Should Investors Sell All Their Investments if Singapore Enters a Recession?
Investors have probably been severely spooked by many events and news articles in the last few weeks.
First off, US President Donald Trump ratcheted up tensions with China in the latest tit-for-tat in the worsening trade war. Beijing announced plans to raise tariffs on US$75 billion of US goods in retaliation to the US’ planned taxing of an additional US$300 billion worth of Chinese imports.
Trump then announced a day later that he would hike duties on US$250 billion worth of Chinese goods from 25% to 30%, and to raise the tariff rates for another US$300 billion of imports from 10% to 15%.
Back home, Singapore has just announced that it’s anticipating its slowest rate of full-year GDP growth in a decade, at between 0% to 1% for 2019.
With trade tensions running high and supply chains burdened with higher taxes cascading through, it seems companies and businesses are in for a very tough time.
Should investors sell their entire portfolio now to wait for things to settle down before buying in again?
Tough to time the economic cycle
Though it may sound like an attractive proposition – selling everything now in order to buy it back more cheaply later on – investors need to realise that it’s very tough to time the economic cycle. Though economic conditions are obviously worsening now, even economists are hard-pressed to be able to predict when they may get better.
Share prices tend to react well in advance of actual data, and this makes it all the more difficult to know exactly when to buy back. Trying to time the market this way is futile, and it’s better to simply hold on to great companies through an economic downturn.
Great companies grow stronger
Investors should also keep in mind that great companies usually emerge even stronger after the end of a crisis. This is because they have the balance sheet strength, cash resources and cash flow to be able to take advantage of bargains on the cheap, and are also better equipped to weather the storm as they are conservatively financed.
Take Singapore Exchange Limited (SGX: S68), or SGX, for instance. The group had no debt, as of 30 June 2019, and continue to generate strong free cash flows. During a crisis, it will still be the sole stock exchange and its derivatives will be in high demand as traders use them to hedge their portfolios. SGX, armed with strong cash flows and a clean balance sheet, will also be able to swoop in and buy up other companies that may be struggling to get through the crisis.
Dividends still flow
By selling all their investments in order to adopt a wait-and-see approach, investors will also miss out on the dividends paid out from cash-rich companies.
For example, VICOM Limited (SGX: V01), a testing and inspection specialist, has been paying steadily increasing dividends over the last five years. It also has no debt on its balance sheet and has the biggest market share for vehicular inspection and testing in Singapore.
Resist the urge to sell everything
Even if Singapore does tip into a recession in the coming quarters, investors should resist the strong urge to sell everything and throw in the towel. In fact, they should make use of the opportunity to buy more shares of companies that can weather the crisis and continue to enjoy healthy dividends from these companies. This means that investors need to ensure they have sufficient cash on hand during a crisis and that they also have a regular source of income to take advantage of these juicy opportunities.