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The Next Big Threat

dangerJust when you thought that things couldn’t get any worse, it does.

It seems that no sooner that we have braced ourselves for a possible end to Quantitative Easing in the US when a new threat emerges. This time, experts are warning of a possible credit crunch in the world’s second-largest economy, China.

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The twin threats have brought down Singapore shares with a bump, with the Straits Times Index (SGX: ^STI) off some 11% from its high on 22 May. Meanwhile, some of the benchmark index’s biggest fallers include CapitaLand (SGX: C31) that has lost 21% of its market value; ComfortDelGro (SGX: C52) has fallen 18% and Thai Beverage Company (SGX: Y92) has slumped 16%.

I have no idea who these experts, who are warning about the threats in the US and China, are. However, a top US central banker recently provided a tiny clue as to what might be happening.

The banker wagged a finger at those who are testing the Federal Reserve’s resolve to dial back its monetary-easing policies. He said “Markets tend to test things.”

Richard Fisher, who is president of the Dallas Federal Reserve, went as far as describing those who are opposed to an end of Quantitative Easing as “feral hogs”. I presume it is a reference to the professional money-men who have been gorging themselves on a diet of cheap money rather than their physical appearance.

Now it looks as though the naysayers are trying to outdo even themselves by outflanking the markets on both sides. This time by testing the determination of the Chinese government to shift its economy from one led by exports to a more sustainable one that will be led by consumers. China hopes to achieve this by tapering the amount of easy money that it will inject into its economy.

The prospect of tapering in the west and now tapering in the east has sent the so-called feral hogs into a taper tantrum. However, we investors need to ignore the volatility in the markets and go about our business in a methodical and logical manner.

Currently, Singapore shares are valued at around 12 times earnings. In other words if Singapore companies were to, theoretically, pay out all of their profits as dividends, shareholders would get an earnings yield of 8.3%. By comparison, a 10-year Singapore Government bond yields 3.1%.

That is quite a wide spread between the two. To me, it suggests that the market correction has been overdone. It also means that buying shares is cheaper today compared to a month ago. Now, I have no idea whether the so-called “feral hogs” are responsible for pushing down the Singapore stock market. But if they have, thank you, “feral hogs” for making my decision to invest 11% easier.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.