How markets have fared since the year started (26 Jan 2010)

We are nearly one month into the new year. Thus far, commodities had a good start, but are now seeing more downward pressure. Based on 24th January prices, the commodities funds within the alternatives space are on average up 1.31% year to date while resources funds are down 3.79%. Technology is doing better, with technology funds on average up 2.12% year to date. But the surprise so far at the start of the year has been financials. On average, financial funds are up 3.51%, but this figure was pulled up largely by a huge 9.46% gain from the Parvest equity Europe finance fund, which is up 9.46% year to date. Despite the ongoing worries about the European debt crisis, we have seen European financials recover ground since the start of the year.

Asian equity funds started the year strongly, but subsequently, worries over China’s potential rate hikes caused profit taking to set in. Asian equity funds are down marginally so far year to date. Korean equity funds on average are up 1.43%, Taiwan equity funds are up 0.13%, Greater China funds are down just 0.34%. Markets like Thailand and Indonesia, the strong winners of 2010, have tumbled. Thailand equity funds are on average down 8.43% year to date, and Indonesia equity funds are down 11.86% year to date.

The current jitters are not something I am too worried about. China’s tightening stance against inflation has been well documented since last year. Earnings of companies have remained strong, and this will be a big theme this year. As we have highlighted, we are negative on gold and neutral on commodities. Thus, my portfolio is also conspicuously empty of commodity or resources funds. The Russia equity fund I am holdings is a hedge against oil prices moving up too high, and I am actually glad that oil prices have moderated recently after they were in danger of breaching 100USD per barrel at one point. I am glad I sold off all of my Indonesia fund holdings as well.

So, the surprising stand outs at the start of the year has been Europe finance funds, Italy equity, France and Iberia funds. Some of these, especially the Iberia funds were something few would have dared to touch last year as the European financial crisis erupted. But they have shown surprising strength despite the situation in Europe over its debt woes not fully resolved. But again, sometimes, as I note, it is where angels fear to thread, where there is blood on the streets, there are bargains. If and when there is clarity in Europe and everyone knows that its debt woes are behind it, then Europe markets will see a big jump, and it would usually be too late by then. The situation in Europe remains shaky, but it bears close scrutiny. I added to my European and US holdings at the start of the year simply because I was too overweight in Asia. I don’t regret adding to these two regions one bit. While everyone (including me) remains convinced that Asia’s and Emerging market’s fundamentals are stronger, the growth is stronger, but US and Europe’s valuations are now quite cheap. Where there are bargains from a valuation standpoint, all that is required is a lot of patience, and sooner or later, such markets will be re-rated. US and Europe could be the dark horses for this year, based on their surprising strength at the start of the year.

Heavy Correction These Few Days. Look out for Bargains! (26 Jan 2010)

After the drop in markets last week, today saw another major selloff. Markets are getting spooked with the heavy selling. There isn’t really a major reason. But nevertheless, people are pointing to China tightening was the major culprit, with the new US proposed regulations on the finance sector as oil on the fire. When people want to explain a selloff, any reason will do.

China has been talking about tightening since last year. If we are worried about asset bubbles forming in Asia, then what they are doing right now is exactly what is needed to cool down a red hot economy that is in danger of over heating. But cooling the economy comes with less liquidity, and so, people are selling off in reaction to that. On a fundamental level though, China’s economy may now be allowed to continue a high rate of growth without necessarily having asset bubbles developing and bursting, bring all that growth to a big halt.

For investors who had been waiting for a correction so that they can buy in again (for those that missed the boat in 2009), now is a great time. Right now, it is a lot of negative sentiment and fear which is driving the selling. It isn’t because economic fundamentals haven’t been improving. The latest numbers for Singapore industrial production just came out, and those were great. Manufacturing output increased by 18.1% in December on a seasonally adjusted month on month basis. And that is the first time we had an increase in the last 5 months. The electronic and chemicals output all saw double digit increases (electronics output up 57.3% yoy, chemicals output up 27.7% yoy). The external environment is improving.

So why have markets been going down this past few days since last Thursday? Heavy profit taking and fear is driving this. The investors that went in last year are sitting on hefty gains, the last few days have made them fearful and some want to lock in their profits. I didn’t wait till now, I already rebalanced my portfolio back in December, I hope many of you did as well.

