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Wednesday, October 28, 2020

What to do with our money

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“What should we do with our money?” That’s the common question posed to me these days. It’s because I often write newspaper articles and Facebook posts about monetary issues and stocks. As Covid-19 broke out, stock prices crashed worldwide and gold prices fluctuated. Health-conscious people then became more conscious of their money. They asked me what they should do with their idle money.

First, people and friends my age or somewhat older are much interested in stocks and real estate as they have dealt with them once in a while. The U.S. securities market has nosedived. So has the bourse in Vietnam. Many stocks plunged drastically. Some U.S. stocks shed as much as 87% of their value and several in Vietnam 60-70%. Their P/E (Price to Earnings) and P/B (Price to Book) have never been so low over the past 10 years.

Having experienced the 2007-2009 economic crisis, those “conscious” people have quickly come to realize that this may be a chance in a 10 years’ time for cash holders, which should be optimized to earn more money. The majority of them are working for domestic or global corporations and are high-income earners. They are economically knowledgeable although some have never bought any stocks or opened an account on the bourse. There’s no need to mention here stock professionals because those of them who don’t got stuck with the current market are mobilizing cash to take what they deem the golden opportunity.

From another point of view, many are more interested in the realty market. In defiance of the possible frozen estate market plagued by problems in legal disputes or “condotels,” one of my friends who works in the property industry recently texted me to remind me of “paying attention to the realty market.” Obviously, the real estate market remains an attractive investment channel for the well-to-do.

People who are my parents’ contemporaries adamantly refuse to engage in the securities market, which was described by a relative of mine as “incredible listed companies which always release falsified reports.” That’s the bias exhibited by old people against stocks. But the prejudice isn’t completely groundless because there are occasionally listed firms which turn loss into profit or make accounting tricks confusing even professional investors.

Therefore, criticisms against these fraudulent companies are understandable. To such prudent senior citizens, the key investment channel involves basically a house or a swathe of land. What’s more, the segments of land plots for building houses and industrial land are emerging with forecasts about the diversification of supply chains outside of China in which Vietnam is a probable selection.

Finally, gold is always a safe heaven for Asians because they can always buy gold, be their savings big or small. Although gold speculation has become much less profitable than before due to the intervention of the Vietnamese Government in recent years, gold as an investment channel still attracts people’s attention. The problem is the domestic gold market has been now distanced from the world market, which has made gold day-trading much more challenging, especially when the domestic gold price is now about VND5 million per tael higher than the world gold price (a tael equal 37.5 grams of gold). Albeit a safe place for people’s assets, gold is no longer as lucrative as it used to be. Gold is not my favorite investment channel at the moment. Yet to many, it remains a traditional investment channel.

Deposit your money to a place you are quite aware of it

In short, until now I haven’t answered to the question as to where one should put his or her money in. Perhaps everybody should choose their own references.

First, I think the channel of choice may be the one you are best aware of. Don’t jump into a territory which has shed much of its value and is presumed to bounce back soon. A stock which has lost a half of its value may again lose the remaining half. That was once the bitter lesson learnt by many in 2008 when they thought they could make profit as the VN-Index plummeted from 900 to 500 points. Several months later, the index plunged to around 300 points.

My current interest is principally the stock market as it closely relates to my profession and has been my key investment channel over the past decade. However, one of my friends invests in the stock market just “for fun.” His money has been pooled mainly in plots of land. Meanwhile, industrial land is the selected channel for one of my family members. So, one should cling to his or her expertise. As far as I’m concerned, the opportunities brought about by Covid-19 may be in different industries, and this time around is not when one should be bold enough to venture beyond one’s best competence.

Two unknowns: the bottom of the economy and risks of a debt crisis

I’d like to talk more about two issues I’m paying attention to as an investor who is seeking an investment channel. They relate to when the economy tumbles to the bottom and how big bankruptcies are.

Whatever the investment forms are, either stocks, gold, foreign currencies or land, only being capable of identifying the timing of the economy sinking to the bottom and risks of bubbles which have not yet expose at present can help identify the right time of investment. For instance, if the economy really falls to its bottom by the end of Q2, then one should pump his or her money to the stock market before that date because this market is often a forerunner ahead of macroeconomic news.

First, we should talk about the bottom of the real economy (the part of an economy that produces goods and services, rather than the part that deals with financial services). This bottom is determined by the peak of Covid-19. According to estimates by a research project conducted by the Imperial College in Britain, the British peak may fall in May. So does it in other European countries. The timing for the United States may come a little bit later, but it will also be in the second quarter.

A recently revised report by Goldman Sachs predicted that U.S. GDP in Q1 would drop by 6% and drastically plunged by 24% in Q2, which is followed by two dramatic surges, 12% in Q3 and 10% in Q4.

However, what concerns me most involves bankruptcy risks. First, it is clearer in the case of companies in the aviation, travel, shopping and entertainment industries which are being frozen by social distancing in countries across the globe. However, when these countries take their grips to the next level—canceling festivals, closing national borders and requesting their citizens to stay at home—their entire economies will be frozen. Then it will no longer be a problem of only airlines, cinemas or shopping malls because the manufacturing sector will be affected, too. The current oil price war has heightened the bankruptcy risks of American shale oil companies, which have relied heavily on loans.

Vietnam is no exception. She is even more vulnerable because her economy is highly open and depends greatly on exports. While the performances of Vietnam’s key importers are lukewarm and the whole country must rush into the lockdown, the risk of enterprises facing bankruptcy in the economy is substantial.

Such a bankruptcy risk can be mitigated only when the Government really interferes with it by cutting taxes, providing emergency loans, supporting enterprises in paying salaries to their workforce or buying bonds of some companies. In fact, some calls for nationalization of the world’s big airlines have been made. The Government should also introduce measures to encourage banks to reschedule/restructure loans and extend more loans to the economy, especially to medium and small enterprises.

Simply put, if we are looking for a recovery during Q3 or Q4 when the pandemic is hopefully over, enterprises must not be dead in Q2. Although it is amazingly simple in many nations, it is political by nature. Which enterprises should be saved? Public debt will be bigger but who will endorse the rise? In an economy where budgetary discipline is effectively enforced, the German Government has just decided to issue bonds worth more than 150 billion euros, an unprecedented move.

If more economies are bold enough to increase their debt to have a bigger budget for support of enterprises and workers losing jobs because of the coronavirus, a global debt crisis may be avoided and the recovery process will be smoother. However, this is an extremely sensitive matter to all political systems, and, thus, the timing is of paramount importance. If money is disbursed too late as a result of prolonged political negotiations, enterprises will die anyway.

This is one of the few factors which prompt me to put cash at the top priority in my own investment portfolio although I have bought several stocks. More than 80% of the value of these stocks have been lost, which prompted big institutional investors to buy them. They may be the goals for future mergers and acquisitions.

At this moment, I still believe that there’s no reason for a rush and keeping cash should be the best policy. I want to be ready to buy quickly cheap assets when the economic recovery becomes clearer.

As I have said, this is an opportunity in a 10 years’ time. Yet if you lose your patience, you may end up buying something overcharged. Gaining cheap assets should be done the way goods are collected gradually during a pandemic time. It needs patience and the ability to contain both one’s ambition and one’s fear for losing a chance.

Bear in mind that in front of us may still be the abyss of a debt crisis!

By Ho Quoc Tuan, lecturer, University of Bristol, England

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