Worst is Over?

Now that a little more time has passed, its possible that when this year is finally over and we look back, the first and second week of August would have been the scariest times markets had experienced this whole year. Of course, we still have a few more months, so it might be too soon to already make such a conclusion. But my opinion is that we should get through the rest of the year without the kind of crash we saw then.

Europe is the problem here. US is not. Despite all the worrying by analysts and economists there of the possibility of another recession, I believe that even if there was some sort of slowdown, it would not be anywhere near as bad as the drop which was experienced after the Lehman Brother’s crisis. At that time, both the financial and property sector in the US took a huge hit, and consumer confidence, which had been pretty high absolutely plummeted. Today, the US consumer is nervously trying to save more, the property sector is barely starting to recover, and so is the finance sector. They say the higher you climb, the harder you fall. I think the US economy has just barely crawled out of the hole it had fallen into after the Lehman Brother’s crisis, so jumping is hardly even on the cards right now. There may be some longer term structural problems with the US, but lots of countries have those.

Europe is a slightly bigger problem simply because the worst that can happen in Europe is much more scary compared to the worst the can happen in the US. Every time another European country faces problems in the debt market, the fear that there will be a European financial meltdown surfaces. And unlike the US, Europe doesn’t have the leeway to freely print money or devalue its way out of trouble. The silver lining is that since everyone has been reading so much about all the doom and gloom that could accompany a Europe financial meltdown, then a lot of this would have been priced into markets already. I read the other day that the market capitalization of just Apple alone was more than that of all the top European banks all added together.

We have a new research article up on how we have upgraded 12 markets and downgraded Europe to 3 stars. The only other time we upgraded several markets to 5 stars was in the aftermath of the Lehman Brother’s crisis. I have already switched two out of three of my bond funds into equity funds. I think I may not have the opportunity to switch the last bond fund over to equity because it may be that the worst is over. We won’t know for sure until the whole year is up, and it doesn’t quite feel like it now yet because everyone is still extremely cautious. However, my personal opinion is that the worst is over.

On a separate more personal note, I have finally gotten the keys to my new home. My wife and I went there over the weekend and we absolutely loved our new place. I think having to wait 3 years for it to finish building probably made us love it more. (Waiting for something always makes it sweeter when you finally get it). But regardless, I will have to sell off my short term duration bond funds soon as we are going to start renovating our new home. I hope as much as possible I won’t have to touch the equity funds I have.

Markets are Stabalising now

Touch wood, but I note that markets are stabalising now. Especially since the price of gold has plummeted from its highs of well over 1800 USD per ounce, I view this as an indication that people are no longer quite as panicky as they were the last few weeks. I don’t like to guess whether we are already at the bottom or not, because it is almost impossible to get the exact day. Nevertheless, we are probably quite close.

The reason why I think we are quite close is because we already started from a relatively low base this year. Its not like markets had been in a bull run for several years (like in 2008), markets were already quite cautious and grappling with various concerns like a double dip recession, the European financial debt crisis and China inflation since last year. Also, there isn’t a property bubble this time round in western countries to burst, that already happened during the Lehman Brother crisis. Companies have mostly been quite conservative, and prudent since the global recession and earnings have actually been quite robust.

Thus, I believe that the 15 to 20% selloff since the highs this year is already plenty and to a certain extent, I think there has been a little too much selling already. If we look back at history, usually the big market crashes which are 30% or more coincide with major recessions or bursting of huge asset bubbles (whether in technology stocks like in 1999, or in the property and financial sectors in 2008). This time though, you would be hard pressed to say that anything is in a bubble at this point, unless that asset is called gold. Just about everything else has sold off substantially this year, even other commodities other than gold!). The crashes resulting in huge selloffs in western markets of over 30% included momentous events like World War 2 (S&P 500 down 60% over 5 years), the Technology bubble bursting, the 1^st oil shock, the great depression, and just relatively recently, the Lehman Brothers crisis followed by the global recession. We would have to be facing another equally momentous kind of crisis for a similarly major market crash to happen now (and barely over 2 years we bottomed out from the last global recession).

