Follow Ian's journey to learn about how we'd allocate our portfolio in today's uncertain environment.
- How’s the market looking? Gloomy and more uncertain
- Will it turn better soon? Economists are turning more bearish on the economic outlook in 2H22
- Where could things get worse? Inflation hard to bring down, debt crisis with tighter financial conditions, and halting of European gas imports from Russia
- What would change our view: Fed pivot, Chinese re-opening, peace talks in Europe
- What we’re doing: Buying SSB and short-term T-bills to hold to maturity
Say hi to Ian, who's learning to make better investment decisions
Our asset allocation begins with the simulated portfolio of a young working adult, Ian.
Ian has a medium to long term investment time horizon of more than 5 years. After all, he's just 29 years old young and does not have any near term obligations to meet.
Like us, he's constantly on the lookout for how he can improve his absolute risk-adjusted returns by making more informed investment decisions!
Through this simulated portfolio, he can learn how to build a portfolio resilient across different market conditions.
A consistent framework for MORE insights
#1 - Macro - How's the economy?
In describing the global economic outlook, the International Monetary Fund (IMF) has summed it up well by calling it “gloomy and more uncertain”.
#1 – The global slowdown is intensifying: The world real GDP is estimated to have shrunk in the second quarter in its the first contraction since 2020.
#2 - Inflation higher than expected: Since 2021, consumer prices have consistently gone up faster than widely expected.
#3 - Central banks raising interest rates aggressively: In response to high inflation, central banks of major economies are raising policy interest rates aggressively.
#2 - Outlook - How's the future looking?
Unfortunately, the global economic outlook is still looking quite bleak.
The IMF expects a significant weakening of economic activity in the second half of 2022.
More worryingly, economists are turning more bearish on economic growth for major advanced economies for this year and next year.
For example, growth in the US was revised downwards by 1.4 percentage point in 2022 in the IMF forecast.
In Singapore, the MTI has revised downwards expectations for GDP growth this year to be between 3% to 4%, compared to expectation for growth to be between 3% to 5% earlier.
#3 - Risks - What else could go wrong?
These are some of the key risks we’re keeping a close lookout for. Most of them are downside risks rather than upside risks.
#1 – Inflation could be harder to bring down than anticipated
#2 – European gas imports from Russia could be stopped
#3 – Tighter global financial conditions could lead to debt crisis in emerging and developing economies
#4 - Expectations -What we’ll be looking out for to change our view
#1 - Fed pivot from aggressive interest rate hikes
#2 - Chinese re-opening and loosening of COVID-19 measures
#3 - Peace talks in Europe
So, how would we invest $100,000 today?
There’s no need to be too brave in loading up on risky assets with the weak economic outlook and uncertainty ahead.
As such, we are more defensive in our simulated portfolio with more holdings in bonds and cash
Our stock portfolio would consist of high quality companies that we think can withstand the downturn and we are comfortable holding for the medium to long term.
We would start building our watchlist and make use of the market correction to buy into these high quality stocks at an attractive valuation.
Cash (10%) – Cash is king, but make your cash work harder
We are holding more cash as dry powder that can be deployed readily when opportunities arise.
It doesn’t hurt that the interest rates we are able to get in deposit accounts have gone up.
What we'd do: We’d be putting our cash in a high interest rate deposit account to make our cash work harder so that its value is not eroded with inflation!
Bonds (30%) – Attractive interest rates but be wary of interest rate risks
With rising interest rates, the yields on bonds have also gone up and are looking more attractive.
For example, the November issuance of the Singapore Savings Bonds offer a one-year interest rate of 3.08%, and a 10-year average interest rate of 3.21%.
However, there might be a limit to allotment from the Singapore Savings Bonds as we have seen from the strong demand in recent issuance.
To be able to deploy 30% of our portfolio into bonds, we’ll also be looking at the SGS bonds and Treasury Bills.
This is especially so after the recent yield on the 6-month T-bill reached 3.21% per annum.
What we'd do: The Singapore Savings Bonds are great because of the flexibility they offer. We also like the shorter maturity bonds to reduce the interest rate risk and potential capital loss if we need to redeem the bonds before they mature.
US stocks (20%) - No rush to buy US stocks
With the S&P 500 index falling by 24% from January to September 2022, you might be wondering if it is time to start bottom fishing.
To answer the question, we can take a look at whether the US market has become cheap enough.
Currently, the price-to-earnings ratio of the S&P 500 is at about 16x. This is just slightly above the long-term average of 15x.
However, the price-to-earnings ratio is not just about the price, but also whether earnings expectations are realistic.
Investors are expecting that earnings could be cut further as the economic outlook worsens.
If the earnings expectations are cut by 10% and the market P/E ratio remains the same, then the S&P 500 index could fall to 3,300.
If the earnings expectations are cut by 20% and the market P/E ratio remains the same, then the S&P 500 index could fall even further to 3,000.
What we'd do: We keep our core holding of US equities as it is liquid and has a good pool of global companies with deep moat. However, we would not be in a rush to buy US stocks, as it is uncertain how much earnings expectations could be cut by.
Chinese stocks (10%) – Very cheap
There are more signs of policy easing in China’s property and gaming sector, which might help to ease investor concerns about the regulatory risks.
The 20th Party Congress will be held in Beijing on 16 October, which will secure President Xi Jinping’s third term. This has led to hopes that after such key decisions are made, the political climate in China might be more stable.
There could also be a chance that China might move away from its zero-COVID policy next year.
More importantly, valuation for the Chinese market is cheap. It is now trading at about 11.8x P/E, below its 3-year average of 12x.
What we'd do: We have a small holding in Chinese stocks to be able to tap on the long-term growth of the economy.
Read more: Should you invest in the Chinese EV sector?
Singapore equities (15%) – Safe haven and defensive
Singapore can be seen as a safe haven amidst the economic storm out there.
This might be why the Singapore market has been able to stay about flat year-to-date, outperforming global indices as of 30 September 2022.
This is supported by the banks, which are seen as beneficiaries of a rising interest rate.
Singapore is also known for having many value stocks, which have done much better compared to growth stocks this year.
What we'd do: We hold on to some Singapore stocks for the attractive valuation and dividend yield.
Singapore REITs (15%) – Hold for yield
To smoothen the volatility and increase the dividend yield of the portfolio, it might be worth looking at selected Singapore REITs.
There are definitely concerns that the dividend yields that REITs offer may be less attractive compared to lower risk assets like government bond.
For example, the dividend yield on the FTSE ST REIT index is 4.9% (as of 31 August 2022), compared to the average 10-year yield of the Singapore Savings Bond of 3.2%.
This means that for taking on some additional risk, we are able to earn an additional 1.7 percentage point of yield.
What we'd do: We'd hold on the selected large cap S-REITs which have manageable debt levels and have fixed a sizeable portion of their borrowing at a fixed rate.
- The simulated portfolio is intended for illustrative and educational purposes only. It does not involve actual money, investments or solicitation of funds for actual fund management by Beansprout.
- You are advised to seek independent financial or other professional advice for your own investments
- Figures may not add up to 100% due to rounding off.
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