Bad idea to try to time volatile market

The Business Times reported last month that stockbroking firms have seen a surge in new account openings and reactivations between January and March.

This surprises me because given the disruption posed by Covid-19 and the resulting volatility and uncertainty in markets, one would have thought that the natural reaction would be to hold back, especially for new investors.

Instead, OCBC Securities was reported to have had more than 2,000 new accounts opened in this period, while the number of its customers who traded in the first quarter was already almost 90 per cent of those who traded for the whole of last year.

Between January and April, Phillip Securities also received three times more new account applications than the average.

It is obvious that the steep plunge in prices has attracted hordes of new investors while previously dormant players have also been tempted to return to the market.

In stock market parlance, these are all “bargain hunters” looking to make money from buying undervalued stocks. Bargain hunting is fine, but don’t confuse price with value.

This is all well and good, but since mid-March when the pandemic’s seriousness first became clear, the biggest stumbling block has been the huge uncertainty about the exact impact the crisis will have on economies and earnings, and this is translating to a significant increase in volatility.

Every day there is some new development, and these alternate almost evenly between the positive and negative. The flow of news is dictating market performance and this flow is hugely unpredictable.

The problem is that finance theory equates volatility to risk, which means that risk has increased substantially. Put differently, the sheer unpredictability of what the future holds and what the next development is means that even if prices may look attractive, risks have increased sharply.

Retail investors would therefore be well-advised to tread carefully.

DON’T GET CAUGHT ON THE WRONG END OF A TRADE

Consider for example, how violently stocks have reacted over the past month to:

• a crash in the price of oil future contracts to below zero;

• news of supposedly encouraging drug trials that may or may not eventually lead to a vaccine; and

• pronouncements by central bankers on stimulus measures.

Each of these has led to large swings in stock prices – over at Wall Street, it is now becoming increasingly common to witness 2 per cent to 3 per cent daily moves in the Dow Jones Industrial Average and the S&P 500. These large movements then spill over here, with the result that the Straits Times Index regularly undergoes big movements of its own.

Retail investors who have entered or re-entered the market over the past few months with hopes of making a quick buck could very easily have found themselves caught on the wrong end of a trade.

DON’T STRAY TOO FAR AWAY FROM QUALITY

The advice of the Securities Investors Association (Singapore), or Sias, is for investors to avoid trading frequently or trying to time entries and exits. Studies have repeatedly shown that it might be possible to beat the market a few times but to do this consistently over a prolonged period is extremely difficult.

An unexpectedly large plunge on Wall Street, for example, will translate into a similar movement in the Straits Times Index the next day, and the resulting panic selling can trigger fear in an investor who might have just bought a short while earlier.

The best course of action would be to go for high-quality stocks with strong balance sheets that should enable these companies to ride out the Covid-19 storm.

It might sound like an investing cliche but buying and holding quality investments is always the best strategy, even in hugely uncertain times such as now.

Investors are advised to familiarise themselves thoroughly with all the risks and features of the investments they are considering with an experienced financial adviser before taking the plunge.

SOME OTHER THINGS TO PONDER

So far, Wall Street has been supported by the promise of near-unlimited money, both from the monetary and fiscal fronts, and this is feeding through to support global markets.

As far as monetary policy is concerned, the US Federal Reserve has slashed interest rates to almost zero. It added that it will do whatever it takes to prevent a total collapse of financial markets, a declaration that markets have taken to mean the Fed will indulge in vast amounts of “quantitative easing”, dubbed “QE Infinity”.

As one publication put it, “the Fed has gone nuclear”.

Of course, it would be difficult, if not impossible, for the US central bank to throw an infinite amount of money at the market, but it’s worth noting that the Fed’s balance sheet stood at a staggering and unprecedented US$7 trillion (S$9.7 trillion) last week.

Other major central banks have also responded with large monetary injections of their own.

Governments, for their part, have also come forward with stimulus packages to boost their economies and save and create jobs. For example, the Singapore Government has introduced four Budgets amounting to almost $100 billion thus far.

No one knows how much will eventually be needed – it might run into the tens of trillions if the crisis lasts for years – or even what the consequences will be of pumping such a massive amount of money into the market. For now, investors appear to be assuming that the Fed is able to save markets and the economy like it did when US banks were threatened with collapse in the 2008 US sub-prime debacle, a disaster that has now become known as the Great Financial Crisis.

Given the anti-China rhetoric emerging from Washington in the past few weeks, that earlier phase one trade agreement that both the US and China signed may now be in jeopardy, unless, of course, it is an election ploy.

Last but by no means least, even though many countries are restarting their economies, everything still depends on a vaccine being developed to treat Covid-19.

Only when this occurs can a return to normal life be envisioned and by most accounts, this is still several months away. Those who are betting now on a V-shaped recovery are very likely to be disappointed, according to almost all global experts.

What this means is that markets can be expected to remain very volatile for a while more and retail investors should bear in mind the importance of diversification, staying invested for the long run and doing their homework before embarking on investing.

• The writer is the founding president and chief executive of Sias.

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