survival guide your bear market...million in cash with gross debt of around s$25.9 million. net cash...

12 MARCH 2020

As an investor, it’s natural to feel fearful and worried as share prices continue to plunge tonew lows. Investors’ sentiment remains extremely poor as news of Covid-19 spreadingaround the world continues to dominate major headlines. To make matters worse, the World Health Organisation (WHO) has also declared Covid-19 apandemic, confirming what we already knew weeks ago. Adding insult to injury, a new price war has broken out for the oil and gas industry, pushingprices back to 2015 lows of US$30/barrel. It seems like nothing is safe these days. How then, should investors navigate this bear market? How should you react and whatshould you be doing with your portfolio? We present you with our very own Bear Market Survival Guide to help you navigate throughthese difficult times. We have put together a collection of 6 short articles in this special report that will help youweather this storm. Ready? Let's go...

YOUR BEAR MARKETSURVIVAL GUIDE

The past few weeks have been a rollercoaster. But the bear market has finally happened. At the date of writing, The Straits TimesIndex (SGX: ^STI) has fallen into bearmarket territory, declining more than 20%from its recent high of 3,415.18 to thecurrent 2,680 level.

www.thesmartinvestor.com.sg

Written on 6 March 2020 As the saying goes — tough timesdon’t last, but tough people do. The same applies for businesses. It sure feels like investors are in themidst of tough times right now, withthe Covid-19 virus outbreak upendingsupply chains and disrupting variousindustries. Though it’s only been two monthssince the outbreak began, severalindustries are already facingsignificant challenges. Manycompanies are seeing sharply reduceddemand for their products andservices, while supply-side problemshave yet to be fully resolved asfactories remain shuttered. It now seems certain that manycompanies will be reportingsignificantly lower profits for thisquarter, or even losses.

But all is not lost for investors like youand me. During times like these, companieswith strong balance sheets can stand abetter chance of weathering the stormand emerging unscathed. The definition of a strongbalance sheet

So, what constitutes a strong balancesheet? There are two key aspects to this. Oneis that a business should have high-quality physical assets such asproperties. These assets will be able tohold their value amidst the turmoiland allow the company some measureof stability. An example wouldbe Hongkong Land HoldingsLimited (SGX: H78) which ownsproperties in prime locations in bothSingapore and Hong Kong. The valueof these properties is likely to hold upeven during a crisis, and investors canhave a good night’s sleep knowingthat these are quality assets situatedin prime locations. The second aspect would becompanies with large cash balanceswith minimal or no debt. During acrisis, the cash would come in handyas a buffer that the company can tapon to continue operations. Having low or no debt also means thebusiness is not beholden to banks, asfinance costs may suck away valuablecash flow that can be used as workingcapital.

1 KEY FACTOR TO

PROTECT YOUR

WEALTH DURING A

CRISIS


Hunkering down during storms An example of a company that is hitbadly by the Covid-19 outbreakis Straco Corporation Limited (SGX:S85). The group owns three key assets— two aquariums in China and 90% ofthe Singapore Flyer. However, due to the stringentquarantine procedures laid out by theChinese Government in late-January,both of Straco’s aquariums have had totemporarily shut.In Singapore, theFlyer is also down due to a technicalfault reported in November 2019. So,the group is essentially left withoutany revenue generation sources. Luckily, the group had plenty of cashon its balance sheet prior to this crisis.That allows them to be able to hunkerdown and weather the storm betterthan competitors who may be heavilyindebted, such as Haichang OceanPark Holdings Ltd (SEHK: 2255).As of 31December 2019, Straco held S$199.45million in cash with gross debt ofaround S$25.9 million. Net cash stoodat S$173.55 million. Haichang, on theother hand, was saddled with RMB 8.2billion worth of debt as of 30 June2019, with only RMB 2 billion in cash. Reducing the risk of shocks The idea behind buying companieswith strong balance sheets is to reducethe risks of shocks or nasty surprises.While almost all businesses will sufferduring a protracted economic crisis,the storm will eventually pass and onlythe strong ones will survive.