Some point to the Euro debt crisis as this possible other event. I believe that the current Euro crisis is a bit overblown to a certain extent. Regardless or not whether the Euro will stay in its current form, or whether or not the Southern Europe countries like Greece, etc default and have to get their debt restructured, those are temporary shocks. Good companies in Europe will continue to produce goods and services which people value and they value will remain. A default and subsequent debt restructuring is actually not the end of the world. Many countries in the past have gone through debt restructuring and the world has continued to move on. Europe, with its hundreds of millions of people, isn’t going to magically disappear off the face of the earth just because some of the weaker countries have overspent and now have to face the music for their overspending. So, keep a cool head, now is the time to look for some bargains and not the time to panic.

Invested $1500 and switched more to equities

Fear is very much prevalent now, with markets sliding every other day, and big drops too. But when there is a lot of fear, it usually means it was a pretty good time to buy. Valuations now are cheap. Even if you have no faith that the western countries like US and Europe can get their act together, Asia will still continue to grow and expand because we have reached a certain critical mass now. While markets haven’t decoupled and if western markets continue to fall, Asian markets will also be affected. However, Asian markets will rebound much faster simply because fundamentally, Asian economies are on a much stronger footing.

I bought another $1500 into Aberdeen Singapore equity on Monday and switched another $11,700 into Aberdeen Asia Smaller Caps as well (the switch buy will take place today on Thursday). As of now, I have switched 2 out of my 3 bond funds into equities. I only have the Fidelity Asian High Yield Bond Fund left. Will wait and see before I commit to switching that. So far, markets are down easily 15% from their peak this year. If it drops further such that we hit bear market territory and the market is down 20 to 25%, I will switch my last bond fund into equities.

I believe the market crash this time round will not be as big a fall as during 2008. Overall valuations of stock markets were much higher then and we were coming off a period of a few consecutive bull run years. This time, for western countries, the economy had barely started to recover, and after a rebound year for Asian markets in 2009, 2010 was a fairly mild year. So, the down side is not that large. In fact, stock markets weren’t really expensive even to begin with before this while crash started, and now they are looking cheap.

We just went through this 2 to 3 years ago. The best time to buy was when everyone is selling in fear. Because no matter how bad things look, markets will eventually recover. If we recovered from the Lehman Brother’s crisis that last time, then we will recover from the US downgrade crisis this time. Actually, US being downgraded to AA+ in itself isn’t even a crisis, because everyone is still willing to lend US money and nobody reasonably expects the US to default on its treasury bonds AA+ or AAA otherwise. But markets are nevertheless falling to this, and sometimes, when enough people sell, it can be a panic onto itself. Right now, fear is prevalent. So, right now, I am buying.

Just added $5000 into portfolio, bargain hunting!

I couldn’t resist it. I had intended to place most of this latest investment of $5,000 into DBS Enhanced Income Fund. But the crash in the US stock market yesterday (4^th August) and the subsequent crash in Asian markets and the Singapore market today caused me to change my mind. Instead, I placed all $5,000 into equities.

If I had the option to postpone my renovation and move to next year, then I would be using the amount I have placed into the DBS Enhanced Income as well into equity funds now. Instead what I have also done is to switch around $14,500 worth of my Fidelity High Yield Bond Funds into equity funds as well.

Thus, my transactions for today (already placed) are as follows:

Buy Aberdeen Asian Smaller Companies - $4000

Buy Aberdeen Singapore Equity - $1000

Switch sell Fidelity High Yield, buy Fidelity Asian Special Situations. (intra switch) – around $14,500 worth (full switch of all units from one fund to another).

Nevertheless, its times like this when I am glad I do have a diversified portfolio which includes both bonds and funds like the Man AHL Trend Fund. Thus, when the market is high by a drop like yesterdays, then I can bargain hunt. Thus, I am increasing my weightage towards equities.

There wasn’t really any particular event that was driving down the US market. A selloff became a rout and before and the US market ended the day down over 500 points, over 4.3%. Asian markets today are reacting to the drop and faring just as badly, with the STI index down 100 points at midday. As I don’t see any major change in fundamentals, the drop makes valuations all the more cheap and thus it’s an attractive time to enter the market, which I am now doing.

