March 2020
A stock market correction is a beautiful thing as it adjusts equity prices closer to their actual or intrinsic values. In reality, it is much easier than that – stock prices come down because of speculator reactions to expectations of news, reactions to actual news and profit taking.
The former “becauses” are more potent than ever before as there is now a wider corona-virus cases spread into South Korea, Iran and Italy as well as many new countries report their first detection case. It is clear now that the corona-virus is 2020 black swan.
At GCP Global, we had warned and prepared our investor students in our REITs Quarterly class as well as our various media interviews about this impending REIT correction. We have written (insideinvest.com.sg/experts-of-the-month/2013/07/11/the-beautiful-correction-by-gabriel-yap/), taught about corrections. What we love most, nonetheless, is to buy BIG into corrections.
We had warned and prepared out investor students in our REITs Quarterly class, Symposiums, as well as in our various media interviews, about this impending REIT correction
One of my premises in warning for an impending correction in our previous investment classes and media interviews, was that REITs have surged for more than 14 months without a pause or rest since the end of 2018. The FTSE REIT Index went from 777.45 at end-2018 to 941.99 for a 21.16% gain within 13 months. This way outperformed FTSE STI Index which managed only to crepe from 3,068.76 to 3,153.72 for a meagre 2.77% return. The huge out-performance is even more exemplified if we look at the Top 10 Best Performing REITs for 2019 – including dividends, the Total Returns would have ranged from 25% - 40%!
These Total Returns trumped the best returns from the 2 previous REIT rallies in the present decade –
1. Aug 2015 to Dec 2017
2. Market recovery after the 23rd May 2013 Taper Tantrum sell-off
Examining the Current Market Correction
This is the first Major Correction in SREITs in the past 14 months. This correction has been beautiful as it has been sharp, quick and precise. REITs came down 6.93% over 7 trading sessions from the peak on Wed 19th Feb 2020 till Fri 28th Feb 2020.
Compare this to the last major REITs correction of 2018 when the FTSE REIT Index corrected 9.164% in a year. This 6.93% correction took place in just 7 trading days!
Corrections are beautiful when they are sharp, quick and precise as they create the pandemonium among investors while many still await if the corona-virus becomes a pandemic. The sell-off in the Dow was down more than 3,300 points in the maddening week of 21st Feb 2020 while the S&P 500 saw its fastest drop from an all-time high into correction levels, i.e. down more than 10% on record.
The Dow posted two declines of more than 1,000 points in that week while the Dow’s 1,192 points fall on Thu 27th Feb 2020 was the Dow’s biggest one-day point loss on record. The S&P 500, meanwhile, posted declines of more than 2% in three of the five sessions in the same week. The Dow and S&P 5000 each dropped 12% and 11% for the week.
Characteristics of the Sell-Off
Another key characteristic of this sell-off was that it was Broad-based and indiscriminate. The 10-Worst Hit REITs lost HT, lost more 7% of its value in just 7 trading sessions! And this is based on their closing prices. If you examine their sessions low, some of the REITs sold off as much as 15%!
Not surprisingly, the 10-Worst Hit REITs mainly comprise the Top-Tier REITs like MCT, CCT, CMT, MIT, AIT, KDC and AREIT as these have been the Top Performers for the past 14 months. These characteristics are similar to the previous 2 corrections.
WHY I LOVE MARKET CORRECTIONS
In my more than 35 years of investing experience (I started watching the stock market and was chasing stocks while in college while my class mates were chasing girls), I actually revel in market corrections as there has never been a correction that has not proven to be a good buying opportunity.
Thus, this sell-off is indeed beautiful as the worst-hit REITs are the ones that have risen the most previously and are mainly Institutionally-owned. This would mean that in the increasing fickle world of funds flows, should the institutional funds flow which can easily amount to a net bought amount of a billion into REITs in a single month, return in a short time, the same REITs (assuming no deterioration of fundamentals) would see a big recovery.
Nonetheless, when investors buy into a correction, one should be cognizant that the recovery may take a few months. On an average, REITs take an average of 4.6 months to recover back to their original prices in a correction. Of course, if the correction turns into a major economic downturn, then all bets are off. A correction is technically defined as a more than 10% drop in prices.
INVESTORS PSYCHOLOGY UNDERLYING MARKET CORRECTIONS
Most investors actually go into a despondent mode as prices tumble during a market correction. This is despite the fact that buying opportunities surface as prices tumble. It could be that they either bought at the peak or bought into the wrong stocks or simply, the 4-letter word – FEAR.
As in Shakespeare, “Time and Tide waits for no man (or woman)”, thus, a good understanding of market timing and taking actions to lighten portfolios just before market corrections are key to success in investing. These are what we specialize in teaching in our REITs Quarterly Class, the next of which is happening next week on Sat 14th Mar 2020. In view of the corona-virus impact which have ravaged REITs prices and thereby provide investment opportunities, we have extended our Early Bird Offer for the class.
For sure, some investors psychological make-up is disorientated during a market correction as they blame themselves for buying in too soon and not selling out prior. But really, the stock market is no place for hindsight – one should move forward and try to “perfect” one’s reading of the markets.
HOW MUCH AND WHEN TO BUY DURING MARKET CORRECTIONS
If you had the foresight to lighten up before the correction, you may also resist from buying too quickly. I normally hope for a short and steep decline, but would prepare for a long one as more investors get more unsure and become more nervous as markets drag and rough it out. As mentioned in my latest media interview, V-shaped or U-shaped recoveries are what investors should be focused on during a correction, other than the misplaced fear of falling market, which admittedly, can cut like a thousand knives.