Now is the time to look for bargains. I will be monitoring this closely. When most of the markets are down 10% from its peak this year, I will shift some money from my bond funds over to equities. If markets pause after this round of corrections, then regain their confidence as economic fundamentals continue to improve, we will see a strong rebound. Fear and negative sentiment could push markets down 15% to 20% even from their peak, but if that happens, I will shift close to all of my bond holdings into equities. It would be a rare opportunity and I firmly believe that if that opportunity happens and is presented to me, I would jump at it.

Looking at your holdings, you won’t be very happy, especially if you have been monitoring them every day. Seeing them drop daily can be depressing and scary. But market cycles are common, and market corrections can easily see the market shift down 10% or more. Just remember, the best buys are made when everyone is selling, not when everyone is buying. So, if you are feeling rotten about how markets are doing now, yet you dare to buy, just like I did last Friday, it might not necessarily be a bad thing. Another thing to remember, you can’t always get it exactly at the “bottom”, somewhere near is good enough. The boat which was originally departing has come back for now, would you board it?

Market Correction! Bought 6k More (22 Jan 2010)

The correction in the last two days has been swift and sharp. At the time of writing, the STI index is down 100 points within just two trading days. However, I just bought $6,000 into my portfolio. The investment were as follows:

Schroders Latin America Equity Fund - $2,000
Aberdeen Singapore Equity Fund - $2,000
LionGlobal Korea Fund - $2,000

Why am I buying now? Because I see this as a correction. The main reasons why the market is falling is due to fears on China tightening its policies to curb inflation. The worry about China tightening is not a new one. There has been fears of the China government coming in to “cool” the market since last year. It did not stop the flow of money into China, and China’s inflation has continued to move upwards. According to China’s statistics bureau, inflation went up by a higher than forecast 1.9% in December.

The market fears anything that might mean less liquidity. And China is currently experiencing too much liquidity. China may raise interest rates by the end of June, and increase banks’ reserve requirements. On January 12, the People’s Bank of China raised lenders’ reserve requirements, also to curb liquidity.

In the end, we can’t have it both ways. Last year, and even now, there are concerns that potential asset bubbles may be forming in Asia, in particular in property. Seeing how badly the bursting of a property bubble can hurt an economy, I am sure no Asian government wants to go down that path. They would rather risk some unhappiness and volatility in markets now, rather than a much more severe one that might occur if such bubbles are allowed to continue forming unchecked.

Actually, I suspect that markets know this as well. Rationally, people understand. China is not in the same stage of economic cycle as US. China is experiencing very strong inflows, rising inflation, and potential asset bubbles. There is nothing “fragile” about China’s economic growth right now. If anything, the government is worried about overheating rather than like US, some double dip recession. But markets will be unhappy with the moves, and short term wise, there will be a knee jerk reaction because the immediate effect is that there will be liquidity drained out of the system, and that is likely to have an impact on the stock market.

However, I remain confident that fundamentally, Asia’s growth track remains strong. So, by tackling the potential problems that might arise, a longer term growth trend will remain intact. Markets are often near sighted, and in this case, they are focusing on the short term effects of China’s policy tightening. I believe that after the dust settles, and as China’s economy continues to grow, but with less fears that asset bubbles could develop, then we will see a surge back again in Asia’s markets. So, I took the opportunity during the two day’s corrections to put in more money.

3 Stages of Building Wealth (Stage 1) (19 Jan 2010)

I am talking about 3 broad stages of building wealth today. Sometimes, it is important to revisit why we want to invest and where we are in our journey through life. Otherwise, it is easy to fall into the daily routine of working and forget about the big picture. People want financial freedom so that they are free to do whatever they wish to. It could be travelling the world, doing charity, taking up their favorite hobby full time, etc.

But in today’s society, you need money for everything, so unless you were born into wealth, it is likely that you would be working eventually. Yet, the very definition of financial freedom is that you won’t necessarily need to work anymore. Of course, some people love their jobs so much they don’t want to stop working.

My father is a good example. He has been teaching his whole life, and he is a great teacher. He is now past 60 year old, formally retired and he doesn’t need so much additional income that he must continue to work. Yet, he continues to give private tuition because it keeps his mind active, and at the root of it, he really loves to teach.

