Another Surge in Markets Will Start Soon (24 Sep 2010)

I am currently very bullish about stock markets. If we look at two things, it would seem to be telling us very opposite things. Investors looking at daily news, and economic updates from the US will be forgiven for thinking another recession is just around the corner. A ton of concerns in the US about double dip recession, and while the latest economic numbers are not exactly horrible (they are still showing some growth in the US economy), they do show that it is taking a breather, and hitting a soft patch. On the other side, investors who are looking at broad earnings for Asia markets, and even the US companies in the US market would be hard pressed not to feel excited. These are either at record levels this year, or if not, will be at all time highs within 2 years already.

The last time we saw such strong earnings at record high levels was back in 2007, when markets were hitting all time highs. Valuations then were more expensive. Today, we are in a situation where not only are earnings going to all time high levels, but valuations are outright cheap! This is precisely because investors are cautious. The cloudy economic outlook from the US, and other concerns have kept market sentiment very cautious, and valuations reflect the low confidence level of investors.

Yet, we must remember that market sentiment and investor confidence can and do change very quickly. Within a few months, the US economy doesn’t fall off cliff, people stop talking about double dip recessions, earnings continue to improve, and as various concerns die away, we can easily see sentiment shift to become bullish, especially when investors realise just how well companies in general are doing. That kind of re-rating plus earnings at a record level could easily mean a substantial surge in stock markets.

I remain very bullish on Asia equities, I see Asian markets having a potential upside of up to 37% over the next two years. Within Asia, 6 markets, including Taiwan, South Korea, China, India, Malaysia and Indonesia will already see record earnings levels this year in 2010 already. And I remain convinced that the Technology Theme will play out over the next two years as well and hence, South Korea, Taiwan, and Tech related funds will benefit from this. Finally, if blue chips are already showing such kind of results, the small caps look even more amazing. Investors still prefer the safety of blue chips at this point in time, and within small to mid caps, we are seeing not only record earnings, but PE levels which are ridiculously low, at single digit levels in various cases. This is why, I just shifted another $10,000 from the Aberdeen Pacific Equity fund to the Aberdeen Asia Smaller Cap fund (and it is already my second latest holding after Aberdeen Pacific Equity fund). The Asia story is exciting, and within it, when risk aversion subsides, and investors turn bullish in a big way, the small caps will really fly.

The importance of spending less than you earn (8 Sep 2010)

I just added another $6,000 into the following funds.

Cash fund - $500
Parvest Europe Alpha - $1,500
Fidelity Asian High Yield - $1,000
Lionglobal South Korea - $1,000
Aberdeen Asian Smaller Companies - $2,000

This time round, the additions are more from a broad based approach. Hence, I added to a bond fund as well as equities funds. I continue to believe strongly that equities will outperform bonds over the next two years, and there will not be any significant fall in markets over the next 6 months to 1 year. And the portfolio is positioned to reflect this. I continue to favor markets like South Korea as I believe that Tech is well positioned to boom, yet has continued to be overlooked even at this point in time.

More importantly though, every time I start to accumulate cash beyond a certain amount in my bank account, then I tend to invest some of it. This means that generally, I am saving some money each month, and that I spend less than I earn. This is a very important habit to form. Because no matter how much you earn, if you spend even more than that each month, then you are moving backwards in terms of wealth accumulation. And even if you earn relatively little, if you are still able to save and invest some of it, then you are moving forward.

Many pop stars, movie stars and sportsmen fail to understand this concept, and even though they earned millions, they spent millions more, and it may be surprising but a fair number of these end up with little or no wealth despite the big bucks they earned in their heyday.

It takes discipline to spend less than you earn, but once you have gotten into the habit, then it becomes second nature. Singapore is actually a great place to save and invest money because income taxes are low, and more importantly, there is no capital gains tax for gains from stocks and unit trusts! This is very significant because it allows money invested to build up even faster. So, get into the habit of saving, and regularly investing and your wealth will build up naturally over time. The best thing about this is that everyone can do it. You don’t have to inherit some large amount of money, or build up a dot com company to sell off, or gamble at the casino, you just need to spend less than you save!

Nobody will talk about double dip after 6 months (3 Sep 2010)

All the talk recently over double dip recessions have scared investors out of the markets. Volume on SGX remains low reflecting the extreme caution amongst investors at this point in time. However, the irony I feel is that in 6 months time, it is very likely that nobody will be talking about a double dip recession anymore. The focus will shift to other things, and this will become just one of the many “scares” throughout this very jittery and uncertain year. But why am I so confident that a double dip recession is so unlikely?

