The 2018 US-China trade war is a game-changer for the global investment markets. It is a once-in-a-decade investment opportunity that you have to seize.
How can you grow your wealth instead of being a victim of the war between two global giants? This article will shed the light for you. But before we start, I want you to think about this question: what investment decisions would you make, if you have Doraemon’s time machine and you can travel back in time?
As an Asian, you probably wanted to buy a private property in Singapore or Hong Kong because you “missed the boat”. Indeed, many new rich were created through property investment in Asia.
But do you know nearly 10 years after the global financial crisis, the US stock markets have run up nearly 300%? Now, what would be your choice?
There are many ways of investing, but most retail investors are misguided. They often derive the wrong conclusion due to the wrong reason. Things like “property price will always rise in the long run”, “I should buy Apple stocks because the iPhone is selling well”; or “I am very confident in Tesla will go up in the future because it produces the next generation cars”.
We hear this all the time. When you choose the right asset class or market, everything is right even if you are wrong.
I am writing this article because I want to help you understand how you should look at the global environment now, how you should relook at your investment portfolio and thesis.
If you are retiring in the next decade. You need to get this thing right. Because there is no time machine in real life. If you didn’t buy Asia property, US stocks or Bitcoin, you have already missed the boat. The most dangerous thing is to be blinded by the past performance of these assets and conclude that these assets will always go up.
I won’t go into the technical details, this article will focus on giving you a framework to work on to invest for your retirement in the next supercycle.
US-China Trade War: Why Do We Need to Care
Do you wish that you have bought this investment and held it for the past 10 years?
I bet you do.
Yes, it is the S&P 500 stocks, the “best 500 American companies”.
The truth is, when the market is good, everybody is a genius. I am not talking about the superior stock return of tech stocks or even the Bitcoin mania. Just throw a dart and pick a stock from S&P 500 list and you will likely gain 300% in the last decade.
There is a good reason why the US market had a stellar run. You may know the Quantitative Easing has printed trillions of dollars and this money has flooded the stock market. Yes, money flow boosts the market. But there are more structural reasons such as shares buyback and agency problem in America’s system. But I will leave it to another day’s discussion.
However, US-China Trade War is a game-changer now. If you think about it, your personal assets are in three components.
- Your personal property
- Your stock holdings
- Your bond or other fixed-income instruments
If you are a Singaporean, your mortgage rate is affected by the US interest rate, in a rate hike environment, your mortgage repayment is going to be higher, and the overall property market will be severely affected.
If you are a conservative investor, you are not spared, your bonds, bond funds and bond ETFs will go down at the same time because a higher interest rate means lower bond prices.
Needless to say, it is likely that your stock portfolio suffered badly this year.
What it means is that if you don’t do anything in the next few years, your personal net worth will be shrinking. But before you take any action,
Know What You Believe Isn’t Always True
If you want to look at the situation clearly, you need to first learn to forget.
If a lie is repeated two times, people will still question it. If a lie is repeated thousands of times, people will take it as the gospel of truth. – Ivan Guan
In the investment world, most people just repeat what they hear without verifying if it is true and whether they are repeating it correctly.
If you are reading this article, I assume you are an English reader. Think about it, where do you get your daily financial information? You probably read Wall Street Journal or Bloomberg, listen to CNBC. And I bet at least 90% of the authors of the investing book that you read are Americans.
I am not saying that they are wrong, but is it common sense to assume that they are biased?
In the tug of war between the US and China, have you ever read a single publication from 中国证券报 or 上海证券报?
It is like when your two children are having a fight, you only listen to the explanation from one child.
I bet even many financial commenters, analysts and fund managers can’t fathom this too. It is not because they are not smart enough, but the foundation of our financial system is built on America’s framework. The way they look at the stock markets are probably taught by CFA Institute and most economic models are developed by the American academia.
Just google how the westerners comment on the recent movie “Crazy Rich Asian”, you will see how much misunderstand the Americans have towards Asian.
