Should Retail Investors Continue To Invest In This Uncertain Macro-Economic Environment? Or Time For Exit and Wait Strategy?

Should retail investors continue to invest in this uncertain macro-economic environment? Or time for exit and wait strategy? During my last post, I have briefly mentioned that there are some groups of investor who have sold off most if not all their REIT portfolio as they believed that REITs are overvalued and have rallied too much against their fundamentals. Also, such groups believe that economic recession is imminent and have switched to bonds and gold. On the other hand, I have another group of obstinate friends who believed in the buy and hold forever camp who asked me why I started selling off my Mapletree Industrial REIT and Starhill Global a few weeks back. Long term always beat timing the market is the core belief of this group of folks.

1. State of the current marco economic situation

I think that the first question to ask is which part of the economic cycle are we in right now? For those who think that we are still at the peak, you will need to start catching up on the recent news. There is no doubt that we are in the downtrend with Singapore GDP falling. There are also various gloomy re-forecast of future GDP numbers by other countries. We also have various bad news from the big boys such as Deutsche bank and automaker Nissan laying off workers. Donald Trump trade war with China is ongoing. For those who thinks that Donald Trump has blinked and pulled back additional tariffs against China, note that this is only a temporary measure to postpone the event to the end of the year to appease the US electorate. Upcoming Brexit and Hong Kong never ending riots add further uncertainties to the regional economic situation. The inversion on short term and long term bond yield curve also created massive panic. Probability of further sells off are high based on the recent news.

2. Exit now and wait for lowest point of the next upcoming recession?

With regard to selling off everything right now to take advantage of market timing, there is a high risk of missed opportunity cost. Also, I have seen many expert economists and analysts declaring recessions after recessions every year and I have serious doubt over their crystal ball being able to pin-point the exact lowest point of the next upcoming recession. According to the Bloomberg Businessweek, economists are terribly bad at forecasting recession. They also tend to underestimate the magnitude of the slump until one year later before they can give such conclusion. 

3. Continue holding and investing?

For the buy and hold camp, this can filter down to even more sub-groups of strategies. I shall not delve into the details here. The only point I want to add here is make sure one does not get caught in forced liquidation of your stock portfolio during the worst trough of the crisis. If you suddenly need to come up with money for down payment of a new home or renovation, or if one is forced into margin call, then this is the worst nightmare that will destroy the opportunity of upsides when the market recover.

Just to sidetrack a bit, REITs are definitely not super defensive assets. The 2008/2009 Global Financial Crisis period saw a huge plunge in many of their value by more than 50%. Also, among REITs, the level of fluctuation also depends on which class of assets they belong to and also their leverage level.

There is also a misconception that during huge plunge in value of REITs, their dividend yield will also dropped by the same proportion. This is not true. The dividend yield at the lowest point could be in the double digit percentage yield due to the extreme low price. But many investors stayed away due to the high leverage employed by REITs and the fear of REITs going into liquidation if they cannot secure new bank loans. I guess the problem at this point in time is whether retail investors practice what they always advocate as common sense, that is, "buy low and sell high".  The irrational fear of losing one's hard earn money will be very real at that juncture where everyone is afraid that the great recession will worsen and evolve into a great depression similar to the 1930s during the most pessimistic period.

4. Summary
For myself, I have taken a hybrid approach. I sold off around 20% of my previous portfolio-mostly Industrial  REIT, office REIT and also Retail REIT (Starhill Global). My current holdings is now make up mainly of only Retail REITs, Healthcare REIT & stock and also business trust (Netlink). I hope that in the upcoming months, I will have an opportunity to accumulate some DBS, OCBC or UOB blue chips.