That doesn’t depart from what seeking financial freedom is all about. You still want to achieve that because you want that freedom to do what you desire, not feel that you are forced to work because you need the income. My father could stop all tuition tomorrow, and it would not affect his lifestyle one bit because he doesn’t need the income from giving tuition. For him, it is a choice, not a necessity. Hence, he has achieved financial freedom.

Achieving financial freedom is a journey and there are generally few stages everyone on this road has to go through. I would broadly classify it into three stages. In the first stage, which many of us are all in, we are all working and building up our wealth at the same time. In this stage, your primary source of income is from your salary (or business if you are an entrepreneur. Income from capital gains, investments, dividends, passive sources are all quite minimal at this point.

This is a very key stage, and if you are not careful, you will end up staying in the stage for a long time. Perhaps even up till retirement. This is the stage where although your primary source of income comes from the sweat off your brow, you won’t stay young and fit forever. You can’t work forever either (and most of us don’t want to!). So, in other to achieve financial freedom, we have to move on from this stage. This means we have to build up our passive wealth so that in time to come, it can supplement, then eventually totally take over as our primary income source. Passive is anything that can generate income or gains which can be spent. It comes from having a second house to rent out, stocks and unit trusts which give dividends and grow, or anything else. The key thing is that it must be wealth that is hard at work helping you to generate even more money all the time. If its income from a second job, or a second business that requires yet even more energy and time from yourself, then you haven’t created more wealth, rather you have created a second income stream but one that requires you to continue exchanging your time and energy for money. The goal in this first stage build your passive investment returns per year to a level where it equals your or approaches your yearly expenses by which time you would go on to stage two.

Let’s take an example. If you spend $30,000 per year. If you can build your passive investments to the point they are generating (including all passive income and capital gains) a yearly return of $30,000, then you would have passed stage one and arrived to stage two. When you have achieved this, even if you stopped working, you would at least get by. Yearly expenses here would refer to essentials rather than luxuries. When it comes to wants, the sky is the limit, and if you set a target on how much you want to spend a year vs how much you actually need, it would be a far larger amount. That will come later.

I will talk about later stages in another entry because most of us are still in this first stage and how we handle this stage is most crucial. Many people don’t even start this stage of building wealth. Instead, they keep spending everything they earn, without building up their passive wealth, and they stay in this stage forever. The first step towards progressing in this stage, is to spend less than what you earn, and to invest that money wisely. Try not to aim to big initially. You don’t have to set up the next Google business, or immediately buy a house to rent out. Start small, and build your way up. If you have only $100 to save each month initially, start from there. As long as you keep to it, eventually, you will have more to invest, and your investment options will automatically widen.

Stocks and unit trusts allow you scale from small to big quite easily without losing beat. While you can’t exactly buy a house and rent it out with a capital of just a few thousand dollars. You can start to grow your wealth through stocks and unit trust immediately with small amounts. Why do I not mention savings accounts amidst all this? The reason is because given the 0.1% interest rates which savings accounts offer, you will never get anywhere relying on them to build up your wealth.

There are many distractions and temptations for us during this stage as we try and build up our passive returns. Most of us are in the early to mid stages of our career life during this stage, so there will be a lot of material things we desire to buy during this stage. Be it buying a car, getting married, going on trips, buying nice clothes, i-phones, LCD TVs, there’s a long list of things we would love to buy during this stage. And when we have children, there are lots of expenses which come with those too as well (I have two children so I know!).

Take note though, that I am not suggesting we go into a hermit scrooge like existence just to get out of stage 1 as fast as we can. We would hate our life, and we won’t be able to keep up some bread and water existence just so that we can save up more money. The idea is to do everything in moderation. Plan it out and be conscious that you want to save some money each month, track your expenses, and you should be alright (unless you have a spending problem). There are always some alternative which a cheaper, but doesn’t necessarily mean you will live in a miserable existence. Take food for instance. There are lots of yummy food at relatively cheap prices (we are talking about Singapore here!), and there are also lots of yummy food at high class expensive restaurants. You just have to choose not to go to those places all the time and you will be surprised how much of a difference that makes.