I won’t go into the technical details. But think about the American stock markets as a playing ground for the university academia, statisticians and even physicians, while China’s stock markets are played by comrades, technology nerds and gamblers. It may not be a perfect analogy, but you got the point. They are fundamentally and structurally different.
That is why, we as Asian investor, cannot just copy and paste the American way of investing.
Warren Buffett Isn’t God
Even if you don’t invest. You probably know Warren Buffett, one of the most successful investors in the world.
It is ironic that both “active investors” and “passive investors” think Warren Buffett is on their side.
- Value investors (active) tell you that you should learn from Buffett to buy “value” stocks when the company are undervalued
- Passive advocators tell you that Warren Buffett’s own estate planning to his heirs is to “allocating 90% of his estate for his heirs to be invested in the S&P500 index fund” (according to 2013 Berkshire Hathaway Annual Report to Shareholders)
The truth is, in Warren Buffett’s own words, “I am lucky that I was born in America”. In his recent interview with CNBC, he said,
“We won it in another way by being wired in a certain way, which we had nothing to do with, that happens to enable us to be good at valuing businesses.
Is that the greatest talent in the world? No. It just happens to be something that pays off like crazy in this system.”
Have you wondered why when the “financial experts” always talked about The Great Depression in 1926? Because that was the only long period of real US stock market crash in the past 100 years!
In the past 90 years, other parts of the world are having wars, political unrests and many other major economically disruptive events.
That is why the investment strategies such as “buy and hold” or “index investing” were popularised because it worked, in US markets. The fact is that “Sell when others are greedy and buy when others are fearful” are easier said than done.
Buy and Hold, long-term investing and passive investing don’t work in other parts of the world most of the time. (Remember Singapore was only founded in 1965?)
How well did Warren Buffett “beat the market” is commonly measured by the outperformance of his company Berkshire Hathaway versus S&P 500 index.
You can see that the outperformance mainly happens in the earlier years in the 1970s and the excess returns were declining over the years.
I wonder if you have the same knowledge, skills of Warren Buffett, will you be able to make the same fortune in Asia’s market.
The Demise of the King of Bonds
I talked about Warren Buffett because most of you are familiar with his name. If Warren Buffett is the “Oracle of Omaha”, Bill Gross of the “King of Bonds”.
Through this legendary Pimco Total Return Fund, he turned every $100,000 invested with him to $400,000. It means an average compound rate of return of 5.3%, for a bond investment! (It is ok if you think 5.3% is not impressive, it is simply because you are not familiar with bond investing)
But since Bill Gross left PIMCO in 2014, his performance plunged (refer to the blue line).
Why? Is it bad luck?
No, it is because the market fundamental changed.
I mentioned earlier that the interest rate and the bond price has an inverse relationship.
- When the interest rate goes down, the bond price goes up
- When the interest rate goes up, the bond price goes down
Bill Gross’s spectacular performance was during the near two decades of reducing interest rate (1988 to 2013). During this period, most bond funds were doing well.
By the time when Bill Gross started his new fund (2014), the interest rate started to rise, the bond price started to fall and even defaulted. Some of the Singapore investors learned the painful lesson from the bond default of Swiber and Hyflux.
The Great Rotation = Wealth Redistribution
Why am I spending so much time talking about Warren Buffett and Bill Gross? I don’t deny that both men are genius extremely smart in their own field, but they can’t cook when there is no rice.
Because the Americans have enjoyed the boom of supercycles for both stock and bond investments, which is the foundation of their personal wealth and retirement funding.
We Asian never really enjoy these despite working harder in the past 50 years.
I dare to say that the macro environment is shifting today and it is one of the most difficult periods of investing in the past decade. And it is also a tipping point for the wealth to re-distributed among the rich and poor.
Let’s go back to my earlier question, what would you invest if you can fly back to 2009? Would you still be panic and sell everything because “the depression is coming” or would you make some smart decisions?
