SINGAPORE (July 9): It does seem like we are in the midst of a perfect storm, judging by the persistent selloff in global equity markets. We have all the makings of one — with the worsening trade spat, geopolitical risks, global rise in interest rates and falling liquidity as well as inflation that is trending higher. The synchronised global growth narrative has fizzled some. While the US economy is still going strong, growth in many parts of the world has lost momentum.

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This economic recovery cycle is, in many respects, long in the tooth. It has been a decade since the global financial crisis in 2007/08.

The CBOE Volatility Index is one of the most widely used gauges of investor nerves, and is sometimes referred to as the fear index. It measures the stock market’s expectation of volatility implied by the Standard & Poor’s 500 index options. Looking at the index movements (see Chart 1), it is clear that volatility has spiked this year compared with the historic calm of 2017.

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Empirical evidence also tells us that when investors are jittery, most will turn risk-averse and the worst hit by the ensuing selloff are, more often that not, the perceived riskier (smaller and less liquid) emerging markets.

In times of heightened uncertainties, it is all about the flight to safety and liquidity, with the latter taking on disproportionate importance.

And, indeed, we have witnessed persistent capital outflow from emerging markets (as well as the rest of the world) and inflow into the US.

Even though the US market also experienced increased volatility, both the S&P 500 index and tech-heavy Nasdaq are still up for the year to date even as steep losses were recorded in most other key markets, including Europe and Japan (see Charts 2 to 4). Many smaller emerging markets and China were among the hardest hit in the current selloff.

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The rout in emerging markets and currencies stems from the US Federal Reserve’s faster-than-expected short-term interest rate hikes and reverse quantitative easing (tightening liquidity), resulting in the stronger greenback, while global trade worries are at the heart of this perfect storm as populism and protectionist policies gain traction.

Trade conflict between the US and China, initially seen as a negotiating tactic, is coming uncomfortably close to reality. The European Union (EU) has threatened retaliatory tariffs on a wider range of US goods even as it tries to defuse the conflict.

The latest manufacturing data from the EU and China suggests that the war of words has translated into a real dampening impact on business confidence, activities and investments.

Meanwhile, oil prices have stayed high as the Organization of the Petroleum Exporting Countries’ production cutback pared excess stockpiles. Prices were further supported by geopolitical risks as well as economic troubles in Venezuela, which resulted in rapid deterioration in output. The hardline stand taken by the US against Iran is threatening to keep more oil barrels from the market in the coming months. High oil prices, in turn, are spurring inflation worldwide.

By all indications, things could certainly get worse. Combined, all of the above could result in slower global economic and corporate earnings growth or, worse, tip us into another recession. If that happens, we may well see a further selldown in stocks.

The truth is that nobody is going to be able to confidently predict stock-market crashes. We would be the first to admit that we cannot.

We do recognise the heightened market risks and, therefore, the selloff is justified. But we also believe they are mostly priced into the market, as these negative narratives and risks are widely perceived and talked about. In other words, investors are not exuberant — a condition that usually precedes stock-market crashes.

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For starters, you should be cautious, and rightly so. Do not leverage on your equity investments. This way, you would not be pressured to sell if prices drop further. Rather, stay invested for the longer term.

Stocks do get disproportionately sold down regardless of fundamentals when fear and uncertainties are at the peak. This is exactly the time for value investors to take the opportunity to buy into companies where there is value to be found.

Assess the underlying fundamentals of each company objectively, in terms of sustainable earnings and cash flows, dividend yields and growth potential.

Stocks in my Global Portfolio succumbed to more profit taking in the past week — notably for DIP, Nine Dragons Paper and Sunpower — as broader market sentiment weakened further.

As a result, total portfolio value fell more than 4% for the week, tipping it into negative territory since inception, down 1.8%. This also means the portfolio is now underperforming the MSCI World Return index, which is up 0.1% over the same period.

Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

In times of heightened risks, stay focused on investing in value

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