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A Bank Just Warned Investors 2016 Will Be A “Cataclysmic Year” – What Should You Do?

The titular bank is the Royal Bank of Scotland and earlier in the month, one of its analysts, Andrew Roberts, had put out a note warning investors that 2016 will be a “fairly cataclysmic year.”

Roberts even went as far as writing, “sell everything except high-quality bonds.” In the note, he highlighted some of the major problems confronting the world now, from volatility in China’s financial markets to the declining price of oil and a currency war. There are more.

In short, “we think investors should be afraid,” Roberts wrote.

While most of what he mentioned are real issues that the world is grappling with at the moment, there are ways for investors to shy away from his advice and being afraid.

Six reasons not to panic

The Motley Fool Singapore has a free weekly investing newsletter called Take Stock Singapore which is penned by my colleague David Kuo. In the most recent edition of the newsletter, David mentioned how six major economies in the world (namely that of China, the U.S., Japan, Germany, the UK, and France) are all slowly moving in the right direction.

That may be cause for some optimism. Growing economies should, over the long-run, translate into growing values for businesses, which in turn is what drives stock prices.

Getting ready for shopping

But, it’s worth noting that the stock market does not always move in lock-step with economic improvements. The stock market can be way more volatile than the signal of increasing business values. And if panic hits, then that may be shopping time!

This is applicable whether you are a deep value investor seeking companies that are cheap in relation to book values – such as SembCorp Industries Limited (SGX: U96) and Keppel Corporation Limited (SGX: BN4) at the moment (both companies are currently selling for less than their book values) – or a growth investor seeking to invest in a fast-growing company such as Raffles Medical Group Ltd (SGX: R01).

Company Price-to-book value (15 January 2016)
Sembcorp Industries 0.67
Keppel Corp 0.82

Source: S&P Capital IQ

The former group of shares, though already cheap, might become even cheaper whereas the latter group may become more affordable. High-growth companies rarely come cheap and that’s true of Raffles Medical too. My colleague Chong Ser Jing had previously showed how Raffles Medical’s price-to-earnings (PE) ratio had rarely dropped below 20 over the decade ended June 2015.

But, shopping time is for investors with cash. How about those who are already invested in the stock market? Good question – that’s something I’ve discussed previously right here.

What to do now

The legendary investor Benjamin Graham was believed to have said that the the market is a voting machine in the short run, but a weighing machine in the long run. Though stock prices can – and often does – fluctuate over the short-term due to countless unpredictable reasons, in the long-term, it is the value of businesses that matter.

Thus, as investors, I believe that, if there is a tenet that we can hold onto, it is the idea that businesses carry an intrinsic value. As long as we understand the intrinsic value of our investments (and provided our analysis is correct!), there isn’t much to be worried of.

So my question to you is, do you understand the intrinsic value of your investments?

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.