Businesses with weak or frail balancesheets are at higher risk of failure asthey may have debts to repay, or mayhave insufficient cash buffers tocontinue their operations.

Get Smart: Strength equateswith resilience As an investor, we would naturally feelworried and anxious when a crisishits.We have spent time and effort toinvest our money in promisingcompanies, but it seems like ourforecasts and projections have nowgone out the window. But all is not lost. While businesses may suffer during adownturn, the best of the bunch tendto come out of the crisis stronger thanever. Perhaps, with less competitors. Investing involves sizing upprobabilities and deploying capitalefficiently based on this assessment. Companies with strong balance sheetshave a much lower probability ofrunning into trouble during crises. Strength, in this case, equates withresilience. Resilient companies can weatherstorms better and will eventuallyemerge even stronger thereafter. These are the kinds of companies thatgive investors peace of mind.


Written on 4 March 2020 With Singapore’s economy slowingdown, it’s natural to feel worried aboutan impending recession. In mid-February, the Ministry of Tradeand Industry downgraded its grossdomestic product (GDP) forecast for2020 due to the Covid-19 virusoutbreak. From a previously estimated range of0.5% to 2.5%, the outlook is now forGDP growth of between -0.5% and 1.5%.If the GDP falls into the negative rangefor two quarters in a row, we will havea recession on our hands. Rather than being bogged down byworry over whether a recession willactually hit us, investors canproactively seek out companies thatare able to weather such economicstress.

Here are three companies that webelieve could be recession-proof andthat can still continue to pay outregular dividends. Singapore Exchange Limited(SGX: S68) Singapore Exchange Limited, or SGX, isSingapore’s sole stock exchangeoperator. The group provides aplatform for the buying and selling of awide range of securities such asequities, fixed income and derivatives. If a recession hits our shores, there willbe more panic and fear, resulting inmuch more trading volume for ourlocal bourse. With SGX’s ongoingtransformation into a multi-assetexchange, it can also now offer moretools and options for both traders andfund managers to better manage theirportfolios. These include a variety ofderivative products that cover equities,fixed income, currencies andcommodities. And SGX continues to come up witheven more of these products, with thelatest being the introduction ofmethanol futures and swap contracts.Ibelieve that SGX can hold its ownduring a recession due to its strongmonopoly position and its consistentfree cash flow generation capability. The group is paying out a quarterlydividend of S$0.075 for a total annualdividend of S$0.30. Its shares provide adividend yield of close to 3.5%.

3 RECESSION-PROOF

SHARES THAT PAY

DIVIDENDS


Raffles Medical Group Ltd (SGX:BSL) Raffles Medical Group, or RMG, is acomprehensive, integrated healthcareprovider that operates hospitals and achain of clinics around Singapore. Thegroup also operates Raffles Dental, ateam-based, multi-speciality dentalgroup in Singapore and China. In January last year, RMG opened its firsthospital in China, located in Chongqingprovince. Raffles Hospital Chongqing is a700-bed facility and has been rampingup its operations over the past year. Thegroup is also slated to open its secondChinese hospital in Shanghai this year. With Covid-19 raging in China, demandfor healthcare services is set to remainhigh.Though these hospitals areexpected to incur start-up losses, thelong-term prospects for the groupremain positive. Healthcare is a resilient industry that willexperience consistent demand throughgood times and bad. RMG pays out a total annual dividend ofS$0.025, and its shares provide adependable dividend yield of 2.5%.

Riverstone Holdings Limited(SGX: AP4) Riverstone is a market leader in themanufacture of nitrile and naturalrubber cleanroom gloves for both thehealthcare and high-techmanufacturing industries, respectively.The group has six manufacturingfacilities in Asia and has an annualproduction capacity of 9 billion gloves. Riverstone has seen consistent risingdemand for its nitrile healthcare glovesover the years due to rising healthcareneeds. Many countries are modernising theirhealthcare facilities, leading toincreased demand for nitrile gloves.Developed nations face an ageingpopulation issue, where older folkrequire significantly more medicalattention and care, thus alsocontributing to this steady rise indemand. Needless to say, the Covid-19 outbreakhas obviously also pushed up demandfor nitrile gloves and medicalconsumables such as face masks. Riverstone has a good track record offree cash flow generation and hasbeen growing its capacity year on year. The group paid out an annualdividend of 7.4 Malaysian sen (aroundS$0.0244). Its shares offer a dividendyield of around 2.4%.


