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Bear market rally on thin ice as geopolitics will hurt more than Covid-19, says Azure Capital’s Terence Wong

Uma Devi
Uma Devi • 4 min read
Bear market rally on thin ice as geopolitics will hurt more than Covid-19, says Azure Capital’s Terence Wong
But what Wong does not understand is why six months later, global indices have bounced back from their lows, with the Dow Jones, Nasdaq and S&P 500 all jumping over 30%.
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SINGAPORE (June 5): During the first month of lockdowns around the world back in January, Azure Capital’s CEO Terence Wong noted that global stock markets tumbled by over 30%. This, according to him, was “just about right” in light of the “unprecedented” Covid-19 pandemic that was unfolding.

But what Wong does not understand is why six months later, global indices have bounced back from their lows, with the Dow Jones, Nasdaq and S&P 500 all jumping over 30%.

“We are into one of the worst recessions ever and some people are saying it could be even worse than The Great Depression. Yet, the stock markets are just bouncing up,” says Wong.

One way to explain the quick rebound is that central banks were quick to pump trillions of dollars into their respective economies to revive them, says Wong. However, this has caused a “real disconnect” between stock markets and economies. And it has also given investors false hopes of a quick and easy recovery.

“Many people are snapping up stocks because they think they are cheap, and there are really high hopes that it is going to be a V-shaped recovery,” says Wong, who unfortunately believes this is unlikely to happen.

Economies are starting to ease out of the lockdown but do not expect immediate recoveries, says Wong. Along with the deep economic contraction, he anticipates unemployment to “go off the charts” too.

“The Singapore economy may bounce back significantly from the lows that came about because there was no activity in April and May, so when something happens in June, that’s great. But we’re still way below where we were three months ago,” he warns.

Cash is king

Wong calls the recent rebound of the stock markets a “bear market rally” — something not unfamiliar to seasoned investors. Events such as the SARS outbreak in 2003 and global financial crisis in 2008 saw the benchmark Straits Times Index (STI) increase by 11% and 17% respectively.

From March 24 to April 17, Wong notes that the STI had risen by some 18.5%, which is not uncommon. But he warns investors not to rush in, because the market has not bottomed yet. “There’s really no hurry to go into the stock market,” Wong says.

He recalls how from end-February to end-March, the Singapore market underwent a “shakedown” which rattled all stocks. He notes that the historical average period of a downturn can stretch anywhere from 300 days to just over a year, with markets enduring an average fall of 43% from start to end. Year to date, however, the STI is down some 20%, or just half of the average fall.

And while Wong acknowledges that some defensive stocks such as REITs, telcos and utilties appear unharmed by the sell-downs, this could all change very quickly.

“If the market were to take another shakedown, even the defensive stocks will be in trouble,” says Wong. Therefore, he urges investors to hold more cash for now. “I think that in due time, though, markets will look attractive.”

Diversification for safety

Like all experts, Wong is calling for investors to diversify their portfolios as a safety strategy. He says it is always good for investors to have a little part of their portfolio invested in other assets such as bonds or gold.

“Have a diversified portfolio based on risk appetite, as well as age,” says Wong. “But I want to warn people that bonds are not necessarily risk-free. There are many danger points,” he adds.

In 2015–2016, Wong remembers how offshore and marine (O&M) bonds offered “salivating yields” of 8–9% as they struggled to attract investors. Many eventually defaulted, hurting both bond and share investors alike. This time round, Wong again expects some bond issuers to end in distress.

“You need to know what you’re investing in. It’s the same thing for stocks and bonds,” says Wong. “Make sure you can analyse companies well.”

According to him, investors need to pay attention to a company’s balance sheet now more than ever, in order to determine the company’s ability to repay loans had taken up.

US-China trade war

While everyone’s focus is now on the Covid-19 pandemic, Wong warns investors not to ignore the on-going US-China trade war. He says that geopolitical tension between the two superpowers has created “many flashpoints”. He recalls how Singapore companies felt the impact right away when Trump fired the first shots of the trade war back in 2018.

“Important issues are coming up in the US,” says Wong. He is especially quick to note that US President Donald Trump’s “rhetorics” are likely to continue until the presidential elections in November.

“Geopolitics is something that could potentially be more serious than the virus itself, and this is going to be negative for the markets,” says Wong.

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