26th August CIO Letter

26 August 2019

Dear Client,

From CEO/CIO’s Desk: Steady Does It

Markets have gyrated violently in the intervening weeks between my last letter to you on 6 August and now. There have been two broad set of factors, both pertaining to concerns over economic growth.

First, the bond markets are moving in a way that are causing concern, as bond markets are often a harbinger of the economic scene ahead. If you have followed MoneyOwl’s Facebook page, you would have read my posts on the inversion of the yield curve, which is when the 10-year US Government bond has a lower yield than the 2-year US Treasury bond. The absolute level of low bond yields (even negative yields in some bond markets) point to a gloomy economic picture.

The second set of factors, of course, is the ratcheting up of the trade war. China retaliated on Friday with an announcement of new tariffs of between 5%-10% on $75 billion of US imports from September. The US then countered with a further increase of tariffs of 5% on Chinese imports, making this 30% on $250 billion worth of imports and 15% on another $300 billion starting on 1st September. President Trump has also ordered US companies to “come home” – though how that works is suspect, the rhetoric is sharp. With a decline in trade, economic growth will be impacted and with it this company earnings and supposedly, stock prices.

Markets have been roiled and there seems to be a perfect storm of recession and declining profits; even technical analysts are getting into the picture to prophesy a crash. Some of you may be worried about your investments and wondering if you should stay in the markets or get out now. In my previous letters, I have explained why you need not be too worried. Unless the market-based global economic system totally collapses, the stock market will go up in the long run, driven by long-term earnings growth which is in turn driven by aggregate global demand on the back of population increases and increases in standards of living. It only does not get there in a straight line because different factors affect demand in the short term differently. You may wish to take a look at our article on the evidence about the markets here.

In my last letter, I have also explained that if you try to time the markets in the short term to do better than the market, your odds of success will be very low, and staying out will cause you to jeopardise your ability to capture market return. There are just too many variables, because stock markets in the short term are not just interest rates or trade or even economic growth, but a complex combination of these things, and most experts don’t get it right and nobody gets it right all the time at the right time. The chart below, which I had shared on FaceBook, shows just how this can be so when it comes to even so-called “reliable” signals of economic gloom.

Looking back, following the Global Financial Crisis, I recall how many investors, including or even especially experts, failed to capture the fierce upturn from the markets in 2009, before any of the economic or political vibes turned positive. At the same time, quite a few others have “upsized” their nest egg by staying invested and putting more in to work. If you understand the evidence about the markets, you do not have to be stressed by the news and you might even start to get a little excited at the prospect of an upcoming “sale”, to put more of your dry powder to work, even as you remain invested and continue investing regularly.

Nevertheless, should you still be worried, please give us a call and our Client Advisers will be very happy to discuss your portfolio and financial plan with you. Once again, thank you for entrusting your investments and financial plans to MoneyOwl.

Yours sincerely,
Chuin Ting Weber, CFA, CAIA
CEO & CIO, MoneyOwl


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