In conclusion, this first stage of building up your wealth is the hardest, and often the longest, but if we know where we are going. We can all get through this stage! There are few short cuts to this stage, and few people are able to zip through this stage in a short time (meaning a few years). Accept that this stage will take a while, but if we keep at it, we will eventually past this stage onto the next!

Which Markets Are Hot Off The Blocks So Far In 2010 (12 Jan 2010)

Guess which market is the strongest so far off the blocks in this new year? Most of you won’t get it, I didn’t expect it myself. But it’s the Turkey market. The only Turley equity fund we have is currently up 7.4% year to date, which is quiet impressive considering most funds are only up 1 to 2% since the start of the year.

Why are we looking at such a short time frame? Its barely one week since the year started in terms of business days. I find it interesting because we are at the start of the new year. Certain markets which surge ahead of others could indicate how certain trends will form for the rest of the year. Do note that the information I am posting is just based on the preliminary trends of markets in the very first week of 2010. It is possible that other trends may appear overtake the current leaders. There is certainly no guarantee that the strongest performers at the start of the year will continue on to be the best performers in that given year. But for now, it is still interesting to look at who was quickest off the block in 2010.

Will Turkey end up being best performing market for 2010? Still very hard to say, but at least at the start of the year, it is going strong. Here’s how the rest of the funds by category (not exhaustive) have performed in the one week since January 2010 started. 

Fund Category	Performance
Turkey	7.39
Gold	6.14
Resources	5.9
Materials	4.17
Indonesia	3.97
Energy	3.82
Latin America	3.41
Global Agribusiness	3.37
Global finance	3.29
Eastern Europe	3.29
Malaysia	3.16
Singapore small cap	2.72
Brazil	2.7
Emerging Europe	2.28
India	2.2
Korea	2.13
BRIC	1.73
Asia ex Jap	1.59
Middle East/Africa	1.57
Europe inc UK	1.52
Greater China	0.92
Tech	0.8
Singapore	0.75
Healthcare	0.43
Property	-0.25

Now, this is by no means predictive. One year is a long time. But if we assume that the trends that people latch on to at the start of the year are going to carry through to the rest of the year, these numbers tell us a few things.

Firstly, that commodities, especially hard commodities will continue to have strong momentum. After Turkey, the funds with the strongest starts were gold, resource, and materials equities funds. These are all funds investing mainly into hard commodities. Are people still worried about inflation? Are people still wary that markets might collapse?

I don’t think its that. Most funds are off to a positive start, so many more people generally positive that this year will be good. But inflation, which has been low, is expected to pick up, and globally, trade is expected to increase as well, which means demand for raw materials like metals, will go up. This is probably why these funds are off to a great start for 2010. The same goes for energy funds. With oil prices off to a strong start at the beginning of the year, energy funds did well. Amongst sectoral funds, global finance funds and global agribusiness funds have also been strong at the start of the year.

Indonesia continue to be have really strong momentum. Despite being one of the strongest markets last year, it is off to a strong start this year as well. Valuations are already higher due to the strong run up, but it appears that momentum will continue to be strong in this market.

Emerging markets, in particular Latin America and Eastern Europe are the quickest off the blocks at the start of 2010. The Latin America funds are up 3.4% and the Eastern Europe funds are up 3.3% on average, And this is higher than the Asia excluding Japan funds which are only up 1.59% at this point. Again, I stress that it is too early to tell, and these are just based on the first week numbers of 2010. Nevertheless, could this be a case where other emerging market countries outside of Asia are increasingly coming under the spotlight? Asia excluding Japan, is after all a much more closely followed market with many well known exciting stories like China and India. But there could be a trend of investors diversifying their investments across all of emerging markets instead of just China and India. Time will tell.

The last interesting trend to note is that so far, just based on the initial performances of funds in 2010, the Singapore small cap category has done better than the generic Singapore equity funds category. There is some basis in this. Blue chips were the first to move last year, and many of the small caps have not really risen much in comparison to the blue chips in Singapore. As confidence recovers, we may see more of the small caps outperforming the blue chips. I am seriously considering shifting up to half of my Singapore equity fund into a Singapore small cap fund.

That’s all the thoughts for today. This will be an exciting year, and I have no doubt there will be new trends and changes during the year as it progresses. So, I will have updates.

