Added 2k More to Portfolio (29 Oct 2010)

Asian markets went into some profit taking this week, but that is exactly the kind of short term pull back I was waiting for to put in my monthly investments. So, I took the opportunity to add in $2,000 into my portfolio yesterday. These were all placed into Aberdeen Asia Smaller Caps.

I continue to think there is more upside potential in Asia, but the surge recently also means that some markets are more attractive while other markets are now closer to fair valuation. South Korea, and Asia small caps remain very attractive to me. Especially on a valuation basis, these look cheap. On the other hand, Thailand, which has run up so much this year, is starting to look fairly valued, and if the run continues, will start to look expensive.

Singapore equities is a weird case. I have great confidence in our country’s ability to grow, and our diversifying of our economy has made the case even stronger. Certain economies like South Korea and Taiwan are still overly reliant on manufacturing and electronics. They are dependant on the Tech cycle going in their favour. (Fortunately for them, I think Tech will continue to do well over the next two years). But China is catching up really fast, and China is going to move into every single sector it can, so the competition from China will only get more fierce. Singapore though, has diversified well. We are now into biomedical, and with the two Integrated Resorts, we are now even slated to have a gaming industry that will rival Las Vegas within two years. Not bad considering we just started it this year.

But having mentioned all that, the Singapore market earnings growth, at  is actually lower compared to many other Asian countries, and our valuations are higher as well. So, while the growth remains there, and I am confident it can continue, Singapore is not as good a bargain as other Asian countries. Other countries also have more upside compared to Singapore. Singapore’s forecast earnings growth for 2010 and 2011 is 9.8% and 9.7% respectively. This compared to just about every other country’s earnings growth which are in the double digits. Singapore’s forward PE for 2011 is now 14.2X. This is now no means expensive, but when compared to many of the other market’s valuations like South Korea, at 9.7X, Taiwan at 12.2X, and even Hong Kong at 12.9X, then you can see why our research has decided to downgrade Singapore slightly recently. Will it still reach 4000 points by 2012? Yes, I believe it will, but other Asian markets may do even better than that.

When I assess own portfolio, I note that my Aberdeen Singapore equity fund only forms 6.67% of my portfolio. This is of course in addition to the Singapore holdings that my other Asian equity funds will hold. Am I too heavily weighted in Singapore? I don’t think so. Most Singaporeans have a fair amount of investments in Singapore. I believe its called Home Country bias. So, I won’t cut any of my Singapore equity fund holdings as of now, despite the nice profits it is currently making.

Remember in the earlier part of the year when I called for patience as markets went sideways? The market often moves sideways for a while, even correcting a little before moving up again, even when it is on a general uptrend. When we see the market doing this, we either pick up some bargains while it dips, or be patient and wait. 2 years is not such a long time. I believe that as early as next year, we will see a lot of the current concerns clear, and the overall outlook get much brighter. Of course by then, markets are gong to be higher too. So, I will pick up bargains every now and then while I can.

I am still trying to save up for some big expenses like renovation, a car, next year too. Hard to do that when I am tempted to put as much as I can into equity funds right now. In any case, next week (1st week of November), I am taking a vacation with my wife in Bali. All work and no play is ultimately not healthy. So, I am taking a much needed break. We are even leaving the kids at home! So, until the week after, signing off for now!

More on Currency (22 Oct 2010)

More on this whole currency war issue. I still don’t understand the strong desire by the US to devalue its currency, and force the China Renminbi’s rise. While some quarters in the US think this is going to magically create hundreds of thousands of jobs, my view is very different. I think it won’t. And in fact, the devaluing of the USD will only hasten US’s economic decline relative to China, and relative to Asia as well. Just look at the United Kingdom. The British pound was at its strongest when UK ruled the commonwealth and over half the world. Today, the pound is a shadow of its former glory, and the same can be said for the importance of UK in the world.