An interesting mention about the Man AHL Trend fund. I must admit I was not very impressed by its performance so far as it trended down since the start of the year. It was a managed futures fund which was supposed to be lowly correlated to equity markets movements or even opposite. However, over the last one month, it was up more than 5%, and I expect that it should do well during this couple of days when there is so much volatility. So, it shows that it can be very useful to be diversified into different assets. Thus, when one category of your assets fall and you want to pick up cheap bargains there, you have the leeway to shift from other assets into that asset. This is just like how I am shifting assets from bonds into equities right now to take advantage of the cheap markets on offer now. The more panic there are in markets, the more we need to keep a cool head and look out for bargains.

New Measures to Safeguard Investors

Our regulator the Monetary Authority of Singapore has released new measures and enhanced requirements aimed at safeguarding the interest of investors. These measures apply to unit trusts as well as other financial instruments and will go into full effect starting next year.

Under the new measures, a customer knowledge assessment is needs to be conducted by all distributors in order to assess on whether the consumer has the relevant knowledge or experience to understand the risk and features of the product they are buying. If he fails this assessment, then MAS will not allow “execution only” service to be provided.

This impacts online distributors like Fundsupermart is a major way due to our business model, which is essentially “self execution only”. Online unit trust distributors like Fundsupermart essentially function like online stock brokerages, except that we apply to unit trusts instead of stocks. The customer goes online, does the research himself, and then executes his own unit trust trades. It is generally all “self execution only”.

Now however, with the new measures, all distributors, including Fundsupermart will be performing customer knowledge assessments on our customers. If you pass the assessment, then well and good, you can still proceed with putting through the trades yourself online. However, when you fail, you will be stopped from “self execution” trades. Thus, literally, distributors are required to stop you from proceeding if you are assessed to have failed.

The criteria to fufill the customer knowledge assessment is also very exact. The education and work experience requirements are very specific and such that we expect that only a relatively small proportion of investors will meet either the education or work experience requirement. The transactional criteria is the easiest to meet. This criteria is that the customer must have placed at least 6 transactions in unit trusts or ILPs over the last three years (can be from different distributors). So what will be the impact of all this for unit trust investors?

For the investors, it will clearly result in increased protection. The new customer knowledge assessment is required to be done on all investors investing into unit trust. Furthermore, if they fail the customer knowledge assessment, then they can only be allowed to transact with accompanying investment advice. This will likely have to be provided only by a specialized type of advisor who has the relevant expertise. There will be new procedures that must be added to ensure that these new regulations are met, hence investors might find it more cumbersome to transact in future.

For online platforms like Fundsupermart, the industry impact on this is that we expect business costs to go up. Compliance costs and the accompanying IT costs of implementing this will result in increased cost of doing business, especially in the online unit trust distribution space. As a result, players in the industry may become less keen on the online unit trust distribution business. Some may even choose to drop out of this channel of distribution entirely. (One of our online competitors has already ceased business). Even if there is no reduction in players, its possible that there may be few new distributors interested in entering this area of online unit trust business over time.

This may actually be an advantage to the incumbants in the business. For a market leader like Fundsupermart, for example, we will of course fully implement this and if we have to incur the increased costs, we will go ahead and incur them. Thus, for example, our IT systems are already being changed and modified to accommodate the new compliance changes, and we have hired client investment specialists who will be the ones who provide investment advice to clients who fail the customer. We are committed to this online unit trust business. Others, though when faced with the prospect of implementing this change to their systems or the increased costs, may reconsider. So, we may see some increase in our market share as a result of this. A new entrant to the online business, for example, will generally have much more new customers who will likely fail the customer knowledge assessment. Whereas an existing incumbent like Fundsupermart would already have a large number of clients who have the required number of transactions to meet the investment experience criteria (which is at least 6 transactions over the last 3 years).

Overall, the exchange for all this is increased consumer protection. Like it or not, consumers and distributors alike will all have to adapt to the new measures by the start of next year. We will all need to be ready. Personally though, I believe that regardless of additional measures implemented, the best protection is still educating yourself. All the best investors took their own knocks by putting their own money on the line and learning from their mistakes as markets went up and down. No amount of regulation can guarantee zero losses. In fact, I have never heard of a successful investor who has never ever lost money on a trade before. Even the professional fund managers just aim to get their bets right 60% of the time, which means that they are wrong 40% of the time. The truly successful investors are the ones which picked themselves up and learnt from their mistakes over the years. Its like riding a bicycle, before you can breeze along, you would have first fallen numerous times before you found your balance. No amount of hand holding can prevent that. Thus, my personal take on these new measures is that in the end, as investors, educating ourselves, becoming an experienced investor is our own best way of protection.