If we go back into US history over the last 50 over years, the only double dip recession in the US since the end of World War 2 was 30 years ago in the 1980s and it happened when there was a second oil shock. That means that since 1950, over a period of 60 years, the US has had just one, one double dip recession. If we go back further, another known double dip happened in 1948, in the aftermath of world war two, and the great depression wasn’t a double dip recession, but instead, simply a prolonged 4 years of economic pain from 1930 to 1933.

Mathematically, these are very good odds that a double dip recession won’t happen because these seem to come very rarely. More importantly, we should look critically at what would cause a further drop instead of just thinking “what if there is a double dip recession?”

Firstly, the manufacturing sector. Now, this has actually been the sector that has helped to pull the US out of recession in the past, and this sector is not showing any serious weakness at this stage. The ISM manufacturing index has been steady growth with the index at over 55 for the last couple of months, and the latest for August, showed a very healthy 56.3, up from 55.5 in July. This as despite so many economists being so sure it would drop to 53 or below because, well, it was fashionable at this point in time to worry about a double dip recession.

Secondly, demand for oil and oil price. Now, this is directly dependent on demand and supply, unless we believe there is a huge amount of speculators playing the energy market and skewing it. If we are headed towards a double dip recession in US, leading to a double dip recession in the world, then price of oil should be plummeting back to 50 USD or lower since demand should be dropping like a rock. It hasn’t happened. Oil has been bouncing around 70 to 80USD per barrel since the start of the year. This shows that be it from people driving cars, companies using energy, but overall demand for oil is holding steady. The price of oil does not indicate a double dip recession.

Thirdly, yet another crash from the financial sector. This is the favorite whipping boy since Lehman Brothers because first US and then Europe had its financial crisis, originating from the finance sector. But again, we must understand, this is also the sector that has been subject the mother of all bailouts by central banks and governments plus starting in 2010 this year, has been subject to the most intent scrutiny by regulators amongst all sectors. They are getting the book and more being thrown at them with regulators going over with a fine comb any potential wrong doing, misconduct, or otherwise. Globally, regulators have been coming down hard on the financial sector, and this is in Asia as well. With this kind of backdrop of massive bailouts and intense regulatory plus self scrutiny, it is highly unlikely that the next crash will come from the financial sector. Look at the Asian financial crisis. It hit so many Asian banks back then, caused a huge amount of self policing and scrutiny from Asian governments, but till today, more than 12 years later, Asian banks are one of the most conservative with the strongest balance sheets globally and does anyone expect a crisis from them? I certainly don’t. Currently, with all the bailouts and such, the US banking industry is more highly capitalized at this point in time than compared to the past 20 years.

Fourthly, from the property market. The Europe and US property market could hardly get any worse at this point. Coming off a big crash in property prices and demand since 2008, the current base is already so low that property could hardly be the next trigger to a double dip. Property cycles are long, and it is possible that US property prices go nowhere over the next few years, but that in itself will not cause a crash or a double dip recession.

Ultimately, things have to get much worse for a double dip to occur, and within the current context, it is highly unlikely. The biggest suspects which caused a recession and crash in the past like the financial sector, property and oil prices are either already at such low bases in the US that they could hardly get worse, or like oil prices, have not been showing any indication that there will be a double recession. What has also been happening is that people have been focusing on the high unemployment rate in the US which continues to persist.

While this heralds continued pain to the US citizens, we have to look at this from the corporate perspective as well. This is happening because US corporates have “fired” a lot of staff and not hired them back. Companies have focused a lot on their bottom lines and this is also why despite the current environment, US companies are actually reporting good earnings growth. Based on consensus estimates, earnings of US companies are likely to grow 22.5% in 2010, 15% in 2011 and 13.9% in 2012. US companies are also cautious at this point in time, so they are not aggressively hiring, nor and they aggressively expanding (or lending money to expand). A lot of the crashes in the past happened when greed caused overlending, and overexpansion (Tech bubble, anyone?). This kind of scenario is just not going to happen at this point in time to US companies.

What this means is that over the next 6 months to 1 year, companies will continue to report double digit earnings, even while economic data and unemployment data remains flat in the US. But with nothing foreseeable that would cause the next big crash there, US won’t zoom into recovery, but neither will it lapse into another double dip recession. And investors will then eventually start to shift towards focusing on  the company fundamental numbers. So, I predict that while it is the current in thing to talk about and worry about US double dip recession, few will be talking about it anymore after 6 months.