Emerging Markets Will Roar in this New Year (5 Jan 2010)

It’s a new year, I added $5,000 to my portfolio as follows:

Schroder ISF Latin America A ACC SGD - $1,000
LionGlobal Korea Fund - $3,000
Fidelity Eur Hy (EUR) - $,1000

Within Asia, South Korea is our favorite market for this year. But as a whole, I really like Emerging markets, and since I am already heavily overweight Asia, I added to Latin America to increase my exposure to other emerging markets outside of Asia.

I think markets are already off to a great start in 2010.The STI index is closing well above 2,900 points, and the Hang Seng Index has also breached 22,000 points. A lot of people are looking at markets with a new fresh perspective, and they are feeling positive about it.

Personally, I don’t just feel positive, I am very bullish. In particular, on Emerging Markets. Here’s why: a lot of the concerns, are still about what is happening in developed countries. What happens when governments pull back on stimulus spending at the end of the year, what happens if the US economy goes into a double spin? What happens if US dollar crashes. The thing is, we had just gone through an extremely difficult 2009, where demand from developed markets fell drastically, the world was in a recession, etc, and through it all, the emerging economies just kept on chugging away.

So, if all these ongoing risks are centered on developed countries, then shouldn’t the people in the emerging markets feel a lot more confident? A lot of people claimed that because emerging markets, in particular Asia suffered massive falls in 2008 as developed markets slumped, there was no decoupling. This is true, to a certain extent. We live in a massively linked up world and it would be impossible for things happening in the developed world to not have an impact elsewhere.

However, as seen in the much stronger rate of rebound from Asian and emerging markets last year, there is now a difference emerging. The US and Europe banks will take some time to right themselves, and similarly, the housing boom fueled by subprime mortgages, now bust, will also take some time for US and Europe home owners to sort through. In the meantime, Asia, and the rest of emerging markets, will simply rebound faster, and forge ahead harder.

Many of the emerging market economies did not need the huge influx of help from government stimulus packages, nor did they have the luxury of such much cash injections. Their banks didn’t need the kind of bailouts that US and European banks needed either. This feared withdrawal of government stimulus packages will hardly have much impact on Asian and Emerging economies at all. Truth to be told, one year is a long time anyway, and I am confident that by the end of the year, most of the businesses in developed countries will be back on their feet as well already. The true economy will take over from there. By the end of 2010, it would be two year since Lehman Brothers crashed. If we still need government stimulus packages to keep economies going by then, we will be in trouble.

I foresee more economic power shifting to the emerging economies. The emerging market economies, led by the giants India, China, Russia and Brazil which together, make up more than 40% of the world’s population are in a unique position. Many have young populations, a much lower cost base, low household debts and strong companies with healthy balance sheets. This is in contrast to many developed countries which are struggling with a graying population, high household debts, and companies with big holes in their balance sheets.

Interest rates and inflation numbers are at abnormally low rates in 2009 because of the global recession. It will not always remain so low. Yet, an inflationary environment will also benefit resource rich countries like Russia and Brazil. (And China has massive oil companies which have been aggressively acquiring energy resources as well). With the stronger economic growth, we are expecting strong earnings growth of around 29% for 2010 from Emerging Markets. And even 2011 will see earnings growth rates of 19.5% as well. And yet, valuations of many emerging market countries remain reasonable. (Russia and Brazil are trading at P/E ratios of below 14 times).

This doesn’t mean developed countries are about to roll over and die. I am probably more hopeful about them recovering than many simply because when we are talking about markets, we are talking about the companies listed in these markets. These are all run by smart people. They know where the growth is. Global companies will all be trying to expand into emerging markets, where the potential for growth is so much greater. Those that succeed will benefit from it as well.

For those of you who are already invested, I hope you have rebalanced your portfolio. I think this year will be a good one, so its ok to take a bit more risk. For those that have not and are wondering if it is still alright to get back into markets. Yes, it is. We are only at the start of 2010. Markets will not shoot up 30% within two weeks. So, there is still time, but of course, the longer you wait, the higher market will move up. Don’t wait until everyone is already in the market, and nobody is worried about government exit plans, or double dip recessions anymore. There are still decent gains to be made this year.