Europe finally getting their act together

To be honest, after so much recent dithering by the European leaders, I was not expecting that much from this emergency summit. But I think the threat to Italy and potentially other countries have finally shaken them enough to get their act together. They have just announced a 109 billion Euros bailout package deal for Greece. More importantly, the 440 billion Euro rescue fund which was established last year was given broader powers to help prevent the debt crisis from spreading further. Also, the bailout package allows Greece to roll over maturing debt and pay a lower interest rate on its loans, and private investors will be required to take some losses for the Greek debt they hold.

This is effectively a restructuring, but somehow, it will be a restructuring without necessarily being called a credit event, or a default. Also, they are finally getting together to act in concert as they give much broader powers to the 440 billion Euro rescue fund. In return, it is a given that countries which are financially weak will be scrutinized much more closely and asked (if not forced) to get their house in shape.

While I hesitate to say that this will at once solve all of Europe’s debt problems, it is a good start. The crucial thing is that after weeks of wrangling, Europe is finally coming together in agreement to find a joint solution to this. Right now, the fears over Europe’s debt crisis is probably the single biggest sword hanging over investor’s heads which has resulted in the large swings in stock markets in recent weeks. The sense that European leaders have finally set aside their individual agendas to act for the common good of the whole of Europe will give markets a big confidence booster.

In the weeks to come, if investors can see that Europe is serious about coming together to tackle its debt crisis, we will see a shift in investor sentiment. There may be a substantial rerating of European equities. Not just European equities, US and Asian equities are also relatively cheap at the moment while earnings remain strong. I have been saying that I believe the second half will see a substantial rebound in stock markets globally. This give me even greater confidence now that this will happen. The upcoming months will be an interesting one.

Savings in General

It’s important to save and invest in general. But it’s often one of the hardest things to do. For most, it would be far easier and happier to spend money that it is to save it. Saving money usually means you have to forgo some nice things. And the problem is, the more you save, the more nice things you can buy!

I personally feel that leaving money in your savings account with the intention to invest it once it has accumulated to a certain “amount” is a little counter productive towards actually saving unless you have a lot of discipline. The money sitting there is just too tempting because it is just so easy to access and use. Chances are before you reach your “target” where you will invest it, you would have spent at least some of it on something already.

Furthermore, such savings give very little interest. Singaporeans are currently getting barely 0.12% from leaving money in their savings account. So, if the intention is to accumulate that money until you have a decent amount to invest, then while you are still accumulating, you are earning essentially nothing. And all this while every time you look at that account balance, you will be tempted to spend some of it!

Using dollar cost averaging by adopting a regular savings plan is a good way to instill some discipline to this whole process. This is called paying yourself first. A regular savings plan which can be done with most unit trusts will automatically deduct a specified amount each month from your bank account and invest that into a unit trust. If you are willing to bear the higher risk and do a regular savings account for an equity fund, it’s actually a good thing in the long run because the monthly deduction ensures that you will buy more units when the unit price is low, and buy fewer units when the unit price is high.

Even if you would rather still accumulate because you want to time the market better, you can also choose to do a regular savings plan into a short duration bond fund like the DBS Enhanced Income fund, or the United SGD Fund. These are only just slightly riskier than leaving money in a savings account, but their returns historically has been significantly better than what you get from savings account. Then once you have accumulated enough, or when you think its an appropriate time to enter the market, you can then utilize the amount you have in the short duration bond fund.

Not only does this instill discipline, it also solves the problem of seeing you bank balances grow and getting tempted to spend all of it in a buying spree. It also requires one more step. You have to liquidate your investments first for the money to go back to your bank account, and you will of course think more carefully as you are doing so. Saving in the end is about discipline and being willing to forgo some nice things in the short term for longer term gain. It’s hard, but it’s a necessary step towards building up your wealth. And utilizing regular savings plan is a great way to help instill the discipline to save. I put my wife on a regular savings plan just so that she will regularly set aside money to invest, and this way, both she and I don’t have to worry so much about the timing of her investments.