Get Smart: Responding to Covid-19 On February 18, the Governmentintroduced a slew of measures in itsBudget 2020’s “Stabilisation andSupport Package” worth S$4 billion tohelp businesses to get through thisrough patch. While these measures stand to benefita broad range of companies andindustries that were adversely impactedby the virus, should the situationworsen, the Government has pledged tostand ready to do even more. Aside from these immediate measures,investors also need to remember thatinvesting is a marathon and not a sprint. In the short-term, there may be stormsand bad weather, but if we keep thefaith and carry on investing prudently,we can build ourselves a wonderful nestegg over the long-term.

Written on 10 March 2020 It’s been a turbulent two weeks for thestock market. And that is an understatement. The reality of the virus’ impact isstarting to sink in. From the epicentre in Wuhan, China,the Covid-19 outbreak has nowmorphed into a global crisis. It has ledto the cancellation of flights, groundingof cruise ships, the imposition of travelcurbs and the quarantine of vastnumbers of people. And to add insult to injury, this weekhas seen an oil price crash, with pricestumbling 30% in one day due to a pricewar. This phenomenon hasn’t happenedsince 1991. In response, the Straits TimesIndex (SGX: ^STI) has edged ever closerto a bear market, with it being downclose to 19% from its peak back in 2018. The Dow Jones IndustrialAverage (INDEXDJX: .DJI) and S&P 500Index (INDEXSP: .INX) have seen similarfalls and we are now in a bear market. How should you react in the days orweeks to come?


3 STEPS YOU CAN

TAKE WHEN THE

BEAR MARKET HITS

Control your fear As Yoda quips in Star Wars — fear is thepath to the dark side. And the dark side,in this case, is selling out your entireportfolio in panic. Plunging share prices are upsetting. Itimpacts our wealth directly. But it’s important to put things inperspective. Ask yourself — will this storm eventuallypass and will the world be able torecover? If the answer is “yes”, then it’ssomething your mind can latch on to forassurance. Second, do a review of your investmentsto see if they can weather thestorm without being permanentlyimpacted. Short-term revenue andprofit declines are normal in the courseof business and should be accepted asthe risk one has to bear while investing. By mastering your fear, you will nolonger be subject to panic and anxietyshould share prices fall even further. But fear is only one side of the equation. There is also greed. Hold back your greed On the flip side, some investors may gettoo greedy during a bear market.

Seeing bargains and deep discountseverywhere, they start going on anuncontrolled buying spree. Just as fear should be controlled, greedshould also be tempered. Once a bear market hits, there will bebargains galore, but you don’t need toown everything cheap. It’s important to be selective and tochoose your investment picks carefully.Being indiscriminate in your buyingimplies a lack of control and may resultin a portfolio of mediocre companies. Instead, investors should carefully planto buy companies that they arecomfortable and familiar with. This strategy ensures that you don’t gocrazy when prices take a tumble. Take your time A third important thing to remembershould a bear market hit is to investslowly and steadily. We will not know how long theproblems will last. Neither does anyoneelse, for that matter. So, when you can spare a bit of cash,deploy it to buy stocks that have beenbeaten down. Over time, as the recovery takes place,these purchases will stand you in goodstead.


But, remember that in the short-term,cheap-looking stocks can becomecheaper. So, you need to be mentally preparedfor short-term paper losses. Investing is a marathon and not a sprint. The end goal is to be able to build andgrow wealth over years, even decades. A few months of poor performanceshould not detract you from that. Get Smart: Be comfortable withthe unknown During tough times, it may be difficultto tolerate uncertainty and volatility. But as investors, we need to getcomfortable with dealing with theunknown. Because when there’s uncertainty, italso creates opportunities for the buyerof long-term values. So, be aware of your own fear and greedduring a bear market. Keep both incheck. And remember to deploy your moneyslowly, and you should turn out just fine.

