We are seeing a quiet rally; Europe is leading the pack! (18 June 2010)

It’s the kind that catches people by surprise. There isn’t any particularly earth shaking news happening. People are busy watching the world cup, and volume is very low everyday in the stock market. Yet, markets are quietly rallying. However, if I mentioned which regions had the biggest rallies over the last one week, I think many people would be taken by surprise by the answer.

Its not Asia, though Asia has rallied as well. The biggest rallies have been seen by the European region. Many European equity funds have rallied 7 to 10% over the last one week (as at 17th June). Granted that they were the most badly hit over the last six weeks and many are still down 10 to 15% even after the rally these few days. However, my point is that often, these rallies sneak up on us before we even realise it.

Is it time to start to look for bargains in Europe now? The biggest bargains happen after the biggest crashes. The bigger the crash, the more bargains there are. And certainly, what Europe has just gone through over the last 6 weeks wasn’t a mere correction. There was real panic in the markets there. I believe most investors here avoided being hit too badly as most were severely underweight Europe (including me). But now that Europe has been bashed down, and is showing signs of stabalising, is it time to look for bargains?

But has Europe’s problems been solved? Definitely not! They are in for more pain in the days ahead, particularly for the countries that have run up large deficits and are now struggling to control them for fear of being singled out and cruxified in the bond markets (if they haven’t already). But a key thing to note about stock markets is that you can’t wait until everything has cleared and blue skies are out. By that time, the first stage of the rally would have largely passed you by, and that often has some of the biggest gains. So similarly for Europe. Its problems are not going to be solved within a few weeks, however, has the European equity market already factored in most of the bad news?

We have to remind ourselves, the global economy is actually still in a recovery mode, and in actual fact, many of the European countries are forecast to see some sort of recovery this year as well, including Germany. Furthermore, the primary culprit of the financial crisis that erupted there was Greece. Even if you include some other problematic cases like Portugal, even Spain, it does not add up to the whole of Europe. Europe is far bigger than just Greece, Portugal and Spain.

One problem with investing into Europe is that if the Euro continues to fall further against the Sing dollar, they would reduce gains even if its stock markets went up. But again, the question is whether a lot of the bad news has already been factored into existing decline in the Euro already. It has already fallen by 15% against the Sing dollar since 6 months ago. That’s a massive drop considering it such a core important currency. Also, the drop in the Euro would have made Europe’s exports cheaper.

Since I already have some holdings in Europe, I am content to wait and monitor further at this point. But if the main economic data flowing out from UK, Germany, France remains positive, then Europe would soon become more and more interesting as a place to look for bargains.

Of course the European financial crisis affected all markets, and emerging markets, including Asia also took a hit. So, valuations are cheap there now as well. In fact, After European funds, the next best performing funds in the past one week are the emerging market equity funds. It is too soon to say that these will lead the rest out of the pack as the rebound in markets take hold, but given that markets have just started to stabalise only last week, its all the data we do have at present.

Ultimately though, investing is about being patient, and having the guts to ignore emotions of fear when the markets are crashing, and similarly, to get cautious about being greedy, when markets are booming. We don’t have to always get it at the exact low point (that is often impossible). On a fundamental basis though, with Asian exports continuing to look healthy (Singapore’s latest NODX numbers were great), there is reason to be optimistic. It doesn’t feel like that coming off the last few weeks of volatility, but I strongly believe that in the end, valuations are more important. And valuations of many equity markets are cheap right now. Even Asia, with its highest growth, is trading at only 12 times PE, and some countries within Asia are even cheaper. No doubt if we looked hard at Europe and broke it up into different countries, we would probably turn up a few very cheap markets as well.

I wish I had more investible money at this point, but most of it is already invested! Anyway, I will end off by saying that I am excited currently and looking to see where there might be bargains. I believe that daring to enter now (or at least soon) will reap bigger rewards than waiting too long. I have also just updated my holdings online. I apologise that I haven’t updated them under my profile, so those who are interested can see how I am currently positioned. (And yes, I do have both European equity funds and Latin American equity funds at this point in time).

The World Cup and Markets (11 June 2010)

A lot of people will be losing sleep watching world cup matches these two weeks. Would it have any impact on stock markets. Overall, I believe volume will be lower. More retail investors might be staying on the sidelines as they devote more energy watching the matches. However, the institutional players and people’s job is to look at markets every day will still be around. What that means though is that if some unexpected news were to surface, we could see greater market movements because the actions of fewer investors will be needed to skew the market in either direction.

