Switching Focus towards Tech and Small Caps (28 Apr 2010)

I made quite a few switches and two purchases today. These are summarized as follows:

1) Switched all holdings in DWS Noor Precious Metals to Henderson Global Technology (about $10,000 worth)
2) Switched all holdings in Fullerton Asian Financials to Henderson Global Technology (about $5,000 worth)
3) Switched all holdings in ING RF Emerging Markets to United Global Emerging Markets Portfolio (about $20,000 worth).
4) Purchased S$1,000 worth of Henderson Global Technology Fund
5) Purchased S$ 500 worth of Aberdeen Asian Smaller Caps Fund

So, what’s the rationale of the switches and purchases? Mainly, I am switching out of precious metals and financial services into technology. For precious metals, I believe the upswing for such commodities has been largely priced into the market. Preciously, there was the added fear that with the weakness in the USD and the global financial system, commodities was the one place to be and I held some of it as a hedge.

Increasingly, we are seeing signs that the whole world is clearly coming out of the financial crisis of Sep 08. (Its one and a half years already, its about time!). Markets are looking ahead and the story for commodities is no longer so compelling. Previously, I liked financials because they had been beaten down during the September 08 Lehman Brothers crisis. Indeed, the Fullerton Asian Financials fund earned me a 53% profit. However, I see some dampeners on financials going forward.

These include rising interest rates and growing regulation. The growing regulation presents especially a challenge. Many developed countries want to claw back money from financial institutions that they bailed out during the Sep 08 crisis. So, they are imposing additional taxes and such. To further protect investors, there is also a whole flood of regulation getting pushed through which would make selling financial products far more onerous and difficult. Finally, in Asia, which is going through a V shaped recovery, there is growing government intervention to cool down a rising property market. These measures will curb loan growth.

In contrast, the technology sector is looking better each day. The global recession previously hit tech companies as well. Now however, the recovery is filtering through to the consumers as well. There has been increased retail sales in US and in Asia. Singapore, one of the exporter countries of tech products saw its latest industrial production surge by 43% year on year last month (beating economist forecasts by a mile). The surge was due to strong resurgence in biomedical production as well as semiconductor chip production. Electronic shipments are accelerating as consumer confidence comes back.

Think of it from a from-the-ground point of view. The global economy is recovering. People are still worried, but getting increasingly confident. While they may not plunge into the huge spending ways of before the Sep 08 crisis that soon, spending will certainly increase from the belt tightening levels during the recession. And tech products will be a big sought after consumer item to spend that money on. After all, technology progresses very fast, so within one to two years, the next generation of tech products will be looking very appealing to consumers. You also have Apple coming out with Ipad, newer versions of Iphone. You have Avatar bringing greater awareness to 3D, increased demand for newer fancier TV screens. So, while people might not be confident enough to splurge on a brand new sports car, a tech product is certainly cheap enough for some self reward and indulgence! The tech sector has been the whipping boy amongst investors since the 2000 technology bubble crash for too long. After ten long years, it would certainly be time for investors to relook this sector with fresh eyes. I think Technology is on the verge of a new resurgence. Hence, my shifts into Technology within my portfolio.

Another area I like is small caps. I already have a fair amount in Aberdeen Asian small caps, so just added a bit more to the fund. I think that in a resurgence of the global economy, at first, it’s the blue chips that will get the most attention. But increasingly, a lot of the recovery will be priced into the clue chips and the best bargains will no longer be in those, but instead in the small caps. As always, be diversified, but I am seriously thinking of shifting more weightage towards small caps as more and more of the good news gets priced into the blue chips. As risk appetite increases with the fading of memories of the last big crash of 2008, we will see more and more funds flow into small caps.

While Asia Charges Ahead, Don’t Let Euphoria Set In (16 Apr 2010)

First, the trade ministry announced that Singapore GDP surged 13.1% year on year in the 1st quarter 2010. On a quarter on quarter basis, the surge in GDP was an eye popping 32.1%, the highest ever growth on record, and higher than any economist had dreamed of forecasting. On the back of this, the monetary authority of Singapore (MAS) also announced that it was recentering SGD’s trading band as well as signaling a policy towards gradual appreciation. This is an unprecedented move in terms of tightening monetary policy as MAS has never done both at the same time before. It also represents a very significant shift in policy. MAS is essentially saying that with the surging economy, the worst is not just over for Singapore, in fact, the Singapore economy is now booming so much that they need to rein in potential inflation, so they are taking action immediately.

Remember when back in July 2009 (last year) when Singapore was the first to announce that its economy was coming out of recession, and this was soon followed by other Asian economies in the region. Singapore is one major trading hub in Asia, and closely tied in to the global economy. Its health and overall economic growth direction is an early indicator of how the rest of the export oriented Asian economies are faring. Singapore’s stunning 1st quarter GDP growth is a telling indicator that global trade is recovering, and along with that, Asia is now not just experiencing a “V” shaped recovery, it is now literally going into a boom period.

Hard numbers tell a bigger story that anything else. While Europe may still moan and worry about Greece and other potential debt ridden European countries, and US is still trying to slowly lower the jobless rate, Asia is now literally running on full steam ahead. Investors are beginning to recognize that emerging economies as a whole, and Asia in particular, is the locomotive pulling the entire world out of the 2008 recession. And Asia is now experiencing a red hot economy. Central banks in Asia should be more worried about inflation and asset bubbles than on double dip recessions. Property prices has surged in many parts of Asia including Singapore, Hong Kong, China, and Taiwan, and this is despite various moves by Asian governments to keep a lid on property speculation. The latest is that Singapore March home sales were up 47% month on month. Stock markets have also risen, though not as strongly as property.

The next two to three quarters will continue to see this trend being played out. While 1st quarter numbers are already eye popping, second quarter numbers will be good as well. Let’s not forget that while stock markets started to surge in 2nd quarter 2009, most of the economic indicators themselves did not show as much improvement at all. This led many to question the sustainability of the rally in the 2nd quarter market rally last year. This means that as we move into 2nd and third quarter this year, the numbers will continue to look very good, compared to the base last year, which is very low.

I am already fully invested, and I even shifted some money from bond funds into equity funds during the February correction. For now, I am sitting back and enjoying the ride up though I am monitoring the situation closely. The improving fundamentals of the economic recovery are now in the process of showing up in solid GDP numbers throughout the region and in companies earnings as well. Singapore is a precursor to the rest of Asia. The question should be whether markets move up beyond what the improved fundamentals justify on the strength of investors turning into a very bullish mode. We are not quite there yet, because the full improved numbers have not shown up in reported economic data or company earnings yet. Nor are we at the stage where everyone and their neighbor is shouting buy.

But as the market climbs higher, then such euphoria will be things that investors need to watch out for. The next two quarters should be glorious and very exciting for investors as they ride the market up. Many who bought in since last year or start of this year are now seeing their patience rewarded. While it is human nature to want to check on your holdings often to see them rising, don’t get drawn into making any emotionally driven decision. The coming few months are likely to be volatile even if on the uptrend, so investors need to be careful. As market sentiment gets more and more bullish, investors tend to get less careful. In actual fact, it should be the reverse. As the market surges ever higher, we should be more cautious instead. So, I will be monitoring the markets closely. At some point in the next few weeks, I may shift back some money which I shifted out of bond funds towards a more neutral stance if the market gets euphoric.