Written on 12 March 2020 During troubled times, investors willnaturally rush towards safe havens. As turbulence and volatility roil the stockmarkets, it sometimes feels like there’s noplace to hide. While most businesses will suffer fromreduced demand for their products andservices during a crisis, some can hold outbetter than others. These are the businesses that are resilientdue to the nature of their industry, orbecause of the assets they possess. Separating the resilient from therest Strong balance sheets are an importantaspect to determine if a company canweather a major storm, or not.


3 STOCKS THAT CAN

SURVIVE A BEAR

MARKET

The presence of free cash flows and theregular payment of dividends are alsosure signs of stability that will giveinvestors peace of mind. Here are three stocks for your watchlist,as they have a very high chance ofsurviving a punishing bear market. Raffles Medical Group (SGX: BSL) Raffles Medical Group, or RMG, is one ofthe largest integrated privatehealthcare providers in Asia. The group operates a hospital inSingapore and one in Chongqing, China,as well as a large network of clinics andhealth screening centres in Singapore. With healthcare demand rising in theregion, RMG’s services will continue tobe highly sought after. An ageing population in Singapore andmany other countries means that morepeople will require medical care intotheir silver years. The group’s flagshiphospital in Singapore has seenconsistent patient demand throughgood times and bad. RMG plans to open a new hospital inShanghai this year, though plans havebeen delayed by the Covid-19 outbreak. At the moment, the company’s 700-bedhospital in Chongqing is fullyoperational and has been ramping upsince January last year.l.

The group also pays an annual dividend ofS$0.025 (for a 2.6% dividend yield) that webelieve is sustainable despite the group’sneed for capital expenditures on its newhospital. VICOM Ltd (SGX: V01) VICOM is a leading provider of testing andinspection services. The group has twomain divisions — vehicle testing and non-vehicle testing. VICOM inspects over 400,000 vehiclesannually and employs a computerisedand integrated vehicle inspectionsystem.SETSCO, its non-vehicle inspectionarm, provides testing and calibration tothe aerospace, biotechnology andelectronics manufacturing industries. The group’s vehicle inspection division isexpected to continue to do well as moreSingaporeans choose to renew their COEs.Older cars will require more frequentinspections, which will provide a boost toVICOM despite the 0% vehicle growth rateimposed by the government. Non-vehicle testing, though, mayexperience headwinds due to Covid-19disrupting global supply chains.The grouphas a rock-solid balance sheet with S$92.9million in cash and no debt (as of 31December 2019). VICOM is well-poised to weather a bearmarket, while investors can enjoy atrailing dividend yield of around 4.8%.


Hongkong Land Holdings Limited(SGX: H78) Hongkong Land Holdings, or HKL, ownsa vast array of investment propertiesprimarily located in Singapore and HongKong. HKL’s portfolio consists of office andretail properties located in primelocations.The group’s portfolio ofphysical assets stands it in good steadto weather a downturn, as theseproperties can be counted on togenerate a steady stream of rentalincome. Though retail properties are facingheadwinds due to the social unrest inHong Kong, office properties have heldup well, with higher average gross rentsin both Singapore and Hong Kong. Also, the recent acquisition of a 23.1-hectare mixed-use site in Shanghai,China for US$4.4 billion allows HKL tofurther expand its investment propertyportfolio for the future. The sales launchis slated for 2022 while completion isexpected between 2023 to 2027. The group pays out an annual dividendof US$0.22, and its shares offer adividend yield of 4.5%.

Get Smart: Bear markets aretemporary The three companies above havecharacteristics that should allow them tosurvive a bear market. However, investors should also rememberthat bear markets are temporary, and badtimes will eventually pass. By buying more of such companies toinclude in your portfolio, you can create astrong buffer during bad times, while alsoenjoying upside during the good times.


