Rising Inflation, Not Recession Fears, Is Investors' Key Worry

Source : The Straits Times, Feb 25, 2008

Soaring prices darken horizon, but savvy investors can still spot opportunities

INVESTORS have been bombarded with talks of a looming United States recession for months now.

The real worry they face, however, is much closer to home - rising levels of inflation in Singapore and the rest of Asia.

After all, rising inflation breeds deadly uncertainties for business - and, often, that is bad news for stock prices.

Walk into any coffee shop, and the buzz is about the price hike in festive goodies and higher fuel prices during the recent Chinese New Year celebrations.

The mood contrasts starkly with that a few years ago, when Singaporeans were preoccupied with the lack of work in a sluggish economy - sob stories of professionals being forced to become taxi drivers after losing their jobs.

Now, there are jobs aplenty, but the consumer price index - the main measure of inflation - has jumped sharply, from 1.3 per cent in June to 4.4 per cent in December, after staying well under the radar at a benign 1 per cent or less in the past five years.

Crude oil prices are bubbling past US$100 a barrel, and gold is making swift strides towards US$1,000 an ounce. The record high prices of an assortment of soft commodities, from wheat to coffee, are sparking fresh fears that rising food prices will drive up inflation sharply worldwide.

Historically, inflation has been the great enemy of equity investors.

Older investors will recall the bogeyman of stagflation - low growth, rising unemployment and high inflation - hitting the world in the 1970s.

As crude oil quadrupled in price, the stocks of OCBC Bank, for instance, plunged to just a fraction of the $50 a share they had reached in 1972.

Still, inflationary pressures today are nowhere as dire as they were in the 1970s.

Experts believe things will sort themselves out a lot sooner this time.

China might grow at a slower but more sustainable pace after the Summer Olympics in August, as its frenzied construction programme winds down. This should put a cap on soaring raw material prices caused by the insatiable demands being made by a booming Chinese economy.

In the West, central banks might clamp down on the loose credit unleashed by falling interest rates, as the sub-prime mess gets sorted out.

Property plays

UNTIL these problems are sorted out, however, investors should be aware that financial assets, such as equities, provide little hedge against inflation.

As costs escalate, investors demand a lower price for shares to compensate for the higher risk in holding them in uncertain, economic times.

In extreme cases, this has resulted in a longish bear market, such as in the 1970s.

It would be wrong for investors to assume that any slowdown in the US can be tackled by a few interest rate cuts by the Federal Reserve, given complications created by rising inflation worldwide.

It would, however, be foolish for investors to allow the doomsday headlines to numb them into inaction.

Already, some Singaporeans are making a smart move by snapping up HDB flats - the best hedge against inflation available to investors in the mass market.

Recently, a stunning 9,900 applications were recorded for the 278 flats that the HDB had offered during its February bi-monthly sales.

A successful application might be likened to winning a 4-D lottery. The value of the flat is likely to spike up, while inflation erodes the value of the loan used to pay for the flat.

For investors who do not qualify for an HDB flat, investing in a private property makes good sense for the same reasons, as the bubble in the residential market deflates.

But there is no need to despair, if they do not have the financial means to do so.

Seizing chances

EVEN though inflation can be a stock killer, equity investments still make solid sense, if an investor looks to the long term.

For the first time in years, there seem to be a lot of genuine bargains in beaten-down sectors, such as real estate and financials, where stocks have lost 30 per cent to 40 per cent of their value in the past six months.

Investors will simply have to keep their cool, keep plenty of cash on hand, ignore the incessant market noise about a recession and inflation, and get ready to pounce on any opportunities that come along.

Stick to the bluest of the blue chips, which will survive and remain in far better shape than other counters, as the stock market continues its bumpy roller-coaster ride in an inflationary and recession-hit environment.

Just bear in mind that big sell-offs present rare and not-to-be-missed opportunities to buy into big dividend-paying banks or cash cows like SingTel.

This will give investors a once-in-a-generation opportunity to make big returns when inflation is successfully nailed down again.

The local stock market has weathered numerous crises - the 1973 oil crisis after the Arab-Israeli war, the 1987 Wall Street meltdown, the 1997 Asian financial crisis and, more recently, the collapse of the dot.com bubble in 2000.

Staying nimble

THOSE with the perseverance to ride out the current credit crunch and accompanying inflation problem will certainly be richer for it.

They might not make it to the league of the Li Ka Shings or Kwek Hong Pngs who rode through the 1970s stagflation crisis to become billionaires with their shrewd investments - but they will at least build up a nest egg for a comfortable retirement.

Take advantage of the bear market while it lasts. It is a great boon for nimble and courageous investors.