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Buy High-Dividend Blue Chips If Market Crashes
By: Dr Chan Yan Chong
Articles (200) Profile

Singapore is finally holding its general election. This is the first election since the passing of founding Prime Minister Lee Kuan Yew and attention is now on how the ruling People’s Action Party (PAP) will fare in this election without Lee.

The buzz surrounding this year’s general election is on whether the Workers’ Party (WP) will be able to secure more seats in parliament, rather than on whether the PAP will remain in power. Thus, the election results are unlikely to affect the Singapore stock market.

The latest US employment figure brought cheers to the market, as unemployment rate fell to 5.1 percent, the lowest level since April 2008. It also means that there is a higher chance the US Federal Reserve will announce a rate hike after its meeting on September 16 and 17. Volatility in the US market has been spectacular over the past few weeks, not unlike that of the Chinese A-shares market, and the underlying reason is the fear of a rate hike.

In the first half of 2015, US stocks have been trading within a narrow range, lulling many, myself included, into thinking that investors have already discounted the impact of a US rate hike. In reality, investors are still worried. Since the first half of this year, investors have been expecting a September rate hike, a modest one that is. Hence, the US stock market has been trading within a narrow range from January to July, with the Dow Jones Industrial Average hovering between 17,300 and 18,300 points.

In August, the Dow suddenly lost its support at the 17,300-point level and almost could not defend the 16,000-point level. The heart-stopping 3,000 points fall from its previous high reflects the investors’ worry about the impending rate hike. When the Dow briefly fell to 15,300 points, the market was thinking that the Fed most certainly will not raise rates now. Even Fed officials had begun to say that the rate hike will not happen.

When the US stock market heard that the Fed may not raise interest rates, investors jumped right back and sent the Dow on a sharp rebound. However, with this rebound, the fear of a rate hike resurfaced and sent the market crashing again. So now, the US stock market is going through a psychedelic roller coaster ride, and everyone’s nerves are frayed over the probability of a rate hike.

This presents Fed Chairwoman Janet Yellen a huge dilemma on whether to raise rates. Though investors loathe a rate hike, it is of impossible to avoid it forever, for the result would be an inflating stock market bubble that will eventually burst and bring about a real economic recession. That was the case in 2000, when the dot-com bubble was allowed to grow unchecked until it collapsed on itself and triggered years of economic recession in the US and all around the world.

The US stock market has been on a bull run since quantitative easing was introduced in March 2009. After hitting a record high in March 2013, it went on to scale new heights even until recently. I believe Yellen does not want a stock bubble to develop in the US market. Despite being unpopular among investors, there is still a distinct chance the rate hike will happen, so we should be more conservative and prepare for the worst. Another important factor that Yellen is mindful of is the US dollar exchange rate. The current strength in the dollar is a result of the expected rise in interest rates, so if the Fed does not raise interest rates, the dollar will depreciate.

US elections are set for next year. Raising rates in an election year is a blatant undermining of the Democrats. If the rate hike causes the economy to falter and crashes the stock market, the hope for another Democrat in the White House will be dashed. Thus, the Fed only has three more meetings to make its decision before 2015 ends.

While the US contemplated on pricking the stock market bubble, the Chinese government has already gone into action as early as June this year to clamp down on off-market margin trade, and is still at it. The timing of this clamp down is important, as delayed actions will risk catastrophic consequences to China’s stock market and its overall economy. Pricking the bubble before it grows too big is good for the long-term development of the Chinese economy, so small investors would have to live with it.

The lowest level of the Shanghai Composite Index in July 2014 was 2,033 points. By 12 June 2015, it has risen to 5,178 points, up 154 percent. Highly leveraged borrowing and margin trading are the reasons behind the sharp rise, prompting the Chinese government to act against off-market margin trading in June, and causing the subsequent correction.

A sharp drop in the stock market will induce panic selling, thus fuelling an even steepr decline. Leveraged borrowing, which fuelled the bull run initially, became its downfall too. Some financial products were forced to liquidate when the plunge in their values triggered the stop-loss mechanism. However, the Chinese government will not stand on the sidelines in the midst of abnormal volatility in the stock market that may bring about a systemic meltdown. A while ago, China Securities Finance Corporation bought up shares from the market to help stabilise the market. I believe the Chinese government will continue to use all means to safeguard market stability.

This round of fluctuations in the stock market has further exposed the immaturity of the Chinese stock market, its flawed system and inept policing, the unreasonable structure of listed companies and investors, and the excessive short-term speculations in China. Recently, the Chinese government went one step further to announce a series of stringent controls aimed at the trading of stock index futures. Margins of non-hedging futures contracts increased to 40 percent of contract values, fees for settling positions were increased to 0.23 percent, and transactions that involve opening more than 10 contracts on a single index-futures product in a single day will be deemed ‘abnormal trading’.

Investors’ Takeaway

For institutional investors, these measures will impact their wealth management capabilities substantially and market volatility may increase further. The Chinese hedge fund industry will also shrink dramatically because of the loss of a key investment tool. With more restrictions being placed on the Chinese stock index futures market, Singapore’s stock index futures has become its primary alternative. The SGX FTSE China A50 Index Futures is the only offshore index futures linked to the Chinese A-share market.

What I am most worried about now is still the issue of a US rate in September, so I suggest investors to stay on the sideline for now. Investors who are losing sleep over their stock holdings may wish to convert some into high-dividend blue chip stocks. For long-term investors, the rise and fall in share prices is just a paper game of their net worth. I always advise investors to switch to blue chips in a market crash. I view share prices as just numbers on the computer, while dividends are what I have in my pocket to spend as I like.

For long-term investors, short-term fluctuations in stock prices are not important; the most important thing is the investors’ holding power. In a falling market, never borrow money to throw into the stock markets. Also, never enter the market betting on a short run on rebounds.

Still worried about when and how much would the US Federal Reserve hike interest rates? Do you have burning questions that you want to ask regarding the China economic slowdown and SHCOMP nosedive in June? Are you confused if any of the external factors from other countries in Asia will affect your Singapore stocks portfolio?

Catch renowned investors and speakers with rich experience in the stock markets, who have had witnessed multiple stock market crashes and global recessions over the years at Shares Investment Conference 2015!

Speaker profiles

1. Dr Chan Yan Chong, a renowned investor with more than 25 years of experience and the MBA programme director & associate professor of business school at the City University of Hong Kong.

2. Kevin Gin (CFA), the Founder and Principal of Alpha Capital. He was the former COO for CITIC Securities, Head of Singapore and Regional Real Estate Research for Kleinwort Benson Securities Asia (now part of Credit Suisse) and Head of Greater China Property Research with Yuanta Securities (Hong Kong)

3. DAR Wong, a trader with more than 25 years of experience and started his career as a futures floor trader in the Singapore financial futures industry, his area of expertise lies in macro economic outlook and FOREX.

4. Daniel Loh, an investment coach that specialises in equities and derivatives trading, he appears regularly on local TV financial programmes like “Good morning Singapore” and “Hello Singapore”.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.


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