This had stayed in my draft for too long.
Now that I can talk about how the liquidity flow had flowed back into the market.
It just shows that liquidity and confidence are the things that drive short term market fluctuation.
Over the long term, we should just hope to take advantage of these flows and hopefully be better position for the future.
Written on 11 - 14th March 2022
There is one thing I take away from my economics class is that demand and supply matter.
Every few years, the emerging market will experience some form of liquidity drain.
Now, there are too much demand for cash and too much supply of stocks and stock prices are going to go down.
So much for economics…
In the US, it is clear that liquidity is being pulled out by the big hedge funds as they receive withdrawal request from their investors. That means that as the hedge funds continue to withdraw cash from the market, the drawdown will spread from the liquid names to the established names and maybe finally to the illiquid names.
Let’s go back to the Asian markets.
Why has the Asian market gone down so severely as well?
Maybe the reason is the same as above that hedge funds in the west with an Asian book needs to liquidate their assets as investors are withdrawing their investment.
Maybe the reason is that there is Covid in China, and things is going to slow down…
Maybe the reason is that China is going to side with Russia and receive a sanction from the west…
Maybe CCP is still going to crackdown on every sector in China and everything is becoming un-investable again…
Maybe we are on the path to War World 3…
Again, this are too much demand for cash and too much supply of stocks and stock prices are going to go down.
Again, so much for economics…
The flight to safety or cash is all in sight now.
If that is the case, what is in it for the Asian investors?
If the US is considered to have deep liquidity, then Hong Kong market has shallow liquidity and would thus experience a more severe drawdown.
The usual name like Baidu, Tencent, Alibaba will be sold off heavily as they provide the highest level of liquidity.
Any smaller cap with some liquidity will be sold off as well.
Now, we can all look in envy to stocks which provide minimal/zero liquidity.
This type of liquidity drawdown happens so periodically in Asia, that most older Asian investors would have gotten so use to it.
If you take valuation into consideration, the drawdown in Asia often look more severe.
The upside for Asian stocks are more cap as well. Liquidity for a bull run in Asia often only comes after a bull run in the US.
It meant that Asian investors need to be a mix of trader and investor, where frequent turnover of the portfolio is the way to keep the portfolio above water.
To rub it in, the ample liquidity in the US also meant that there is a good chance that the cash withdrawn from the US market may need to find a home in the US, making the rebound in US much faster.
Minus the geo-political risk, the currency risk, US continue to look like the best bet in the world…
I am not going to give up on the Asian market. This is still my playground where I have been honing my craft for the past 2 decade.
The US market is a harder field to play in and I often feel inept when I am investing with a bunch of “experts”.
I have gradually moved away from my traditional market of Singapore, Malaysia and HongKong and into the market like the US, Australia, Western and Eastern Europe and tragically Russia (which contributed to most of my permanent losses for the month).
Similarly to the Asia, most of the emerging markets are also plague by the lack of liquidity which meant that they may also be plunging.
Maybe, it really pays to stick to the developed market for the sake of liquidity.
Or maybe we should really just ignore the stock market and pretend that we are really investing in companies with no stock quotes.
Or maybe we could lower our expectation so that we are happy with just the dividend received.
As of today, I am down by 6%-7% for the year, it looks like this drawdown would be long and painful indeed.
Unlike previous crisis, I have a mix of investments from all over the world and is facing a slightly lower drawdown than my past experience. Overall, I am surprisingly comfortable with my positions.
Instead of looking at new names, the aim is to continue averaging down on the worst affected part of the portfolio and that means more HongKong stocks is coming into the portfolio.