By TEE LIN SAY
Some of the biggest companies today were conceived in troubled times. For instance, Microsoft started in the recession of 1975, Hewlett Packard during the Great Depression and General Electric amid the Panic of 1873.
Clement Chew Often, distress delivers valuable assets at fire sale prices. There are great opportunities to buy up or start a company, or to grab properties or stocks that will eventually be worth a lot more when the economy turns around. However, putting one’s cash to work when there is economic turmoil can be scary.
Does one hold cash or invest during a downturn? It is not an easy decision, as many people may have lost some of their wealth from investing in stocks, commodities or property following the boomtime of 2006 and 2007. Jaded investors may also be reluctant to sell their currently loss-making stocks and re-allocate the funds.
After being burnt, many would be more interested in licking their wounds and preserving whatever capital they have left.
With the large American and European banks in bad shape and the problem of debt deflation yet to be solved, it is safe to say that the current recession looks broad and lengthy. If investors hold this view, then wealth preservation ought to take precedence.
Financial experts always talk about the importance of investing in some form of asset class. Simply holding on to cash will not stave off the effects of inflation, they point out.
We are no longer experiencing a persistent increase in prices. The bigger fears are the stifled production and increasing unemployment. Nevertheless, inflation has an impact on the money we put aside for a rainy day.
In Malaysia, inflation is now 4.4% as of December 2008. With Bank Negara slashing interest rates by 75 basis points to 2.5% in January, there is effectively a 1.9% negative real interest rate on savings.
Lim Teck Seng But should we worry if inflation eats into our savings? To some, it is still better than putting the money in the sagging markets for stocks, commodities or property.
Macquarie Research thinks otherwise. It suggests that investors move out of cash and into equities in the first quarter of 2009 because it expects a bear market rally in 2009.
It says: “Contrary to common belief, Malaysia is not a low volatility market. Therefore, investors should reweight Malaysia in the short term. Technically, investors have never been more underweight than now on Malaysia versus MSCI, so we could also benefit from liquidity.”
The decision to re-invest depends on a few things – the investor’s risk appetite, time horizon, and more importantly, outlook of the market.
Says MIDF-Amanah Investment Bank Bhd vice-president of dealing Lim Teck Seng: “While interest rates are extremely low, coupled with political changes and potential economic slowdown, psychologically, people feel that keeping money in the bank is safer.
“Everybody is thinking about security. Nobody is thinking about making money.”
His advice is to hold some 70% of one’s portfolio in cash, and the remainder in investments. He feels that the current crisis is something that has never happened before. Hence not even the best economist in the world can predict the recovery of the recession.
“People may say it is time to buy, but honestly, who will use their own money to do it?” Lim asks.
“For instance, if a person already has a house, he will put off his initial idea of buying another house for investment. He may miss out on the rental yield of the house, but who cares? Even worse is the prospect of losing his principal amount!”
He says few people really bother about deposit rates at current times. “They don’t mind if the rates go to zero, as long as their cash is preserved,” he adds.
JP Morgan Securities (M) Sdn Bhd senior country officer and equities broking head Clement Chew says that in the present volatile market, many investors are risk-averse and prefer to sit on cash.
“Given the global volatility, I would suggest looking at defensive dividend yield stocks if you want to be in the market,” he adds.
He points out that defensive stocks such as British American Tobacco (M) Bhd, DiGi.Com Bhd and Berjaya Sports Toto Bhd have fared well when compared against the Kuala Lumpur Composite Index, due to their dividend yields.
“If you think markets are going to recover, then its time to go for the higher beta cyclical stocks. For now, we prefer stocks that have resilient earnings,” Chew says.
Lim, however, feels that investors would rather jump into a rally much later, rather than get stuck buying a stock too early.
“It is mainly the fund managers that go for dividends. Retailers and high net worth individuals are more interested in capital appreciation,” he says.
He does not advocate buying a stock purely for its high dividends. “Let’s say you buy a stock that gives a 10 sen dividend per year. What if today the stock price drops 10 sen. Then you have to wait a year to get your 10 sen dividend,” he argues.
Furthermore, given the difficult economic and business conditions, companies may also change their dividend policies to conserve cash.
Deposits in the banking system increased significantly in December by about 12% to RM972.4bil. The increase was said to be due to the Government’s payments for development projects and bonuses to civil servants. However, much of the money appears to remain in bank accounts.
“If people were really buying stocks, why are the volumes on Bursa Malaysia still so weak? People are thinking of security,” says Lim.
He adds that stock picking is increasingly difficult. “People used to say blue chips were safe. But last year, it was the blue chips that got pummelled. Plantation stocks used to be considered premium stocks, but look what has happened,” he says.
Chew believes that opting for short-term trading strategies in a volatile market is risky. “Even the best investors find it difficult to time such a market. You should switch out of defensive dividend yield stocks when there are clearer signs of a bottom,” he says.
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