Is The Singapore Stock Market Healthy? A Billionaire Speaks Out

Billionaire investor, Paul Tudor Jones, has a stark message for fellow investors in Singapore. Years of low-interest rates, avers the legendary macro trader, have bloated stock valuations to a level not experienced in the country since 2000. He states that it happened before the tumble of the Nasdaq, which stood at 75% over a period of more than two years. He argues that such a value of the stock market in relation to the status of the economy should be a cause of concern for investors.

Hedge fund warning

Jones was speaking at a Goldman Sachs Asset Management closed-door conference, as revealed by people privy to the meeting. The billionaire investor was voicing what many hedge fund and financial managers, including companies such as CMC Markets, have been warning other investors in Singapore. Stock trading has hit unsustainable levels. However, not many of them can be as explicit as Jones, predicting a major market tumble by year end.

Just last week, Scott Minerd of Guggenheim Partner, admitted that he expected an early fall this summer – or a significant correction. Another entrepreneur, Philip Yang, seems to agree with Minerd. Yang, who has been running Willowbridge Associates since 1988, foresees a stock plunge of between 20% and 40%. Larry Fink of BlackRock Inc. predicts an up to 10% if the current earnings are anything to go by.

But the grim view of the future isn’t widespread. A few financial managers have suffered for raising the red flag as the eight-year substantial equity continued to march forward.

The warning signs

However, there is no lack of warning signs: US stocks are now 2% below the all-time high experienced on March 1. The S&P 500 index is currently trading at about 22 times earnings, the highest in the last ten years. This could be attributed to the post-election surge, as President Donald Trump takes charge at White House.

It would seem that managers expecting the worst turn of events have each a harbinger of doom. In a letter, Seth Klarman, who runs the Baupost that is worth about $30 billion, told of corporate insiders who have been heavily selling company shares. He attributes this trend to the feeling that company valuations are either full or have become excessive.

Share sales by insiders have outstripped purchases by a whopping $38 billion in the first quarter of 2017. This is the highest ever balance since 2013, as per information from The Washington Service which provides data and analysis on insider trading. Klarman further notes that the margin of debt hit a record $528 billion in February, a sure sign to some that stocks in Singapore may be overheating.

Speaking on condition of anonymity, one multi-billion dollar hedge manager said that the increasing rates in the US could result in fewer companies having the capacity to borrow funds to pay dividends or buy back their shares. According to data from Bloomberg, the 30% plunge in the S&P 500 in 2009 was a result of buybacks. The anonymous manager also reveals that they have been shorting the market, hoping for a ten per cent correction in US equities this current year, 2017.

Some worried investors like Minerd cite President Trump’s struggle to enact new foreign policies as triggers to the slump in financial markets in the Middle East. Other triggers include the slowing down of China or a high inflation that could result in higher hike rates. However, Yang could not be reached for comment through phone calls or emails.

Nevertheless, Billionaire Jones, who runs the $10 billion Tudor Investment, is spooked, but he agrees it is not yet time to short the stock market. Having already rallied 10% this year, Nasdaq could perform better if Marine Le Pen, the nationalist candidate, loses the election next month in the French presidential elections. The billionaire trusts his foresight, after successfully predicting the October 1987 market crash.

The culprit

While Jones fell short of stating when things may turn for the worse or the magnitude of the expected fall, he is not without a culprit. He blames the half-trillion dollars in risk parity funds. The funds will spread the risk equally across different classes of assets. More money will end up in lower volatility securities, causing people to dump them quickly as they expect a downturn.

Risk parity, says the billionaire, will be the hammer on the downside.