ARE STOCKS CHEAP

ENOUGH TO BUY

NOW?

Written on 3 March 2020 Markets have also been swooning in thelast week, with the USA experiencing itsworst week since the Global FinancialCrisis when the Dow Jones IndustrialAverage (INDEXDJX: .DJI) crashed 12.4%. Our local Straits Times Index (SGX: ^STI)fared just slightly better, falling “just” 5.3%last week. Last Friday saw the index diveby 100 points, an event not seen sinceMay 2019. With bad news still swirling around,investors are understandably nervous andwondering if markets could crash further. The million-dollar question now iswhether stock prices are cheap enough tobuy as valuations have accounted for theeffects of the viral outbreak.

Could prices dip lower, or is this theturning point where stocks bottom andthen reverse direction? Let’s dig deeper in order to provide arealistic assessment for the currentsituation. Getting a grip on valuations At the heart of fundamental investingare valuations. Valuations represent how cheap orexpensive a share is in relation to itsearnings and cash flow generationcapability, and serves as a sanity checkwhen investors approach the market toeither buy or sell. As share prices tumble, valuations willobviously look cheaper. However, investors should rememberthat earnings will also correspondinglytumble as the virus disrupts supplychains and negatively impacts variousindustries around the world.

So, how does an investor know when valuations are “reasonable” enough forthem to be able to buy? There are a few ways of looking at this. One method is to look at the dividendyields for companies that generateconsistent free cash flows. As share pricestumble, dividend yields head higher asthey are an inverse function of the shareprice. However, in order to buffer againstpotential dividend cuts, factor in a 20% to25% cut in dividends and then recalculatethe dividend yield. If the yield still looksattractive and the company has a greattrack record of weathering crises,investors can consider buying someshares. An example to use may be SATS Ltd (SGX:S58). For fiscal year 2019, the group paidout a total annual dividend of S$0.19. Thistranslates to a yield of 4.6% based on theshare price of S$4.14. As SATS is one of thecompanies directly affected by the Covid-19 virus, we can assume a 25% cut individends as earnings will get pressured.This translates to an annual dividend ofS$0.14 along with a dividend yield of 3.4%. Investors need to decide if they are happywith this level of yield, keeping in mindthat business could recover strongly oncethe virus situation blows over.


Another method is to look at theaverage price-earnings ratio (PER) forthe company over the last five years. If the PER dips below this five-yearaverage, it could mean that thecompany is cheap and could signal anopportunity to buy some shares. Spacing out your purchases Valuations are just one aspect of thestock market, though. Sentiment could always push shareprices down to bargain-basement levels.That’s why it’s important to space outyour purchases, rather than going “allin”. Using up all your cash at one go meansyou will have no opportunity to continuebuying should share prices fall further. Buying at regular intervals is also a goodmethod for assessing new events asthey crop up. These events may or maynot affect the investment thesis, but atleast they allow the investor a chance toconsider if he is doing the right thing. Going all in at once leaves youvulnerable to unexpected events thatcould invalidate your original thesis,possibly forcing you to lock in a largerloss than if you had pumped in smalleramounts.

Cheap could get cheaper Finally, it’s important to keep a coolhead.As share prices and valuationscontinue to crash due to persistent badnews, there’s always a chance that cheapcould become much cheaper. Investors who buy at periodic intervalsneed to be psychologically prepared fortemporary losses as bad news drivesdown sentiment further. However, as long as you are confidentthat the company is fundamentally soundand that its business can recover post-crisis, you should just sit tight and not letthis bother you. Being mentally prepared So, you have decided that stocks arecheap enough to buy a little. Remember to space out your purchasesas valuations could plunge further asmore bad news is reported. Being mentally prepared for short-termlosses is also important as keeping yourcool will allow you to continue to buy asthe market falls. Market corrections are greatopportunities to accumulate shares instrong companies at beaten-downvaluations. Don’t miss out as such opportunities donot come often!


