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How To Invest In A Global Slowdown

Only a few months ago, it didn’t seem at all possible that a global slowdown was on the cards.

America was looking as though it was taking its first baby steps on a path to recovery. Global markets were salivating at the thought that the world’s largest economy might, almost single-handedly, haul the rest of the world out of a slump by their bootstraps.

But increasingly, the “R” word has been mentioned by those who now believe that a confluence of seemingly unrelated global events could send the world economy into another downturn.

Flimsy excuses

The US Federal Reserve is scared. Instead of raising interest rates again in January, as many had anticipated, it chose to delay another rate-hike.

It sugar coated its decision around some flimsy excuses about global stock-market market volatility. Elsewhere, Japan has thrown the kitchen sink at its domestic economic woes by introducing negative interest rates.

The Bank of Japan had hoped that the punitive cost of holding readies would force companies and consumers to spend and invest, rather than to play it safe and hoard cash. But the plan has backfired.

It has attracted even more money into Japan through its Government bonds, as investors scramble for safe havens. Those very long-term government loans now yield absolutely nothing, if held for its full duration of 30 years.

Tortoise with mud flaps

It has also forced up the value of the yen, which could make it progressively harder for Japanese exporters to lift the Land of the Rising Sun out of its economic sunset.

Meanwhile, China’s restructuring policies are looking about as useful as fitting mud flaps on a tortoise. Its ill-conceived measures to fast-track economic growth by driving up its stock markets have imploded, spectacularly.

Instead of increasing the wealth effect of the nation, it has made an entire generation of investors wary of buying shares. Rather that admitting that it was wrong, those in power have blamed everyone other than themselves for the stock-market fiasco.

NPOEC

To add even more misery to an already miserable economic picture, the Organisation of Petroleum Exporting Countries, otherwise known as OPEC, is looking more like NOPEC. There is no organisation, as the once-powerful oil cartel has thrown in the towel over controlling crude prices.

The free-for-all, pump-as-much-as-you-like strategy could mount untold pressure on vulnerable oil exporters, as well as those economies that depend either directly or indirectly on the oil industry.

In times like this, it is easy for investors to cut and run, as some in the market have already done. But recession – should one materialise – is nothing new. They happen about once every seven years.

The difference this time around is that many central banks around the world are running out of ammunition, if they have not already run of bullets.

Bank base rates are already at rock bottom and central bank balance sheets have been bloated by years of Quantitative Easing. It is hard to see how central banks, which are the lenders of last resort, can help this time around.

More harm than good

In fact their well-intentioned monetary-easing experiment might have done more harm than good. It has allowed indolent companies and slothful economies to delay fixing their structural problems when they could have.

But investing has never been about short-term share price increases, though some might like to think it has. Investing is about looking for good companies that can generate a decent return on the dollar that you have invested in them.

These are companies that can deliver a consistent return on equity; companies that can pay their creditors with ease and companies that can reward investors with regular dividend cheques without breaking the bank.

Good businesses

These are also companies that are not heavily burdened by excessive loans or are able repay their borrowings and interest at a canter through their healthy cash flows.

These companies also make goods and provided services that are valued by customers. These companies do exist.

Over the last 20 years, Jardine Matheson (SGX: J36) and Jardine Strategic (SGX: J37) have delivered annual total returns in the double digits. Two of Singapore’s oldest banks, namely, Oversea-Chinese Banking Corporation (SGX: O39) and United Overseas Bank (SGX: U11) have delivered annual returns of around 7% over the last two decades.

Some people might like to call these recession-proof businesses. But they are simply good businesses, which we should hang onto, in both good economic times and bad.

In fact, we should be capitalising on any turmoil by picking up any bargains left behind by investors who are busy fleeing the market in a panic.

A version of this article first appeared in the Independent on Sunday.

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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.