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THE STRAITS TIMES

Preparing for the next stock-market

collapse?

China's total debt mountain, which includes government, corporate and household debts, reportedly stood at US$28
trillion (S$38.4 trillion) last year. PHOTO: REUTERS

PUBLISHED AUG 3, 2015, 5:00 AM SGT

Markets or companies don't determine our fate - it is how we react to their
movements
David Kuo
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I don't normally like to think about bad things. I am the kind of person who looks at a half-filled glass
and sees it neither as half-full nor half-empty. Instead, I want to know who made the glass and whether
it is a good business to invest in for the long term.
But I want to thank (reader) ktseng88 for raising the subject to me about the bursting of the next
bubble. It seems that no sooner have fears over the Greece debt debacle subsided than another
potential tale of disaster waits in the wings. The red-faced Greece-naysayers are now quickly re-writing
their doomsday scenarios as they drool over the next possible Armageddon to scare us witless.
The next potential disaster could quite easily have been the collapse of the Shanghai and Shenzhen
stock markets. But swift action (twice) by the China authorities made sure that the drama did not turn
into a full-scale crisis. Chinese shares - despite their sharp falls - are still overvalued. And, in the
absence of complete freedom to trade shares, they are likely to remain overvalued.
Amusingly, China has been reproached by some quarters for copying developed economies' playbook
by making easy money readily available. But the scale and manner of China's intervention is staggering.
The euro zone, Japan and the United States might be accused of kicking the can down the road but
China has rolled its stock-market barrel down the expressway. However, that is not the calamity that
we are supposed to be bracing ourselves for. The next disaster, it would seem, is the Chinese debt
bubble that is growing by the minute.
China's total debt mountain, which includes government, corporate and household debts, reportedly
stood at US$28 trillion (S$38.4 trillion) last year . It is equivalent to nearly four times the country's total
annual economic output. But opinions differ over whether China's debt problem could derail the
nascent global recovery and send stocks crashing.
On the one hand, so the argument goes, global financial crashes are often preceded by a borrowing
binge. It happened to Japan in the 1990s; it crushed many Asian economies in the same decadeand it
brought the US and the United Kingdom to their knees in the late 2000s. It is happening in China now.
However, the counter-argument is that China does not resemble any of those previously indebted
economies. It has a vice-like grip on banks; it has a chokehold on its financial sector and it also has its
stock markets in a full nelson. Debt, it is argued, will never be allowed to go bad in China - it will simply
be rolled over until it is repaid slowly or conveniently forgotten. The latest jargon is "debt re-profiling".
But don't be too complacent just because China's debt has yet to become a pressing issue. As soon as
experts start to play the "what-if" game, almost anything can happen. The "what-ifs" can quickly turn
into "Why are still you holding onto risky assets such as shares" as fretful traders dump stocks.

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Perhaps one of the greatest truisms in investing is that people get interested in stocks when everyone
else is. But the best time to get interested is when no one else is interested. It is never easy to buy
popular stocks and do well.
What's more, there is nothing especially difficult about investing. All we need to do is buy good stocks
in good times and hold on to them as long as they remain good businesses. There are many of those
types of good businesses in Singapore. They can be ideal investments for patient investors who are
prepared to continually add money to their chosen stocks.
Investing guru Peter Lynch once said that the best stocks to buy may be the ones you already own. So a
correction simply gives us the opportunity to buy more of the stocks that we like at a better price.

Our goal as investors should always be to buy, at a rational price, a share of a business whose profits are
very likely to be higher in five, 10 or 20 years. Over that long time frame, though, we are likely to be
rocked by many stock-market crashes and corrections.
But time and time again we see that the stock market behaves like a great relocation centre, where
money is moved from the irrationally active to the sensibly patient. In the end, it is not the stock
market or even the companies that determine our fate. Neither can stock-market bubbles and crashes
hurt us. It is us and how we choose to react to them.

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