How To Invest In An Uncertain Environment?

This Article was first published on 30th April 2018 on our Asia-In-Focus Newsletter. To get the latest newsletters, click here.

Musing About Malaysia Election & The Trade War

The market is up! The market is down! The market is up! The market is down! That seems to be the financial news over the past month. It might appear that the financial market is more volatile at the moment and market sentiment is bad, but in fact, the market has only declined about 1-2% last month. Against the peak in January 2018, the market is down about 7%.

So what is worrying the market? According to the news media, plenty. There is the saga with Facebook Inc and how our data is not safe with them! There is the danger of President Trump’s tweets; for now in particular to trade with China and Amazon.

More locally, there is the upcoming election in Malaysia and how many of the traditional businesses that have been deemed as defensive and safe by generations of investors, such as public transport (ComfortDelgro), media (SPH and Media Prima) and retailers (Dairy Farm & Aeon Malaysia) are all being disrupted by new players in the industries.

How should an investor be navigation through these waters?

First, The Trade Wars

The US government accused the Chinese government of manipulating its currencies and other measures to artificially maintain its competitiveness of many of its businesses. This is not a new accusation and one that has been on-going for years.

We talked at length about this topic in this past, you can read more about it here (Spot the Oxymoron; The Open China and The Close USA) and here (Will The US Start A Trade War With China).

However, what is not talked about much is that trade is a two-way street. Sure, many Chinese exporting businesses have benefited with a depressed currency, but so have the US consumers, enjoying below market priced products for many years. In a way, if the Chinese government is indeed “subsidizing” its exporters, the Chinese government is also indirectly subsidizing US consumers with Chinese tax dollars.

So now, it seems the US government is finally starting to do something about it, putting tariffs on many Chinese imports, many in the electronics industries. In return, the Chinese government has turned around and added tariffs onto many US agriculture products, such as pork, nuts, Ginseng and Durian!

Yes, durian is on the list of US export that will be subject to new tariff but the US exports zero durian to China in the last five years. #listpadding

However, the level of trade war reached an important point when China decided to add a 25% tariff on one of US largest export to China, soybean. In fact, Chinese buy more than 60% of all US soya bean export in the past.

That announcement created a very interesting sequence of events that is useful for investors to learn from. First, US Soybean plunged, more than 5% within a few hours as Chinese buyers rushed to buy Brazilian Soybean (US main competitor) that are tariff-free, leaving few buyers for US Soybean. However, as the price difference widens between the two markets, other buyers began to take notice. European and Japanese buyers came around to pick up the bargains, within a few days, the price has stabilized.

It kinds of show us that the fear of the tariff is actually scarier than the tariff itself. Moreover, if there is a quality product, like soybean, the stock of a good company, is on offer, there will still be buyers for it.

In the moment of a crisis, there is always a pinch of opportunity hidden inside. In this manner, I actually feel the uncertainty is a great opportunity for investors. Be greedy when others are fearful but be fearful when others are greedy. (Always easier said than done though.)

On Malaysia Election

The commentary below is simply a personal thought on what could happen if either side wins in the next poll. It is not a reflection of my political views but rather merely an assumption exercise I think all investors should practice to better understand and think about logical causes and effects in the market.

Malaysians are rushing to the polls next month (Including myself). Should that spook investor? What could be the outcome? If the incumbent continues to win in the polls, it would mostly be business as usual. The current economy is fuel by huge foreign investment and mega government public projects. But the underlying challenges of the country remains.

Raising inflation and corrupt practices both within the public and private sectors. No one seems to have the answer or willingness to address these challenges at the moment and simply by rising minimal wages will hardly solve the issue. After all, increasing the minimum wage will just add to the cost of doing business in Malaysia, and businesses would need to raise prices to offset the additional cost, which in turn goes back to the consumers through even higher inflation. So the most likely scenario is that Malaysia will continue to grow albeit at a slow pace and the root issues with the country would most likely be just a can being kicked down the road. Everything will be “same same”.

And what might happen if the opposition does achieve its maiden victory? What will happen then? The immediate challenge is of course to regain the confidence of the foreign investors. Without that confidence and if foreign investors decide to pull out or slow down their investments, it could cause a currency crisis where investors dump their ringgit and find opportunities elsewhere. If that happens, inflation could be even higher than what it is now. However, if that challenge could be solved, then we need to think about how different would be the new government compares to the old. If it is just a change of guards while keeping the system, then it could just be same Malaysia.

If there could be real change, it might take a while for everyone to work out their difference and ideology, given that the current opposition coalition has no real history of working together before this election. So that could just mean, it should get messier before it gets better.

If I sound pessimistic, I am sorry as it is not my intent. On the contrary, I am very optimistic about Malaysia but I just feel that the future of the country is less dependent on who is sitting on the iron throne  parliament, but rather on the Malaysian people and the private sector. Having a strong private sector is the key to having a sustainable growing future and Malaysia has shown it does have the ability to create world-class businesses (Hartalega, IHH Healthcare, Top-Glove, AirAsia, the banks, ViTrox Corp and many more) that can stand on its own regardless of government policies. That would most likely continue.

But going back to the present, in an uncertain environment, what kind of companies would continue to do well? I believe that the main reason why we should be investing in companies rather than just properties is the key fact that companies can be flexible while properties can’t.

Management of a company can change their direction and strategy with the varying macro environment. However, if you invest in a property, if the location is bad, it is bad. There is nothing much you can do.

Thus, with uncertainty, we should be looking at companies that have shown strong ability to adapt to changing times. For example, British American Tobacco Malaysia (BAT) show us that even though it has been manufacturing in Malaysia for many decades, there is no reason why it cannot close down its factory and move elsewhere if it no longer makes economic sense.

Or the management of AirAsia, where they have shown us that they are open to experimentation and finding new ways, by auxiliary income, boosting its logistic arm, having a reward cards system to boost their revenue and make their business stronger.

Change is the only constant in this world, only those who are able to adapt will survive for the longer term. This is the same for companies as it is the same for individuals.

Thus, the key when investing in an uncertain future is always to look for QUALITY QUALITY QUALITY. I cannot stress that enough.

However important the above two issues are, in my opinion, they might just be a passing trend. Yet what is happening to the disruption to traditionally defensive industry such as the transportation, media and print, telecommunication, cable-TV and even the retailers could be a change that might change our way of lives forever. And that should be an even bigger question for us to ponder as an investor. That is a story for another time.

Till we speak again.


Stanley Lim

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