WHY MARKET CORRECTIONS ARE BEAUTIFUL
Market corrections also allow my strategy of building my positions and/or top up my positions to those REITs where I am the Top 20 Shareholder at more affordable prices, especially if I have taken huge profits in the rally up prior.
It is also opportune time for me to utilize my steady cashflows (REITS pay out their dividends every quarter while other high yield stocks pay out every 6 months) to buy in at cheaper values.
Let me illustrate – I have been a Top 20 Shareholder of CapitaLand Retail China, CRCT since 2016.
The market presents you with value, but you need to know when to seize it.
I first bought back CRCT (after trading out previously at $1.65 and above in the run –up from $1.35 to $1.65 from Sep 2015 to 2016) in Dec 2016 at $1.33 - $1.35.
This chance was only the 5th time in the past 5 years prior that CRCT had traded at below $1.35. I felt that 2016 was a good year to establish a major position in CRCT as the operations of its 10 malls in China experienced its worst numbers – DPU dropped for the first time in the past 5 years from 10.6 cents in FY2015 to 10.05 cents in FY2016.
This was confirmed when the results came out in Mar 2017. The best time to buy is when the market punishes the REIT price, but the smart investor should know the REIT quality of assets well enough to know if they are one-off or a recurring problem.
CRCT’s share price went on a roar in 2017 as expected interest rates increases by the Federal Reserve were held back. It took just 10 months for the share price to climb to the previous high of $1.65 - $1.72 achieved in Jun 2015 by Oct 2017. It was a great profit-taking opportunity as I had sensed that interest rates may finally start to move up (some 4.5 years after the Taper Tantrum on 23rd May 2013) and CRCT’s share price was challenging the previous high again.
While CRCT continued to report fundamentals in its quarterly results, there was not much new news that convinced me that the share price can go beyond the previous high of $1.65 - $1.72 achieved in Jun 2015. Thus, I liquidated a huge portion of my shareholdings at $$1.65 - $1.69 in Oct 2017.
A million shares in CRCT, buying at $1.35 and selling at $1.65 will earn you a cool $387,750, including dividends in just under 1 year for an investment of $1.35 million. This worked out to a return of $387,750/$1.35 million = 28.7 in less than a year!
As the Federal Reserve started to raise interest rates, CRCT’s share price continued to fall in 2018 and went below $1.35 again in Nov 2018. This chance was only the 6th time in the past 7 years prior that CRCT had traded at below $1.35. It was clear to me that it was time to establish a major position in CRCT again as for the first time since its listing in 2006, CRCT has embarked on a more aggressive path of growth with acquisition of the Rock Square Mall in Guangzhou which was completed in Feb 2018 in exchange for divesting a lower-yielding Anzhen mall.
I could see that CRCT was switching its gear up by shifting its focus from stability of master leases to growth generated from more actively managed assets, a feedback that I have constantly being giving to CRCT’s CEO and Head of Investor Relations in our various investment update meetings and follow-ups.
The acquisition of Rock Square Mall was illuminating in that 52% of Rock Square’s total rent or 32% of its Net Leasable Area (NLA) was up for renewal from 2018 to 2020. Moreover, when I checked in detail, it was clear that average passing rents were below market.
Thus, the price paid for Rock Square Mall was a good deal. I had then challenged CRCT’s new CEO, Mr. Tan Tze Wooi to make sure that Rock Square Mall rocks when rental renewals came about.
True enough, CRCT was able to achieve strong double-digit rental reversions of between 23.4% to 29.3% for Rock Square Mall in their Quarterly reporting through 2018.
Once again, the best time to buy is when the market punishes the REIT price, but the smart investor should know the REIT quality of assets well enough to know if they are one-off or a recurring problem. For me, buying back a million shares in CRCT during the Nov 2018 low of below $1.35 was a no-brainer.
Then just barely 2 months ago, CRCT share price once again moved up to $1.65. This time it took 15 months. To me, it was clear that it was the 4th peak in its share price. Thus, again it was a no brainer to take profits in a big way again.
This sets the fertile ground for me to do bargain hunting in CRCT and other REITs in this current correction.
LAST THOUGHT ON MARKET CORRECTIONS
If you have saved for the raining day – corrections are one of the best times to deploy these raining day reserves. Yes, market values of stocks may go down after you buy them, but to me, they are merely a perceptual issue while waiting for the market turning point.
Again, most of the REITS that fell the sharpest has recovered the fastest. Actually, does one really need to be so smart to grasp all regression analysis and their impact on stock prices.
One just need to know enough to prepare and take advantage of the “beautiful correction” to buy BIG to make money in life?
Therein lies the core of correctional beauty!
After a great run in 2019, how are REITs positioned to benefit in 2020? Especially in the latest correction, how does one strike when the market is down.
Join us on 14 March 2020 as we guide you in detail through the class to sieve the wolf from the sheep and to separate the Good REITs against the bad.
OUR LATEST MEDIA INTERVIEW ON MARKET CORRECTION –
OUR PREVIOUS PUBLICATIONS ON MARKET CORRECTIONS -
OUR RECENT TOP REIT VIDEOS –
1. Making Your Millions in REITs
2. Distinguishing the Value Traps in REITs vs the Top Performers
OUR RECENT TOP REIT PUBLICATONS –
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