In today’s inter connected world, no man is an island, and that goes for nations as well. If US thinks that it can somehow only export stuff, and stop importing stuff because it devalues its currency, it is badly mistaken. People buy your stuff if they want them, price is only one of the factors that come into it. The German pound ( and the Euro) was very strong right up to the Euro financial crisis, but that didn’t stop German car makers from competing right at the very top with Japanese and Korean car makers even as US car markers continued to lose market share. Look in Singapore, where cars from all countries are being sold. (We have no national car company of our own). The Mercedes and BMWs are the most popular cars right after Toyota. Even Hyundai and Kia cars are now becoming more popular as well, and its not just because the Korean won is cheap, its also because Hyundai and Kia now make good cars.

Ultimately, because of the flow of goods and services all over the world, countries which are gaining in economic power will still see it happen regardless of what happens to their currency. The average Chinese worker in China is still going to be cheaper than the average worker in the US even if the USD gets devalued another 20% against the Renminbi. And the US imports a ton of stuff too. So, if it gets its wish, then it is going to see the things it imports get a lot more expensive. Not everything can possibly be made in US, and some things will see demand regardless. The end result is that they will see US standard of living fall simply because the purchasing power of the US dollar becomes that much lower as the USD devalues. We are already seeing commodity prices resume their rise with the weakening of the USD. How much less commodities can the US possibly consume?

Another thing US perhaps did not consider is a reverse brain drain. US has benefited in the last few decades from a lot of talented scientists, professionals going to US to work and live there. The strength of strong purchasing power of the USD also had a part to play in this. It made it so attractive to live in the US that people were willing to leave behind family, friends, etc to travel thousands of miles to a foreign land to make their living. If this trend of the USD devaluing continues, there will be a reverse brain drain, and this will include skilled and talented Americans as well. In the end, if we look into history, I have rarely seen a situation where a country that finds its currency devaluing significantly over the years actually finds itself better off because of it.

On another note, this has been a flat week, but this doesn’t change my bullish view on equities. It is very common for stock markets to go through such smaller cycles even within the midst of a medium term uptrend. I would see any potential correction or dips in markets at this point in time as opportunities to buy. As always though, be careful not to get too greedy, so if you find that rising stock markets have caused your equity holdings to rise above what you are comfortable with, then take profit now and then so that you have the confidence to stay in the market in spite of its volatile cycles.

The next Bull Run is here, and Currency Wars (15 Oct 2010)

The STI index looks likely to finish today at over 3,200 points. Given that the Singapore market ended last year at 2,897 points, we are now 10% higher than what we started the year with and we are not quite at the end of the year yet. These last two and a half months before the year ends might actually see the Singapore market, and Asian markets move even higher, so despite everything which has happened to derail markets this year, I am confident that we should see some decent gains from markets this year.

The earnings season in the US has just started, but when it is over, I do expect good news from most of the companies. Spending is starting to come back in the US, and if anything, the weak US dollar has made its exports look even more attractively priced. So, US based companies with a global business will be seeing higher earnings just from the conversion back to the USD even if their business and sales haven’t improved at all, and with Asia continuing to grow strongly, I would be surprised if that is the case.

Even back in the US, the high unemployment rate means that companies in the US have been reluctant to hire, and why it has made the unemployment numbers look bad, and prompted the US central bank to consider further stimulus, what this means also is that the companies are keeping themselves very lean, and when sales improve, their earnings numbers will look very good indeed. This is why shockingly, when we look at overall earnings, we see that overall earnings will surpass 2007 record highs by next year. So, despite everyone worrying so much about the US economy, US corporations actually have a lot to smile about right now.

I believe the current strong earnings trend by many companies, including those in Asia, and the low valuations will see us enter the next bull run phase. It looks like it has already started already. October has been a very strong month so far. I suggest checking out your holdings if you haven’t in a long time. You might be surprised how much they have moved up. My 2 kids had their holdings shoot up strongly, and the same goes for mine own as well. My holdings were at $343,397 back in April this year, six month on, they are now currently at $419,587. According to our database, 62.4% out of all of the total number of Fundsupermart accounts are all in the black too, and I fully expect this percentage to rise over the next two years.