Why do we invest?
If you saw your neighbour has made a great fortune through stocks or property in the past decade and you are afraid of missing the boat, you need to be careful.
Let’s face it, you have already missed the boat and you can’t go back. But you can catch the next one if you choose it wisely.
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in the corrections themselves. – Peter Lynch
How to Invest as a Singaporean or Asian
I will use Singapore based investors as an example, but it is similar if you are in other parts of Asia.
From a Singaporean’s perspective, here is what has happened in the stock markets year to date.
We haven’t seen such a diversion in major stock markets for years.
- If you invest in US stocks (the red line represented by S&P 500 index), you made more than 10% before the last month’s crash
- If you invest in Chinese stocks (the blue line represented by Shanghai Stock Composite Index), you lost more than 25%
- Singapore stocks (the green line represented by Straits Times Index), you lost 10% by now
It is counterintuitive, but the battle this year is not to make an excess return but to preserve capital. And now you need to ask yourself this question. If you are Temasek or GIC (our Singapore sovereign fund manager) and sitting on billions of dollars, where would you put your money?
Would you put your money in the US, Singapore or China?
From my observation, money is already flowing into China stock markets. And it is a natural thing. If the run in the US is over, the smart money has to find someplace to park.
The table below shows despite the crash, China ETF received the largest INFLOW next to the US this year.
From an investor’s perspective, we love Fund Flows. Fund flows will push up the price (eventually).
And China is not only the place where you can put your money. The smart money is moving at lightning speed now. Take a look at the Brazil market and Indonesia markets, both run up more than 10% in the past month.
Despite sitting in Asia, you need to be a global investor, and it is so easy to achieve it today with modern technology. When the financial storms are coming,
The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails. – William Arthur Ward
The recent events prove that a systematic way of following the global trend and managing risk rigorously is what you need for investing for your retirement.
Additional Reading: What US-China’s 90 days trade war truce mean to you.
In the next article, I will talk about what asset or investments benefited or will benefit from the US-China trade war. subscribe here for future updates.
I would love to hear your opinion on this article, simply leave your comment below.
in the us china trade war where is all the money going?
You can check out this article for the answer.
Great analysis. China is being embroiled in the trade war with US. Until the situation stabilises, it is vacuous to dive in now.
Your first chart of the S&P graph from Mar 09 to current is what I would call 6/6 hindsight for 300% hike. Unless one has WB’s discipline to buy and hold for decades, stock market investment is highly emotional. Put yourself in the situation in Mar 09.
After being hammered out of daylight during the Asian Financial Crises of 08/09, one would stay out of the market licking one’s wound. If one is clairvoyant (to know the gargantuan rise of S&P)and spent the next 2-3 years recovering to invest again, it would be end of 2012( S&P then was up 50%). Unless one has the iron-discipline to stay till now despite so much temptations and distractions to take profits, he would not gain even 100%. Very few makes that kind of margin with stock market, only with property. The reason being that stocks is volatile, liquid and emotional. Property being illiquid, quantum much higher, most likely on mortgage and less volatile gives better and more stable returns.
The asset class produces many more rich than stock investors.
You have a good point on why it seems easier to get better return on property. Because it is illiquid and high quantum, it reduces emotional selling.
But it is also a double edge sword, during a property market downturn, people will be reluctant or unable to cut loss and suffer greater fortune due to the leverage effect.
My point is that property had a bull market due to long term low interest environment. People who were succeeding in property investment are just like Bill Gross. The question is that will this kind of growth sustains when the macro changes. This is what we need to keep a close look out.
How about Eurozone?
Hi, Tan HH,
Eurozone is neither here nor there. In the trade war between the first and second economy, every country has to make a stand or forced to make a stand. A country without a stand will be like Singapore, whose stock market’s performance is in between China and US.
The fund flow shows the money was pulling out from Europe, so they are in bad shape.