How to guesstimate the industries to avoid investing in for 2020
Okay, so just by typing out the title to this post makes me feel nervous.
Why? I'm sure there are a lot of you readers out there who have much clearer crystal balls, or are at least have the credentials (street and otherwise) to do this better than me.
From my previous post (see Goals Review: February 2020), I mentioned briefly some thoughts I have on the general outlook of the economy.
Today, we'll delve a bit deeper into the speculative territory, and see if our time spent there would allow us to get a better idea of what are the stocks you may want to avoid this year.
The Question on Everyone's Lips
One of the hottest questions of 2019* was: are we going to experience the THE crash soon? Going strictly by the speculative theory of how market crashes happen every decade, we are technically already overdue for one.
* my gut makes a special appearance again in this post for how he feels
Many predictions were made, many collective breaths were held, and many predictions went by without anything drastically happening. Trump's presidency will cause a crash. Oh, never mind, the US-China trade war will cause it then. Aha! Trump's indictment will surely do it!
With COVID-19 rearing its head in so many countries, could this be THE one thing that tips the scales over?
Let's explore more. And while we're at it, let's practice some second-order thinking.
In the hypothetical situation where COVID-19 causes a prolonged 'drought' (till December 2020, for example), what are the businesses that may get affected the most? Okay, and if these businesses go kaput, what are its implications for the wider economy (i.e. what else can get affected)?
What are the industries that may get affected the most?
Already, countries are feeling the strain of the loss in tourism income. With a lack of travellers, the most obvious ones to get hit would be the AIRLINES and HOTELS. Places like East Coast Park, and Jewel shopping mall already feels like an ang-moh paradise with the very clear and distinct absence of Chinese tourists. Why do I say this? Because two weeks ago I walked 58km over 17 hours from Changi to Tuas Second Link, and I saw this for myself. And why the heck was I walking from one end of Singapore to the other? I guess that's a story best kept for another blog post.
Okay back to our train of thought: with the lack of tourists around, what will happen? Now obviously touristy spots like Chinatown, Marina Bay Sands, RWS, Sentosa, will surely feel the strain. Will our tourist friends visit Orchard Road, and some of our malls as well? I guess so. Not just that, but Singaporeans may not go out that often for awhile. If that's the case, then RETAIL REITS would be affected too.
Could then we go one step further and say that overseas businesses that set up shop in S-REITs WITH PRESENCE OVERSEAS that don't have as great a COVID-19 tracking system as Singapore's would be affected too? Yup, sure.
Since Chinese migrant workers will also find it difficult to come back for work, the next order of thinking then suggests that GLOBAL SUPPLY CHAINS, and the CONSTRUCTION INDUSTRIES might be the obvious ones to feel the manpower crunch. Will this have an effect on their order books then?
SMEs (especially those in food/retail) will most likely feel the strain. With fewer demand for their services, they may end up going kaput. Being of a smaller nature they would naturally not be able to weather the storm for a prolonged period of time. Then what? Their bad loans would then have to be considered as non-performing loans by the BANKS that they loan from. This will thus have an impact on their balance sheet and cash-flow.
Update: so very interestingly, the Chinese banks are now already reported to be feeling the burn and are resorting to creative measures to essentially kick the proverbial can down the road. Obviously there will be consequences for this. Amongst causing financial regulations to be less transparent and banks to be less credit-worthy, we can only wait to see how else and when this buildup will truly reveal itself.
We could go on with more orders of thinking, but we would probably end up involving every industry in Singapore. But you get the drift. In a short span we have come up with a potential list:
S-REITS with an overseas presence
Businesses dependent on global Supply Chains
SMEs (or, probably closer to our context, small caps)
Now, the point of this post was to highlight that with some second-order thinking involved, we can easily list out some potential industries we should avoid.
However, for me personally, these are the very businesses that I want to take a closer look at this year.
I no doubt have faith that especially in a country like Singapore, there will be many companies belonging to the industries above that will be able to weather the storm. As a Singaporean, I truly wish them all the best and hope for their success. As much as we try to understand companies through SGX announcements and annual reports, we must never forget that they are a very real source of livelihood for their workers, and are what helps to bring home the bacon cai png for their families at the end of a long work day. We do not wish to see suffering if it can be prevented at all.
How then do we figure out which are the businesses that will thrive? Well, it's a personal encouragement (and a nudge) to hit their accounting books to find out...
What other industries can you think of to add to the list?