Less than nine weeks ago, I was in Singapore, at the headquarters of one of the fastest-growing, best-managed companies in the world.
This company is the world leader in water treatment and purification systems. It helped turn Singapore into the Silicon Valley of the world's water industry. Now, it does business across Asia, the Middle East, and Africa, solving water shortages. The name of this company is Hyflux. It trades on the Singapore stock exchange under the ticker number 600.
I had just had a meeting with senior management. The CFO told me his company was on course to make 300 million Singapore dollars (SG$) in earnings over the next five years. He told me his order book is so full, the company is turning business away.
The only problem was, I wasn't the only person who had figured out what a great company Hyflux was. The stock price – at around SG$2.75 – implied the company was worth more than SG$1 billion. I would never spend $1 billion to get $300 million in earnings over five years, even on this superb company.
"If only this stock was 50% cheaper..." I thought to myself as I left the company, feeling a little deflated. "Maybe someday..."
Now... after stocks have experienced one of the worst crashes in history, Hyflux is 35% cheaper than it was during my visit. It's amazing it's not down more. International stock markets have been destroyed. Ireland fell 80% during the crash. Russia fell 79%, China fell 74%, Brazil fell 72%, India fell 71%, and Korea was down 70%. In all, 43 stock markets have suffered even greater declines than the U.S. market, and only three did better (Switzerland, Israel, and Jordan).
These stupendous declines tell me we're now living in a different world. This isn't just a standard bull-market correction like the crash of 1987. This is something bigger. Like a child who touched a hot stove, investors won't make the same mistake twice. I see a return to thrift and caution all over the world. Saving trumps speculation. Prudence trumps risk. And unfortunately, with this sentiment, it's going to be a long time before emerging-market stocks embark on a new bull market.
For example, even though Hyflux's stock has fallen in value, I'm still not willing to consider it. In this new world, no one's going to embark on the ambitious projects Hyflux is known for.
In light of all this, I'm making cash the focus of my portfolio. Let me explain...
First, the crisis we're heading into will have strong deflationary forces. Deflationary means prices fall. I expect we'll see a wave of bankruptcies, defaults, forced selling, and unemployment. Cash will be the most valuable asset around. It already buys double the real estate, the stock, and the natural resources it bought six months ago.
I expect cash will be even more powerful in the years to come. I want to own Swiss francs, New Zealand dollars, and U.S. dollars. I also want a large position in physical gold. Gold is also cash. At a minimum, make sure you own a couple ounces of gold and enough dollars to cover several months of living expenses.
I'll also be buying safe stocks that generate lots of cash. I'll look to buy a stock like McDonald's or Wal-Mart instead of something like Ruth's Chris or Saks. I'll buy companies with long records of raising dividends and companies with high dividend yields. Dividends act like ballast in a bear market. They prevent stocks from falling too far. Dividends also attract safety-conscious investors... and investors looking for income to supplement their day-to-day standard of living. I believe cash-producing stocks may be the next darlings of the market.
The crisis will also have strong inflationary force, as governments furiously pump in cash to revive the economy. These inflationary pressures could generate some spectacular "ripples" in the market. In a few years, we could see the rate of inflation get much higher.
I'm personally excited about the coming few years. What most investors don't know is these kinds of situations produce much bigger investment and speculative opportunities than a "Goldilocks" situation. They produce opportunities to buy a dollar's worth of assets for 30 cents.
Stick with DailyWealth, and we'll alert you when these opportunities arrive.
Good investing,
Tom
