Picking Up The Pieces From a Grim Year


2018 could hardly have ended in a more depressing fashion. Bad news abounded, ranging from the tsunami affecting the Sunda Strait to the global market correction wiping out all the gains of the previous year, leaving investors and pension holders poorer than they were at the beginning of 2018.

What is important now is to put the events into perspective and develop a strategy to face the future.

 

Krakatoa – East of Java

This was the title of a dramatic film made in 1969 depicting the last days of the original Krakatoa (now spelt Krakatau) island before it exploded and collapsed into the sea in August 1883 sending a 40 meter tsunami crashing down on neighbouring coasts. A very similar event, albeit on a smaller scale, occurred on the night of Saturday 23rd December 2018. Krakatoa of course is west of Java, not east; a small detail overlooked by Hollywood but the scenes of terror depicted must have been relived in reality by those tragically caught up in the latest event. The film and short sections of it, as well as very informative documentaries, can be found on YouTube.

Why is this relevant to a column about finance? Well, survival comes first of course and those who lost their lives cannot be brought back. But those who did survive are now faced with making a living in a place where tourists are unlikely to return for a long time to come, especially while Anak Krakatau which arose from the sea decades after its parent disappeared, continues to threaten. They are not alone with their fears; memories of the Lombok earthquakes in August are still fresh in people’s minds and for the people of Palu and Donggala the triple horrors in October of earthquake, tsunami and liquefaction mean that life will never be the same again.

Bali too has had its share of both natural and man-made disasters in recent years. The island has recovered remarkably and quickly from bombings and natural phenomena such as Agung’s eruption. But the threat will always remain of volcanoes, earthquakes and tsunamis and when you look at the three major disasters to hit Indonesia in the past six months, first Lombok then Palu and now Krakatau, it is clear there is no room for complacency.

This doesn’t mean expats should consider leaving these tropical isles to return to the safe havens of Nether Wallop or similar refuge in our home countries. Living here has many pluses, but with the benefits come a few risks. The solution is to recognise the risks and work out ways to lessen them. Fortifying the home to withstand earthquakes is an obvious one. If you live near the coast make sure you have a plan to escape to higher ground in the event of a tsunami. Be well informed; it is possible to sign up free of charge with the United States Geological Survey (earthquake.usgs.gov/earthquakes/) for e-mail alerts on earthquakes and you can check www.tsunami.gov for tsunami warnings. Keep them bookmarked if you live by the coast! Check that you have insurance to cover such events. If you are running a tourist-related business, make sure you also have assets in other places; don’t have all your eggs in one basket.

 

2018 a bad year for investors also

2018 was the worst year for global markets since 2008 and December alone saw a bigger fall in US stocks for that month since the Great Depression.

You might consider seeing your investments or pension fall by 20% over the year as a disaster in its own right. But experienced investors will appreciate that this is the nature of the beast; to beat cash you have to accept bad years as well as good years and have faith in the fact that historically investors in the world’s stock markets have come out on top in the long run. Some see stock market investing as gambling but true investors are putting their money for the longer term into companies and industries that keep the world turning.

 

But why did markets fall so sharply in 2018?

Some will say this was a natural and necessary part of the normal market cycle. Not all markets followed suit but major markets and the US in particular had enjoyed a 10-year ‘bull’ market and a correction was overdue. But corrections need a trigger and we had no shortage of these during the year.

Here are some of the obvious ones:

  • Trade wars – started because President Trump felt the US was getting a raw deal from other countries.
  • The ‘easy’ money available from stimulus action following the Global Financial Crisis of 2008 had strengthened the US economy but was now threatening to lead to inflation. Hence the decision by the Federal Reserve to raise interest rates four times during 2018. High interest rates help to control inflation but can reduce economic activity.
  • The decision to raise interest rates made Trump angry as he thought stimulus should be a permanent feature and his comments about the Fed., which is meant to be an independent body like central banks in other countries, unsettled the markets.
  • Stalemate over Trump’s campaign promise for a wall along the length of the Mexican border led to a partial shutdown of government before Christmas, as he could not get the support he needed to raise US$5 billion.
  • Brexit. A potential disaster for the UK and a bad example to other countries that might also give way to nationalistic and populist movements. Brexit must have been music to Putin’s ears as he relished the prospect of a weaker Europe. At the end of the year the outcome was still very uncertain.
  • The global threat to retail trading grew significantly in 2018 as more and more space was vacated in shopping malls and high streets throughout the world and some 150,000 jobs lost in the UK alone. The cause? The rapid growth of online sales. Good for disruptive companies like Amazon but a disaster for many small businesses and even some large brand names.

The list is not exhaustive but there was clearly enough bad news around to frighten people out of the markets. Which is a pity because it was business as usual for companies that don’t hit the headlines, like manufacturers of domestic items, food chains, plane makers, companies in leisure and entertainment etc. And there are plenty of innovative companies turning in very healthy profits. In short, the fundamentals for earnings growth and expansion to meet the needs of a growing global population are still in place. If you want to be part of it then you have to remain in the markets or use this window of opportunity to get into them. While we do not know if the bottom of the market has been reached, we do know for certain that prices are significantly lower than they were a year ago.

In short, provided you have ample cash reserves and insurance in place, bad news can be good news in the long term if you can put all the noise into perspective.

 

Colin Bloodworth, Chartered Member of   the Chartered Institute for

Securities and Investment (UK), has spent over 20 years in Indonesia.

He is based in Jakarta but visits Bali regularly.

If you have any questions on this article or related topics you can

contact at : colin.bloodworth@ppi-advisory.com or +62 21 2598 5087.

 

You can read all past articles of Money Matters at www.BaliAdvertiser.biz

Copyright © 2019 Colin Bloodworth