio

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”³

The bear market presents opportunities to rebalance your portfolio. With prices fallen to attractive levels, you may also consider diversifying into different asset classes to reduce any over-concentration risk of your portfolio.

Diversification is a prudent step during bear markets as various asset classes tend to perform differently under the same market conditions. Taking bonds and equities as an example, when bonds go up, equities tend to go down and vice versa. Long-term studies have shown a portfolio of a mix of asset classes with low correlation can help deliver returns in the long term. That’s because the asset class that outperforms can counter the poor returns of the underperforming asset class. This allows the investor to achieve higher returns without taking on much more risk at different times.

3. Stay Invested

“I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”²

In reality, trying to time the market can be a costly strategy.

The chart above illustrates the impact on the performance of different stock markets by missing out the best 10 and 20 days in a period of nearly 10 years. The study reveals that the differences in annualised returns can be quite significant, and the impact can be even more dramatic for emerging markets or single countries. Simply speaking, it is just too easy to miss out the gains!

A broadly diversified investment strategy is recommended over the long term. 

What’s Your Next Move?

Understandably, not everyone has the acumen of Warren Buffett. If you need assistance in rebalancing your portfolio and diversifying your investments, you can always talk to your Relationship Manager. HSBC Bank Malaysia Berhad has a pulse on global investment expertise, broad research coverage and prudent risk management policies that may help you face the bear without fear.

Source:

1.“The U.S. Financial Crisis: The Global Dimension with Implications for U.S. Policy”, CRS Report for Congress, 29 January 2009.

2. “Buy American. I am.” The New York Times, 16 October 2008.

3. Berkshire Hathaway Inc. 2008 Annual Report, Chairman’s Letter.

Disclaimer:

Warren Buffett is not endorsing, approving, or in any way contributing to the contents of this article. This article is in no way connected to Warren Buffett or Berkshire Hathaway Inc.

July 2009