Updated: May 6, 2021
An interview transcript with Money FM 89.3 on 21 May 18:
Ryan: Since you joined our programme, you have been adopting a defensive play, any reason for that?
There are 4 stages in a bull market, let us try to identify which stage we are in today:
Stage 1 - Bull markets are born on pessimism
Stage 2 - It has grown on scepticism
Stage 3 - mature on optimism
Stage 4 - and die on euphoria
I do not think we are at the stage 1 and 2 right now, we are likely in a mature one and I will continue to observe if the global “sold-off” in February this year is a reaction to euphoric bull.
There is time and season for everything, and usually after and a major sell-off and especially when the market started to pick-up in momentum, this will be the best time to get aggressive and invest into growth stocks. At the moment, I will prefer to be on the defensive side.
Ryan: In the recent years, were there opportunities as such?
Yes, about 2 year ago, when the China markets sold off after a euphoric bull in 2015 because of the HK-Shanghai connects, it opened a flood gate of liquidity to the China market. From then till this year January’s peak, US markets has appreciated about 48% whereas China markets has appreciated about 58%.
The China ETFs listed here were one of my consideration then.
Ryan: Is there any indicators that you are looking at right now?
Yes, there are 2. The largest economy in the world, which is US markets and the US interest rate.
Being the largest economy in the world, the direction of the US markets will likely affect the sentiment of our markets here.
As for the interest rates we will look into the US 10 years treasury yield. 10 years treasury yield in layman explanation means: what is the interest rate the banks are charging? Supposed you were to take-up a 10 years loan tenure borrowing?
And when the interest rate is on the climb, for individuals or companies, if your gearing or borrowing is high as well, that is not a very good news. This means you will have to pay more interest every month, eating-up into your available cash flow or reducing your net profits.
Ryan: Why most are talking about the 10 years treasury yield? Why not on the 2 years or the 30 years?
There are so many tenures, a US 10 years treasury yield is used as a benchmark to set as a borrowing cost for mortgage rate worldwide.
Ryan: Based on your studies, what is the direction of the interest rate or the 10 years treasury yield?
Many analysed that the 10 years treasury yield has broken above the previous high at 3.03% set in 2013, therefore, it is a psychological level. But I believe there is more to it, than breaking above 2013’s high. You can Google and access to a 10 years treasury yield chart, go all the way back to 1980, you will be able to see a classic downtrend of the interest rate since 1981. In 2017, the almost 4 decades of downtrend has been broken and it has been trending higher since then. It is also gaining even more momentum this year. I have also posted this new trend on our website.
Drawing trend-line can be subjective, some will take the recent high achieved this year as the new peak and continue to project this trend downwards. Therefore it is also important to track into the historical data where we just did and also to reference to the fundamental developments as well.
Ryan: Are you seeing this almost 4 decades of downtrend has ended?
According to the technical studies, it seems like that is the case. Furthermore, the fundamental development in the recent years also match-up with this view.
Of course there is always opportunity in any given situation. For the time being, I still prefer to stay cautious and continue to look-out for the laggards and the defensive stocks.
Ryan: What could be the reason for adopting the laggard’s strategy in a rising interest rate environment?
It is about risks management. Investment is not always targeting on the upside, it is also to be proficient to manage on the downside if it happens. Example:
Comparing two stock “A” & “B”, they are both value stocks.
Stock “A” over the last two years has rallied from $3 to $10.
Stock “B” over the last two years was left un-noticed from $3, today it is at $4.
If there is a financial crisis happens, which stock do you think will have a greater risks?
Ryan: What does your studies tell us? Any such stock that is in your radar?
Yes, fortunately studies indicated there are such stocks.
SIA is a very typical example. The last high was at $20.20 in 2007. Since 2011 until today, it has been hovering around the band between $10 and $12, today it is at $11.79. Studies indicated, since the beginning of this year it was holding steady and prices has been trending higher lately, hopefully it will break above it’s upper range of about $12 on any good news or new development.
ST Engineering is also another example. Studies indicated, since 2008, it has been hovering around $3.50 till today. And I particularly like defence stocks especially with so much uncertainty and tension around lately.
Above chart, credit to Yahoo Finance.