Shifted more into equities, added $3,000 into portfolio (25 May 2010)

I just switched out my holdings in Fidelity Europe High Yield Bond Fund into Aberdeen Pacific Equity, and added another $3,000 to my portfolio. And all $3,000 went into Aberdeen Asian Smaller Caps Fund. So, essentially, I am heavily overweight into equities at this point. Actually, I didn’t even want to look at my holdings, because I knew that with how markets have been falling since last week, it wouldn’t be a pretty sight.

However, it is also at such times, when I put in more money into equity funds. I still have about 10% in two bond funds (a US high yield bond funds and an emerging market bond fund), but I am at this point in time 90% into equities.

The current European woes with Greece debt and the Euro taking a pounding seems to drag on and on. Unfortunately, there isn’t any fast resolution to that messy situation in the EC. It will just need time to be sorted out. Time and a lot of political will because they will have to make sure Greece goes through with the tough measures (bitter medicine) required to get itself out of its current bankrupt state. (And let’s be honest, if the EC didn’t come in to help out Greece, it would have had to go bankrupt just like Iceland). Another area where political will is needed, would be when taxpayers in the other countries like Germany are presented the bill required to bail out Greece. They are not going to like it.

This brings me to my next topic. I think high yield bond funds are safer than general bond funds which hold sovereign debt at this point. It’s a rather controversial opinion because generally, high yield bonds are rated as higher risk than sovereign debt from G7 countries and developed countries which are the bonds which many global bond funds like to hold. But at this point, the whole EU is coming under strain due to the fall in the Euro, and the run on the Euro is revealing the weaknesses in the EU bloc. There are countries there, which without the Euro, and the EU, would have been downgraded to junk status without hesitation from rating agencies. The only reason they are still credit worthy is because they have the backing of the entire EU bloc. This makes the entire EU bloc risky though, because they are helping to soldier the risk of these financially weaker countries onto themselves. As a result, the Euro is falling.

At this point in time, Asian high yield bonds and US high yield bonds look more attractive because there is much less currency risk. US, as the base currency, is always where the money flows to when investors are spooked. So, as Euro falls, the US dollar can only strengthen. Asia, with minimal exposure to Europe, and growing fast, will continue to see inflows. The west are even clamering for China to let the renminbi appreciate, so Asia’s currency will stay strong.

Another reason is that I feel that the potential default risk in Asia and US high yield bonds is actually lower and less destructive than the default risk in sovereign country debt. High yield bond fund managers look very closely at companies before deciding whether to take up their debt issues. And with the generally recovering economic environment, most companies are well able to service their debts, roll them over, and obtain new debt. Even if there are a few company defaults, given the huge number of issues that a high yield bond fund will hold, the impact will be minimal.

Sovereign debt is more complicated in a way. There are the main G7 bonds which tend to make up a relatively large part of any indicative index. And there are a limited number of countries whose sovereign debt have a very credit high rating. Countries with a low rating tend to fall into the emerging market category like Latin America, Eastern Europe and some Asian countries. Yet, the developed countries’ sovereign debt ratings I feel at this point is looking risky. Many developed countries have issued huge amounts of debt in order to finance their huge stimulus packages in the aftermath of the US financial crisis. So, their finances aren’t anything to shout about. At the same time, it is arguably far far harder for a country to rein in itself if it has overspent (like Greece) as compared to a company. A company is free to fire staff, cut costs, etc, but political fallout from the citizens if a country tries to increase taxes and cut civil service staff or pay will be tremendous.

Thus, I feel that high yield bonds, corporate bonds for the most are looking far more attractive than sovereign debt at this point. It is easy to avoid Europe currency exposure if you wish to. Just stick to region specific type bond funds like US high yield, or Asia bond fund, or Asian high yield bond fund. Unlike the stock market, or the bond market, currency is a two way street. The Euro can’t just drop by itself, it has to drop vis a vis the USD or vis a vis some Asian currency.

There will come a time when it would be interesting to go into Europe markets and look for bargains. But at this point, I would err on the side of caution. So, yes, while I think markets have corrected enough for me to increase my exposure into equities, I am sticking to Asian equities for now. Asian small caps will look more and more interesting as time goes by as well. This is because many of these small cap stocks tend not to have any European exposure, unlike some of the larger blue chips which might have a global presence. I am confident that Asia will continue to grow, and while the markets are ducking for cover right now. Eventually, as the dust settles in Europe, confidence will return to Asia as investors see that Asia continues to grow despite what is happening in Europe. And as confidence returns, we will see a rapid rebound in Asian markets. Hence why I am shifting some of my bonds into equities, and topping up another $3000 more into equities as well.

