Fearing a Downturn? Here’s What to Do

By Property Soul (Guest Contributor)

In my earlier blog post “7 Reasons Why Property Prices Won’t Recover Soon”, I talked about ‘regime uncertainty’ and how the recent China stock market crash further undermined market confidence.

During the free fall between June 12 and July 7 this year, Chinese equity investors lost more than $3.4 trillion in equity value in less than a month. By the end of August, investors suffered a total of $4 trillion in losses, not to mention China’s subsequent desperate move to devalue the currency.

Although foreign investors own less than one percent of Chinese stocks, foreign hedge funds still have billions of dollars at stake through Exchange Traded Funds and other types of investments.The rest of the BRIC economies aren’t doing better. Last week Brazil officially announced that the country is now officially in recession, joining its counterpart Russia which is in full-blown recession amidst depressed oil prices anda massive currency depreciation.

The ripple effect of a bear market

One might argue that only the privileged minority invest in stocks in China. For most people, life goes on as usual in the world’s second largest economy. Looking around, you might not see many people suffering from big losses in the recent global stock market slump.

The reality is: it is not the money lost in real terms, but the loss of market confidence and the fear that the worse has yet to come that is sending ripples down the line.

While everyone is blaming the “made in China” problem, companies are already taking necessary steps in anticipation of a possible downturn. The common measures include:

1. Having cost cutting measures in place to cut down expenses;

2. Calling a halt to ongoing business expansion plans;

3. Holding back planned local or overseas investments; and

4. Planning new rounds of company restructurings and lay-offs.

The fear of the unknown

The article “Fearing slump, rattled Chinese long for advice” (The Sunday Times: August 30, 2015) is an interesting read. Americans have had their fair share of painful memories riding through the dot com bust and subsequent market recession in 2001 and financial crisis in 2008. The Japanese have experienced three lost decades after their market crashed in the 1980s. Singaporeans have survived the Asian Financial Crisis in 1998 and the SARS-related depression in 2003.If the current hiccups continue, we know what is going to happen next. But not the Chinese.

The new Chinese generation who grew up during their country’s best years and experienced double-digit economic growth every year may not be prepared for the country’s first downturn since the economic reform in the 1980s. As the article clearly points out, “many young professionals have known only boom times and fear the abyss of a downturn.”

Although Chinese tourists are still the biggest spenders in many countries and Chinese investors are still buying properties overseas, if they believe that times are going to be tough ahead, they may over-react by dramatically cutting down purchases.

They know that salary increments, commissions and bonuses will be frozen. A higher unemployment rate is expected with more workers losing their jobs. Older workers are likely to delay their retirement plans.

To cushion the impact of the anticipated downturn, families spend less and cut down on vacations. Consumers refrain from buying luxury goods, cars, properties and any big ticket items. Investors hold back any planned investment to keep liquidity.

All these austerity measures have a big impact on retail, tourism, luxury goods and real estate. Over-reactions triggered by the fear of the unknown become a self-fulfilling expectation of a real economic crisis.

Actions to take when facing a downturn

Investors have at least three options when a possible downturn is in sight, depending on their financial situation and investment style.

Option 1: Time to cash out

In an economic crisis, cash is king. Savvy investors know when to sell and keep a high amount of liquidity.

Option 2: Wait and see

In times of uncertainty, hold your horses to avoid making investments you may regret later. Be patient and wait till the dust settles.

Option 3: Bottom fishing

Be greedy when others are fearful. No one knows when the bottom is. You will go for it anyway. Just be prepared of the risks ahead when you bottom-fish. Invest only with calculated risk and always have a plan B in place.

By guest contributor Property Soul, a successful property investor, blogger, and author of the No B.S. Guide to Property Investment.