It has been a frightful couple of months on the stock market in lots of different ways. I for example, have been frightfully busy buying shares. But not everyone has the same strength of conviction to buy when prices are low. Instead they would much rather wait for the market to bottom, properly. But how exactly do we know when the market has reached its lowest point? The simple answer is we don’t. No one, as the old adage goes, will ring a bell in the morning before the market opens to tell you that the Straits Times Index (SGX:…
It has been a frightful couple of months on the stock market in lots of different ways. I for example, have been frightfully busy buying shares.
But not everyone has the same strength of conviction to buy when prices are low. Instead they would much rather wait for the market to bottom, properly.
But how exactly do we know when the market has reached its lowest point?
The simple answer is we don’t.
No one, as the old adage goes, will ring a bell in the morning before the market opens to tell you that the Straits Times Index (SGX: ^STI) will go up by 10% that day.
That is why a buy to hold strategy is the only sensible one for long-term investors. But here are, nevertheless, some clues that we can look for that might tell us that the market could have reached or might be reaching a base.
Bad news is priced in
Look out for signs that the market will react positively to bad news. It could be here in Singapore or it could be somewhere else in the world.
Just take a look at shares in aero-engine giant Rolls-Royce. They soared 14% in one day, despite slashing its dividend by half. Similarly, companies such as Dairy Farm International (SGX: D01), Mandarin Oriental (SGX: M04) and Jardine Matheson (SGX: J36) all reported underwhelming results. But their shares barely moved.
If the disappointing news had been delivered just a couple of weeks or months ago, the shares could have plunged by as much as 10% or 20%. But shares in some of those companies actually rose.
The market had become too pessimistic. It could be a sign that we are nearing the bottom of the market.
Talk to any Singapore taxi driver and they will tell you just how dire the Singapore economy is right now. They will moan that no one ever goes out at the weekends, anymore.
It seems that Singapore’s cool cats have turned into domestic pets – preferring to curl up at home, after they return from work.
Our friendly cabbies might not have a PhD in economics. But they probably know more than a thing or two about how the economy is performing. One driver related to me how his friend’s take-home pay had been reduced, as a result of a cut in overtime work.
Economic downturns are scary. It can lead some of us to assume that just because bad things have happened that they will continue to happen in the years ahead. But even the best people forget that recovery has followed every downturn.
What’s more, stock markets could rise some six to nine months before the economy even shows the first glimpses of recovery. So if you think we might see an economic recovery by the end of 2016, then we might not be too far away from a market bottom now.
Singapore Real Estate Investment Trusts were yielding around 7%. Let me say that again very slowly…seven percent.
Now let’s be serious… when the 10-year Singapore government bond is yielding around 2%, why wouldn’t you want to invest in some of the best yielding real estate assets in Singapore that pay some three times more.
The answer has to be fear.
Fear of losing money, fear of a lack of tenants at some of Singapore’s prime properties, fear that top companies are going to desert Singapore, fear that oil prices will remain at US$30 a barrel, or simply fear because of fear itself.
I can’t guarantee that oil prices will rise anytime soon, though they are inching higher by the day. Nor can I guarantee that the distribution by Singapore’s REITs won’t be cut. I can’t even guarantee that Donald Trump won’t win the US presidential election. They are all risks.
But Singapore shares are ostensibly cheap. Singapore’s banks and countless other companies are cheap. Singapore telecommunication companies are cheap.
And the first rule of investing is to buy when prices are low. So, the crop of cheap shares you see around you is a good sign that we are probably close to the bottom of the market.
You can wait for someone to ring the bell to let you know that the market has bottomed, if you like. But in all my years of investing, I have never heard anyone ring the bell, yet.
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.
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.