The “Great Lockdown Recession”: Is This a Good Time to Start Investing?

Covid-19 has been devastating for many workers and industries, but investors are divided as to whether this is a hellhole from which the economy will never crawl out of or a golden opportunity to buy cheap stocks.

The big question is whether Singapore equities are done for, or whether there will be light at the end of the tunnel. Everyone seems to have their own view, but what about the experts whose opinions hold a little more weight than random social media users?

To find out, we spoke to representatives from local banks DBS and OCBC, robo advisor Syfe and financial planning firm St. James’s Place Wealth Management.

Disclaimer: This article contains experts’ opinions and thoughts on the impending recession, and is meant as a guide for readers only, not financial advice. Please practise your own discretion when making investment decisions and seek a financial advisor if you need more guidance.

 

How has Covid-19 affected the stock market?

This isn’t the first time the world has had to deal with a disease outbreak — there was SARS in 2003 and Ebola in 2015 — but it seems that the effects of Covid-19 on Singapore and global stock markets have reached unprecedented levels.

This is unsurprising, since the current situation is unlike most of the major downturns in recent years that, according to Mr Dhruv Arora, CEO and Founder of Syfe, were caused by “social, political or economic mismanagement in one sector, which then spilled over to other sectors”.

He referenced the dot-com recession in 2000 that was caused by excessive speculation in internet-related companies in the 1990s, as well as the 2008 financial crisis which was caused by a depreciation in the U.S. subprime mortgage market that developed into an international banking crisis.

According to Mr Hou Wey Fook, Chief Investment Officer at DBS Bank, “The Covid-19 crisis has led to a major sell-off in global stock markets. Sharp moves were also seen in all other asset classes such as forex and bond markets as USD rose, bond yields tanked and oil prices collapsed. Liquidity stress led to forced selling of all asset classes to raise cash to meet margin calls and cover losses, spiralling into deeper market selloff.”

Ms Carmen Lee, Head of Investment Research at OCBC Bank also points out that as the situation is evolving rapidly, there is little to no concrete data on the repercussions of the crisis.

“Companies are warning of lower profits, but no specifics were given. Estimates of the potential impact also vary widely. This has created added uncertainty to the market due to the lack of earnings clarity for the next two quarters,” says Carmen.

Mr Arora’s views echo this. He shares that the stock markets have reflected “uncertainty and anxiety, with intense price swings and benchmark stock indexes falling into bear territory.”

It’s clear that Covid-19 isn’t one of the usual suspects, and we are currently in uncharted waters. The world is waiting with bated breath to see what will happen next, but from what the experts have shared, the general consensus is that the economic fallout is going to be quite bad.

 

How does this recession compare to the 2008 global financial crisis?

By now, most of us have accepted that Singapore is on the brink of a recession. MAS has forecast negative economic growth of -4% to -1%, depending on the evolution of the pandemic.

Many are looking to the most recent major recession for insights, but as mentioned above, the current crisis is very different from the 2008 global financial crisis.

Mr Hou warned that the current recession could be worse, sharing that the International Monetary Fund (IMF) has coined this recession the “Great Lockdown Recession” and estimated a 3% drop in the global gross domestic product (GDP), which is much greater than the 0.1 contraction in 2008.

Likewise, Mr Gary Harvey, CEO of St James’s Place Wealth Management Singapore, “expects the global economic contraction from the pandemic to significantly exceed that of the global financial crisis in 2008”.

 

When will the economy recover?

Based on past trends when U.S. stocks fell more than 25% (like during Black Monday, 9/11 and the 2008 crisis), the market took about 22 to 48 months to recover. Should we expect the same?

Well, it seems that the verdict is split among the experts.

Some believe that given how serious things are, global economies may take much longer to recover. According to Mr Hou, recovery is widely expected to be U-shaped (instead of V-shaped like in 2008) and there’s even a risk of it plunging into an L-shaped depression should the disease linger and return.

He adds, “The demand contraction and freeze in economic activities will be larger than during the global financial crisis as cities get locked down, travel frozen and production halted.”

Others, like Mr Harvey, expect the opposite.

Although he acknowledges that the global economy will most likely be hit much worse this time, he expects a faster recovery “if we were to enter a full-blown recession”. He highlights that the U.S. took about 3 years to recover from 2008, making it “one of the slowest recoveries on record”.

It’s anyone’s guess when the Covid-19 pandemic will end. Hopes that the warm weather would bring the virus to a natural demise have been dashed as global infection levels have risen well into spring.

Until we have some definitive information about when Covid-19 will end, there is no telling when the markets will rebound.

“We are currently in a bottoming process, and we need to see topping out of infection cases for the uptrend to begin,” said Mr Hou. He believes that until infections reach a peak in other countries outside of China, the markets will continue to “struggle for direction and display outsized reactions to incoming weak economic and corporate data.”

 

Is now a good time to start investing?

For newbie investors who are thinking of getting their feet wet right now, the temptation to dive in and pick up discounted stocks is counterbalanced by a fear that the market will sink lower, or never rebound.

For Mr Ritesh Ganeriwal, Head of Investment Advisory at Syfe, the advice is clear. “With the recent sell-off in the markets, new investors now have the opportunity to stock up on quality investments, previously trading at all-time highs, at discounted prices.”

Ms Evy Wee, Head of Financial Planning & Personal Investing at DBS Bank, shares a similar sentiment. She says, “There is never a ‘perfect’ time to start, as no one is able to predict with any certainty when the market will bottom out. A market correction, like now, may be an opportunity to pick up assets at better valuations.”

While it’s impossible to know when exactly prices will hit rock bottom, if you’re prepared to hold on for the long game, experts are generally optimistic.

Ms Wee shares, “We advise our clients that investing is a marathon, not a sprint. We also believe one should take a long-term view when investing to enjoy the benefit of compounded returns. Staying focused on long-term targets will help overcome the anxieties caused by short-term market volatility.”

Mr Ganeriwal adds, “Markets have always recovered from a downturn. For instance, despite the market crashes of 1973, 1987 and 2008, the S&P 500 has always trended upwards in the long run.”

 

Conclusion: Experts optimistic that markets will eventually recover

The general consensus is that the economic upheaval caused by Covid-19 is going to be worse than anything we’ve ever known.

With so much uncertainty about when a vaccine for Covid-19 will be found and how the situation will play out in view of various countries’ containment measures, there is no end date in sight to the impending recession.

That being said, analysts are optimistic that markets will eventually recover when the pandemic is over, whenever that might be.

For newbie investors, the advice is unanimously to invest for the long-term, rather than let yourself get upset by current market volatility. Choose your stocks wisely, opting for companies with strong fundamentals. If you’re totally clueless, consider opting for a robo investor, but make sure it’s one with a diversified portfolio and good risk management strategies. Or compare online investment brokerages at our MoneySmart page to decide which one is best for you.

If you’re an existing investor, keep calm. It’s hard not to be concerned about the current situation, but historically, fleeing the stock market and dumping stocks for cash has never proved successful. If you can still afford to, it may be better to sit tight and hold on because markets should eventually recover — it’s just a matter of when.

What do you think of Covid-19’s impact on the global economy? Share your thoughts with us in the comments below.