We have to be patient at times when it comes to investing. Focusing on the current fear in the market will inevitably cause one to panic. I believe things will look vey different within 6 months to a year’s time so I am not focusing too much on the current negativity in markets.

The Euro is not out of the woods, topped up 2k more (18 May 2010)

It might look rather odd. I am not feeling very positive about the Euro, to be frank, but I just topped up another $2,000 into my portfolio. The main reason has to do with this so-called contagion effect and the fallout. Do I think that Europe is headed for more trouble, yes, unfortunately I do. But will Asia markets and high yield bonds come out of this well when the dust settles over there in Europe? Yes they would.

Firstly, let’s touch on Europe. Despite committing over 1 trillion US dollars to support the Euro, it is still coming under attack and has slid back to the levels before the 1 trillion dollar measures were announced. And it will continue to come under attack. The EC had two very stark choices before they announced the 1 billion dollar measures when the Euro came under pressure, would they stand together with Greece and the Euro, or would they go their separate ways, let the Euro fall apart and cut Greece loose. They choose the former, to stand together, and support Greece (and by default the Euro).

The problem with that, is that the market knows that such a choice is going to be a really tough road. And so, currency speculators, hedge funds will all continue to attack the Euro at every sign of weakness. Why is it so tough? Because while its easy to announce big measures, throw money at a problem, if the root of the problem is not solved, it will just get bigger and bigger.

Is it really so terrible for a country to go bankrupt? It’s not. Many countries have defaulted on their debts, had to go to the IMF for money, and forced to swallow bitter pills to turn themselves around. Some of the Asian countries had to go through this during the Asian financial crisis back in 1997/98. But while some had to go to the IMF, others didn’t, and since there wasn’t an “Asian Commission” to bail out any Asian country, whatever bitter pills that had to be taken, were taken. The more affected countries saw their currencies crash, but as a result it made their exports much cheaper, and the combination of the financial discipline plus their cheaper currencies caused most Asian countries to bounce back in a big way in the corresponding recovery. Most significantly, while the entire Asia was sold down, (even Singapore then), the bounce back was sharp and fast, particularly for countries which had strong reserves and whose currencies was never really in serious trouble (like the Singapore dollar).

But in Europe, we have over 20 countries of different backgrounds, politics and finances linked together by one single currency – the Euro. Its worked for the last ten years, but now the cracks are obvious. By refusing to cut Greece loose, and standing together, the EC has effectively made the Euro vulnerable to future attacks linked to any weakness in the weakest of their countries. If Greece shows any weakness in overcoming whatever tough financial measures it needs to take to address its huge debt, the Euro will come under attack as a result, and other countries like Portugal, Spain will all come under increasing scrutiny.

Trying to support a currency without addressing the underlying weakness has always been a futile problem. 1 trillion might be a lot of money, but hedge funds collectively could probably match that and more if they smelt blood (or weakness in this case). Even big countries like UK have learnt the hard way that if they try and prop up a currency against the rest of the market, you would probably need more money than you could cough up even if you are a central bank of a big rich country.

I sometimes wonder, if the EU had bitten the bullet, cut Greece loose from the Euro, what would have happened? There’s a difference between cutting a country from the Euro versus kicking it out of the EU. By cutting Greece loose, the EU would have shown that the Euro club is not for everyone, and even if you are part of the EU, if you don’t have the financial discipline to qualify, you are out. This would have immediately stopped the contagion then and there. The Euro would have been safe from further attacks because people knew that if countries didn’t make the cut, they would be kicked out. Greece could then be allowed to devalue their original currency and whether they manage to get their house in order sooner or later, at least the contagion would not spread.

Now unfortunately, by standing together, we have traded short term stability for long term weakness. The Euro is now only as strong as its weakest link. There will be a lot more pain going forward for the countries in the EU, and it remains to be seen if they have the political will to truly stand together. The bill has not truly been paid. When the richer member countries like Germany, France get the bill for what they have to come up with to save Greece, and the Euro, will their citizens balk? Honestly, I wouldn’t want to be holding EU country debt or much Euro now with all this uncertainty in the horizon.

So, why am I topping up more? Because even if I run through some of the worst case scenarios, I still arrive at the conclusion that Asia would come out of it alright, if not stronger. In particular ,if we are talking about currencies, its all relative. For the Euro to fall, it has to fall against something, be it the US dollar, the Yen, or other Asian currencies. Let’s not be afraid to look at extreme scenarios. Even if the Euro falls apart, would that immediately plunge Asia into a recession? It would not. There would be chaos in Europe as member countries have to go back to their original home currencies, but does it mean even Europe itself would fall into recession, much less Asia? The answer would be no.

