How to Invest & Profit Unaffected by Stock Market Downturn (and Upturn)

Well, guess what, the markets are roaring back. And it’s not because the global economy has suddenly improved by leaps and bounds since Aug major correction. Stocks are back into action because of expectations that the world central bank will do everything in its capacity to keep the party going. Read – Fed maintain its interest rates low at 0-0.25% since 2006, until end of the year – we shall see.

Question is – did you pick up any bargains during the correction period?

Well I did – see below. I walk the talk.

mqreit chart

mqreit buy

If you believe what goes up must com down, and what goes down, must come up, then it was an interesting time to cherry pick in a battered market, provided you always keep at least 10% of investment war chest (10% portfolio in cash).

Ringgit continue to be battered though, with no end in sight. As we have covered it here – it’s the oil and commodity prices. Bank Negara has also seemed to tone down the pace of its intervention, as past interventions have posed a significant drain on the reserves. In Ringgit terms, foreign exchange reserves fell by RM 7 bil in Aug 2015 to RM 357.7 bil, the single largest monthly loss in almost 7 years, in a single month.

Trivia [source: Focus Malaysia 21 Sept]

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Last year, foreign workers remitted RM 28 bil  home. This year, the figure is expected to exceed RM 32 bil. Remittances by foreign workers put pressure on the ringgit.

The figure is much higher than the RM 6.9 bil net foreign outflow of funds from Bursa Malaysia last year.

Clearly, we cannot stop foreigners from selling stocks or bonds. What we can do is to reduce our dependence on foreign labour – unskilled/skilled/professional

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Fear and panic selling are always great creators of discount sales. Contrarians have always made money in times of panic. Of course, things could get worse before they get better. And thanks to the Internet, investing today is all about staying nimble.

You see, even Malaysian Prime Minister knows the concept of value investing. [Source: Focus Malaysia] On 14 Sept, he announced a RM 20 bil injection into equity fund ValueCap S/B to boost under-performing stocks. But you see, under-performing doesn’t mean value buy, as not all that glitters is gold. No further details are available on its investment strategy. You already got Khazanah and PNB, both are huge state-owned funds, so the question is, do we still need ValueCap or not?

Furthermore, RM 20 bil is insufficient still to ‘support’ the market. No big deal compared to foreign funds. Foreign investors also would ignore this ‘sentiment’ because this is NOT the root cause – which boils down to oil & commodity prices, US rate hike and China growth concerns.

But I am also not going to talk about dollar (ringgit) cost averaging (DCA) today. Or value investing. Because you know that concept already. In this volatile time, does the statement below from most of my clients resonate with you?

“What are there to invest to get away from the volatility of the market?”

Answer: Private Equity

1. What is ‘Private Equity’?
Private Equity is an asset class consisting of securities, either equity or debt, of companies that are not publicly traded on a stock exchange. 

Note: Even the well known value investing education provider, 8I holdings known for its MIP course, formed its own in-house private equity division (see announcement here)

2. What are the differences between investing in Public Equity versus Private Equity?
Public equity is an asset class consisting of stocks of companies that are publicly traded on a stock exchange. Private equity differs from public equity in its riskreturn profile and the investment duration. Market data research has revealed that private equity offers a better long-term risk-adjusted return compared to public equity in both the developed and the emerging markets.

private-equity-data

The trade-off for the higher risk adjusted return from private equity is that in the short term, private equity is not as liquid as the publicly-traded stocks. Because of the attractive risk-return profile of private equity, this asset class has enticed sophisticated investors seeking long-term capital gains. However, up to now, most of the private equity funds have been invested by institutional investors into pension funds and sovereignty wealth funds instead of by individuals because of the long holding period, usually over ten years, for traditional private equity funds.

3. Is there lesser risk involved in Private Equities compared to Public Equities? Why?
A research report published by UBS Bank Wealth Management dated 13 February 2014 compared the long-term risk-return profiles of private equity and public equity.
The comparison showed that the long-term risk-adjusted return of private equity is much higher than public equity. There are two
reasons for this:
1) Unlike public equity where everyone buys and sells on the same terms, a good private equity fund manager can create higher returns through private deals transacted with privately negotiated terms with better return and lower risk.
2) Private equity requires a holding period and there is usually no liquidity during the holding period. This means that you cannot redeem the investment during the holding period

private-public-equity

4. Investing in Private Equities is a slightly new concept for Malaysian investors. Why should they consider it?
For qualified investors seeking good long term risk-adjusted returns and who do not mind a holding period, private equity is a good asset class. Specifically, it would offer a unique natural hedge to benefit from both the strong market and the weak market. Plus, the underlying asset which acts as collaterals are a good tool for downside protection.

5. With assets being mainly USD-based, what currency risks will Malaysian investors face if the Ringgit appreciates ?
A USD-based private equity fund can reduce Malaysian investors’ currency concentration risk in Ringgit. In the current globalised
economy, many expenses and economic growth are strongly positively or negatively correlated to USD. If a Malaysian investor only holds Ringgit assets, he/she will be subjected to currency concentration risk when the Ringgit either depreciates or appreciates.

The best way to reduce such risk is to diversify certain holdings into USD assets such as a USD-based private equity fund. Even though a USD-based private equity fund is using USD as the accounting currency, the private equity fund’s underlying assets may be diversified in various countries and the value of the underlying assets are strongly correlated to the local economy. Therefore, the value of such diversified assets is a good hedge against currency fluctuation, including a potential weakening of the USD.

This Post Has 2 Comments

  1. Hi Lieu,

    The form is not working, hence I am writing to you here to request for a private presentation on the private equity investment.

    Regards,
    Francis

    1. Francis, I dropped you an email and a SMS earlier this week

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