The hashtag #FiscalCliff has been trending on twitter since the beginning of December. In fact, I have been using that hashtag often on my twitter account as well (in case you have not yet followed me, you can do so here .)
Just what is the fiscal cliff? And what are its ramifications on the average Singaporean who is invested in the stock market? Well, if you are still not sure about what the fiscal cliff is about, we have a treat for you below!
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Fiscal Cliff Impacts on The World
When the world’s sole super power fails to sum up the political will to starve off economic gloom, you can rest assure that the rest of the world will experience the ripple effects of said cliff. The key word here would be global trade. The US is the largest or second-largest export market for most Asian countries. Therefore, export driven countries will be most affected.
The usual suspects include Hong Kong , Vietnam and of course, our island home, Singapore . Hong Kong however, appears to be the most vulnerable to the fiscal cliff shock. This is because unlike most countries, it does not have the ability to cut interest rates because the Hong Kong dollar is pegged to US dollar. Singapore will not have it any better either. Although the Singapore dollar is pegged to a basket of currencies (including the US dollar), the Monetary Authority of Singapore (MAS) could have its hands tied dealing with another problem.
Inflation and Global Recession
Although Singapore’s inflation figures for November have eased to a two-year low of 3.6 percent, economists say that it is still above the historical inflation rate of about 2 percent. In a statement accompanying the release of inflation figures, MAS and the Ministry of Trade and Industry maintained that inflation will continue to remain elevated for the final quarter of 2012 and the first quarter of 2013. A key instrument that MAS uses to keep inflation in check is by appreciating the Singapore dollar (restrictive monetary policy).
However, if a possible global recession hits our shores, such restrictive policy could add further gloom as global trade grinds to a halt. Hence, there is a prospect of a double whammy to the SIngaporean economy if the US falls off the fiscal cliff and in doing so, triggers a global recession.
If Singapore does go for a ride down the rabbit hole, investors are right to be concerned about the value of their investments. What can Singaporeans who are invested do?
The Way of the Contrarian
Yes, the force is strong with this one. This being a contrarian approach. Buy when people are selling off and sell when people are buying in. But do you have the stomach for it?
If you don’t, then it’s probably wise to switch to more defensive plays. These include consumer services, telecommunications and healthcare picks. But which? Lets take a look at a stock pick from each sector and plot them on a graph.
Source: Factset, STI returns versus M1, Parkway Life REIT and Comfortdelgro
These defensive stocks can weather a recession relatively well as based on historical performance. They also recover well. That’s the key idea. Weathering a recession is all fine and good, but if it subsequently lags the market, then the point for investing in the market to begin with, becomes moot. But while some shifting in stock components in your portfolio is wise, it would probably be a bad idea to do a drastic repositioning. Ultimately, the fiscal cliff brings uncertainty or risk. As an investor, you should be comfortable with risk because it is with risk that you will be able to earn returns.
However, for investors who were already planning to sell down on stock holdings early next year, it would be wiser to sell them down before the clock strikes midnight on 1 January 2013.
Otherwise, the investment community has one piece of advice for local investors. Do not panic. Along with some slight adjustments to your portfolio, it is always prudent to make sure you have a cash stash that can last you for one to three years. Put this money away at a local bank (which is insured by the SDIC or Singapore Deposit Insurance Corporation) and not under your pillow!
Have any thoughts/comments or feedback regarding this article? Reach out to me on my twitter account, @Tradeable . I will also discuss and tweet about various other investment and economic related news in Singapore and beyond, there.