Overall though, I don’t expect the world cup to cause markets to fall. There is no fundamental reason why it should. Lower volume does not necessarily mean a falling market. In fact, some large gains in markets happen when volume is low, especially after a drop. In the US, Americans are not really into soccer much, so there would be very minimal impact. It is in soccer mad Europe where we are likely to see the quietest markets, especially since the time zone is similar. In Asia, where the timing of the matches means that most people would be watching the matches at night plus there are few Asian teams represented, it shouldn’t have as much impact either.

One of the biggest contributors to market volatility, the Greek crisis and Euro’s fall has now stabalised. So, on that note, barring any unforeseen bad news, I believe markets will continue to stabalise in the coming weeks. People will be watching upcoming economic data rather closely. If there is reassurance that the turmoil in currency markets and Europe has not affected the global recovery taking place, then we can expect to see a rebound in markets in the weeks ahead.

Sovereign risk remains high though. Right now, any country that seems weak financially can expect no mercy from rating agencies, and currency markets. Case in point, the focus on Hungary, nevermind the fact that it is not even part of the Euro currency. I will be switching my holdings in my emerging market bond fund to an Asian high yield bond fund. There isn’t a lot of choices in the Asian high yield bond fund space yet. Currently, it is just the Fidelity Asian High Yield Bond Fund. That’s fine though, because the fund is a good one. I believe that corporate risk is actually lower than sovereign risk at this point, yet one can get more higher yields from being in an Asian High Yield Bond Fund as compared to being in a “safer” global bond fund.

I will also be monitoring markets for bargains. The current market levels are attractive for accumulation. Asia continues to recover strongly. A lot of the concerns right now are at most minor road blocks for Asia. If we continue at the current trend, economic power will continue to shift from the West to the East. I really like Singapore and South Korea markets right now. Singapore is an odd situation. We are looking at GDP growth of as high as 9%, maybe even higher this year. But looking at markets, you would have though we were in recession. In the end, fundamentals will matter more, so I am looking to continue to accumulate more while markets are cheap as I believe that markets will soon resume their uptrend after stabilising these few weeks.

Markets are Stabilising (4 June 2010)

Asian markets look to be stabilising now. I believe most of the fear and panic over the Euro has been priced in by now, and nobody really believes North and South Korea will go to war regardless of how antagonistic the two sides might sound. (If they were fighting you would have thought they have started by now already rather than just trading harsh language).

The key issue which has plagued markets in recent weeks, the falling Euro and the huge debt problems facing Greece, and other countries appears to be ebbing. While it is by no means resolved (it will take some time to clear up their debts), there are enough actions taken by the European governments such that the markets have been reassured. So, while we are not exactly seeing any big rebound in the Euro, it is at least no longer in freefall.

The meltdown in Europe markets and the earlier fall of the Euro did do one thing, it scared the governments in the EC so much that they rallied together to come up with a huge package and more. Because individually, the bond markets were punishing the weaker EC countries as well by driving up the interest rates they needed for further financing of their bonds, many countries other than Greece all got very nervous and a wave of measures were taken by EC governments to cut costs, rein in spending. Basically, everyone was afraid to be the next Greece, and so, fell over themselves to show that their governments were taking active measures to cut down their debt.

All this while, economic data from US and Asia continues to be encouraging. In the US, the ISM’s nonmanufacturing purchasing manager’s index continued to stay above 50 (at 54.4) in May, which continued to signal expansion and growth. Singapore‘s manufacturing also expanded in May for the 13th straight month. One of its components - new export orders index hit a high of 55.4. Another reason why I believe markets are stabilising now is that the sell off has made stocks cheap again. Asia ex Japan markets as a whole are now at valuations of 12.7 times PE ratio for 2010 and 11 times PE ratio for 2011.

Asian companies are mostly reporting positive and growing earnings, while trading at below 15 times valuations in a generally improving economic backdrop. So, while the recent volatility focused investors attention on the negatives, and drove markets down, you can’t ignore fundamentals forever. Asia is taking the lead coming out of this last recession and since Asia is not saddled down by the debt problems which plague a fair number of developed countries, this lead will widen in the coming years. This shift of economic power towards Asia is going to continue, and it will be one of the main reasons why I continue to be bullish Asia for the long term.

As such, I am not afraid to buy more when the markets go through a correction. To be honest, I didn’t much want to look at how my holdings have dropped last week, but I still went in because psychologically, the more unpleasant markets may seem, then that means the cheaper they are, and hence the more opportunities. Take Technology. While Apple is selling so many Ipads that it is delaying some of its global launches because it won’t be able to keep up, yet Technology stocks got sold down along with everything else as well in recent weeks.

So, while you might feel lousy about looking at your investments now, remember that the best buys are made after a selloff when everything is cheap rather than at the height of a bull market when everyone is making tons of money. We have just had such a selloff, and markets have now started to stabalise. so it is now a great time to start looking for bargains!