This quote is particularly apt at a timelike this. Just last week, the Straits TimesIndex (SGX: ^STI) closed at 2,960.98,the first time it has closed below 3,000since late October 2018. As of Monday, 10 March, the STI isdown over 18% from its recentpeak. Over the long-haul, the stockmarket rises more than it falls. Between 2002 and 2016, a period of 15years, there were a whopping 13 yearswhere the STI declined 10% or more(from peak-to-trough). The frequentdeclines would seem to suggest thestock market did poorly over thisperiod. But that’s the wrong conclusion. Fromits inception on 11 April 2002 up to theend of 2017, the STI rose around 7.5%per year. Holding stocks for the long haul,through the sunshine and the storm,would have produced a positive gain. 2. It’s not what we do, but whatwe don’t do Another great piece of advice from oneof our readers: “Do not touch stocks which we do notunderstand or are not familiar with.”

As investors, we can sometimes getcaught up with the manyopportunities that present themselveson a daily basis.

Written on 10 March 2020 Here at The Smart Investor, we believethat everybody can learn how to invest,smartly. Some time ago, we once invited someof our readers to share their mostimportant investing lessons. Some ofthese lessons are timeless, andapplicable at any point during one’sinvesting journey. The best part of these lessons? Thesimplicity of them. These lessons are well within reach of acommon investor. Here are 3 of the best lessons that we’dlike to share with you: 1. A Simple Quote to Live By

“Enjoy the ride of market sunshine,persevere to ride out the market storm”

3 INVESTMENT TIPS

YOU CAN USE RIGHT

AWAY


Especially with the market as it is today. Sometimes, we might feel the pressure to act on it, fearful that we might miss outon any upturn in the stock price. However, we need to be disciplined in avoiding companies that we do notunderstand. It’s a simple, yet effective rule and one that Warren Buffett uses too. The Berkshire Hathaway CEO says there’s one rule you should always avoid:Buying a stock merely because you think it’s going to increase in price. That’s because even the best investors aren’t able to predict how the market willperform. Instead, you should invest in companies that you both understand and believe willoffer long-term value. 3. Focus on the long term The most surefire way to make money in the stock market is to buy shares ofgreat businesses at reasonable prices and hold on to them for as long as theyremain great businesses (or until you need the money). If you do this, you’ll experience some volatility along the way, but over time you’llproduce excellent investment returns. And The Smart Investor is here to help you along the way.

As our ex-colleague, Morgan Housel, once quipped, every past decline looks likean opportunity, every future decline looks like a risk.

For us, today's decline is an opportunity. How about you?


Contact us at [email protected] Visit our website @ www.thesmartinvestor.com.sg Disclosure: Chin Hui Leong owns shares of Hongkong Land, Singapore Exchange, Raffles Medical Group, VICOM, SATS andBerkshire Hathaway. Royston Yang owns shares in Singapore Exchange, Raffles Medical Group, Straco, VICOM, and SATS. The Smart Investor, thesmartinvestor.com.sg, an investment education website managed by The Investing Hustle Pte Ltd(Company Reg No. 201933459Z) is not licensed or otherwise regulated by the Monetary Authority of Singapore, and inparticular, is not licensed or regulated to carry on business in providing any financial advisory service. Accordingly, anyinformation provided on this site is meant purely for informational and investor educational purposes and should not berelied upon as financial advice. No information is presented with the intention to induce any reader to buy, sell, or hold aparticular investment product or class of investment products. Rather, the information is presented for the purpose andintentions of educating readers on matters relating to financial literacy and investor education. Accordingly, any statementof opinion on this site is wholly generic and not tailored to take into account the personal needs and unique circumstancesof any reader. The Smart Investor does not recommend any particular course of action in relation to any investmentproduct or class of investment products. Readers are encouraged to exercise their own judgment and have regard to theirown personal needs and circumstances before making any investment decision, and not rely on any statement of opinionthat may be found on this site.


survival guide your bear market...million in cash with gross debt of around s$25.9 million. net cash...

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