Right now, there is weakness because the Euro is linking them all together. In an extreme scenario, if the Euro currency was dissolved, the EU would be seen as a grouping of countries each with their own strengths and weaknesses. The stronger member countries like France, Germany would not be placed in the same light as the likes of Greece in terms of financial strength. The initial chaos would be painful of course, but when the dust has settled, I do not see stronger countries like France, Germany weakening just because the Euro was dissolved. In fact, the Franc, the German mark would become more popular because they are seen as the stronger currencies in the region. Asia, itself would continue to export to Europe, and its currencies might actually rise against many European currencies. While some export markets might be affected, it would not be the entire region.

During the Asian financial crisis, while Asia countries were grappling with currency attacks, recession, the rest of the world continued to grow. The western countries hardly experienced much of a blip in their economies. I believe the same would happen even if the Euro could not be sustained and it fell apart. The Euro definitely does not have the status which the US dollar has. The world at this point can’t do without the USD, but it for sure can survive without the Euro, which didn’t even exist more than 10 years ago.

At this point though, I am glad I have switched out of financials, into Technology. There is too much ongoing potential problems at this stage and possible contagion effect to take a lot of risk with the financial sector, even though I do believe that Asian financials will come out alright. In contrast, the Tech sector will continue to see growth and recovery this year. The iphones, ipads, TVs flying off the shelves are proof of that.

I would also be more comfortable putting money into high yield bonds rather than a global bond fund which would likely have G7 and developed market bonds. But this blog entry has become longer than I originally though, so I will save my thoughts on why I actually think high yield bonds are safer than a global bond fund or developed country sovereign debt at this point in time for a future blog entry. Till next time.

Added $1500 in the Current Market Correction (4 May 2010)

I did some switching into the Henderson Global Technology fund last week. With the correction we are seeing this week, I added in another 1500 to my portfolio. The funds added into were as follows:

$750 – Aberdeen Singapore Equity
$750 – Henderson Global Technology

The current weakness in Asian markets stems from Goldman Sachs and China. Goldman Sachs is facing criminal charges and the intense spotlight on the firm, and fears that it may open the way to implicating other financial industries has western markets worried. Here in Asia, a bigger worry is how China is stepping up its efforts to combat rising inflation and asset bubbles. China just ordered the increase in bank’s reserve ratio. This is just the latest in a whole host of new policies meant to limit a rising property market. More can be expected to follow. As a result, the China markets, including the property sector has recently corrected downwards.

However, despite China’s efforts, there remain many concerns on whether they will be able to successfully cool down the stock markets and the property market, without causing the China economy to slow substantially. As China’s red hot economy has been instrumental in leading Asia out of the current recession, many are understandably nervous.

However, despite these concerns, I still think Asian stock markets at this point are fairly cheap. We are not even back to the 2007 highs in most cases, and even then we were not at a bubble. The shift in economic power continues to happen as Asia charges ahead in a V shaped recovery as opposed to the much weaker recovery being seen by developed regions like Europe or US.

But I already have an heavy overweight position in Asia. For me, Technology remains the most interesting at this stage. I think the Technology bubble bursting in 2000 has a big psychological impact on many investors, many of hope have sworn off the Tech sector permanently. But I believe it is more important to look forward than to look back.

Technology has undergone big changes in the last ten years. The sector is no longer filled with startups with no business model, and just some vague internet strategy. The Technology crash has weeded all those out. The remaining Technology companies are now all strong leaders within their own fields and many are cash rich. At the same time, coming out of recession, many consumers will be looking to buy more Tech products, and not just consumers, companies as well. This is because many companies let their IT spending slow during the recession to save costs, and they will now have to gradually upgrade their systems.

Technology also doesn’t face the kind of scrutiny that other sectors are facing at the moment. They aren’t being hauled up to face criminal probes like Goldman Saches, nor are governments thinking of levying any special taxes on the sector (unlike how Australia is now talking about levying a special super tax on resource companies). I think Technology will be the dark horse sector over the next 12 months, and could outperform most of the other sectors including those getting the most interest now (property, financials and resources).

My other purchase (more like a top up) was into Singapore. This has a more home base bias, but ultimately, I have no worries on Singapore. The economy is expected to grow close to 9% this year (substantial rise in economist forecasts we are seeing!). And many of the blue chip companies are well capitalized, cash rich, and will be beneficiaries as the Singapore economy charges ahead this year. The two IRs which are now completed are icing on the cake, but don’t estimate their contribution. Already tourism arrivals are substantially higher. Singapore is forging ahead as a financial hub, and as a fun, happening place for tourists to come and visit. Based on all these and with valuations at this point still at a relatively fair 14.7X for the year 2010, Singapore remains attractive.