The Safest Haven For Our Money

The markets are looking uglier than the back end of my refrigerator. There is a distinct smell of fear in the markets.

Global exchanges have been in sell-off mode. During trading one recent Monday, the Dow Jones Industrial Index slumped by more than 400 points, before staging a comeback that halved the losses.

Our Straits Times Index (SGX: ^STI) is now sitting closer to 2,500 points than the 3,500 points it was knocking on the door of just one year ago.

Singapore’s banks, DBS Group (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O35) and United Overseas Bank (SGX: U11) are worth around a-third less than their highs of 2015.

Bailing out

The financial scribblers are having a field day. And many traders have been bailing out of stocks faster than fleas are jumping off an ailing dog.

But no one is able to explain quite why. That is what fear does to people.

They are just doing what others are doing. It is almost a case of monkey see, monkey do, in the mischievous Year of the Monkey.

Some traders are selling oil stocks because they think that the strength of the US dollar could heap even more pressure onto already-low crude prices.

The dollar, they say, could strengthen because of the US Federal Reserve’s determination to raise interest rates several times this year.

Ditch everything

So they not only sell oil stocks but they are also selling Emerging Market currencies because that is what others are doing.

But they seem to overlook the fact that, for instance, Vietnam is growing at 7%, and India’s growth rate of 7.3% is now faster than China’s. Even much-maligned China could grow at around 6.5% this year.

Meanwhile, bank stocks around the globe have been hammered.

But if you think about it logically, higher interest rates, which are precisely what some experts are predicting, could actually be good for banks.

Like it or not, banks can make more profit when the interest they charge borrowers and the interest that they pay to depositors starts to widen.

So we have one scenario – higher US interest rates – but two totally different responses from the market.

Losing their bite

Investors have also been ditching technology and biotech stocks. These were the stock-market darlings of last year – but not anymore. The FANGs, namely, Facebook, Amazon, Netflix and Google have lost their bite.

That said, investors are piling into the Japanese yen in their droves because they believe that it could be a safe haven. Exactly how negative interest rates can possibly be a safe harbour for their money defies all reason.

The yields on Japanese bonds have now been driven so low that they will return nothing, if they are held over thirty years. Over ten years, bond holders will actually lose money. That is hardly a good – let alone a safe – investment.

And there’s more

There are other things that are going on around the globe that could be worrying investors. The rate of growth in China is slowing, which is heaping indescribable pressure onto miners from Chile in the west to Cobar in Australia.

But it is probably the tightening of US interest rates that is creating the biggest headache for markets. They would much rather that the US Federal Reserve keeps interest rates lower for longer.

For almost eight years the market, which includes banks, developing economies, consumers, many indebted industries and investors have benefitted from ultra-low interest rates.

Apron strings

But markets have been tied to the apron-strings of the US Federal Reserve’s Quantitative Easing for so long that they don’t known how they will ever cope without it.

Maybe the US rate-setting panel will hear their wailings at the door, when the Federal Open Market Committee meets in March.

But I am not waiting until then.

Warren Buffett once said: “If the Fed Chairman were to whisper to me what its monetary policy was going to be over the next two years, it wouldn’t change one thing I do.

It should not change one thing that you do either. The safest haven for your money over the long term is the stock market. It always has. It always will be, regardless of the gyrations in the stock market.

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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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.