Just a bit on currency wars though. It has only been in the last 3 weeks that this term has now suddenly started to appear in the media all over the place. Basically, the western nations, especially the US, are firmly on a road towards weakening their currency, and they are not happy with nations like China because China, by keeping its Renminbi pegged within a trading band to the USD, is seen as profiting at the expense of the US. US firmly believes that the renminbi is undervalued by a significant amount and along with other western nations, are pressuring China to allow the Renminbi to appreciate. China’s resistance to this, and the failure of the recent IMF talks to get all the major nations to agree to a sort of “global” direction towards the currencies has led many to now worry that the major nations are now all about to engage in a “currency” war where each major nation will compete with each other to see who can devalue their currency faster than the other.

My view on all this? A lot of it is political posturing. Countries have little control over what other nations wish to do with their own currency. I am not even sure why US is quite so upset about given the fact that the USD has already been falling quite hard the last few weeks. So, their exports are already cheaper for most countries. Even against the renminbi, the USD has weakened, because it is no longer a hard peg, there is some room, within limits for the renminbi to trade.

I will write more on this in my coming blog entry. But my quick take on it is that there will be a few things that might happen as a result of concerns on currency wars. The USD will continue to fall, though I don’t expect a freefall. Commodities will continue to see their prices go up, because just about every major commodity including oil, and gold is all priced in USD. And equities will also see an uptrend from this as well. Because what a company produces will always have a value to it. So, a car produced by a car maker is always going to be worth something. So, regardless of how a country’s currency move, its companies will still retain their value over time. Google isn’t going to worth any less as a good company just because the USD weakens. So, buying into equities (companies) will be a good choice too when there is a lot of uncertainty over currencies. So, look out for more on currency wars and such in my next blog entry and have a good week!

My kids’ portfolio outperformed their Dad’s (8 Oct 2010)

My kids’ accounts are doing pretty well right now. Both are now well in the black when they were in the red last year. Funny, how a strategy of not looking at an account at all also helps investment decisions. In fact, I am not sure if I should be ashamed or not, but their portfolios are doing better than my own! They are up 13% over 3 months, and 24.3% over 1 year. My own portfolio, which I manage more actively, is up 11.5% over 3 months, and 17.8% over 1 year.

To be fair though, I must defend that my own portfolio has bond funds, while theirs is 100% into equity funds, and all of it into just two funds, one Asia equity, the other, Singapore equity. But, the good thing about managing a portfolio where your kids couldn’t care less how you manage it, is that I adopted a much more passive strategy. No active management, just add on some money into the same two funds maybe once or twice a year (usually around Chinese New Year Time or their birthdays).

This means that despite all the volatility this year, they didn’t try and time the market in any way, they didn’t go in or out, and they didn’t have any hot picks or such. (Unless Asia is considered a hot pick). Maybe because it was meant to be truly long-term investment, their Dad (me), also resisted trying to do any of the kind of fancy portfolio allocation, market timing, favorite research picks either. But because it was meant to be a really long-term investment, I could afford to go 100% into equities, confident that any market cycle correction would even itself out.

To be fair also, it would have been hard to pick the best-performing market and funds each quarter. Let’s take a look at the 3rd quarter which has passed. It was an excellent quarter for most markets in general. The five best performing markets (all in Singapore dollar terms) within this quarter (based on the 22 markets we track) were as follows:

Thailand          +23.2%
Indonesia        +15.0%
Australia          +14.5%
Brazil               +13.8%
Korea              +11.8%.

So, if you had a single country fund investing into any one of these markets, you would be very happy. Investors placing money into Japan on the other hand, would have been sad, despite the strength in the Japanese yen. The Japan market, based on the Nikkei 225 index, was the only negative market in 3Q, down 0.1%, in Singapore dollar terms.

Ultimately though, have a diversified portfolio, have a good investment strategy, and be disciplined. Even though we have had everything from a Euro financial crisis, China tightening, to the shadow of a US double dip recession (which didn’t) scaring investors, most markets are in fact up for the year. Earnings will carry us into the next phase, but don’t get too greedy. I am bullish and wish I had more money to invest into markets, but despite that, I will still strive to maintain a balance between my bond funds and my equity funds. So, if as we predict, equity funds go into a big bull run, then at some stage, I will still be disciplined and take some profit out from my equity funds, and place them into my bond funds. (And I will probably end up underperforming my two kids’ portfolios over the next two years!)

Dilemma! Need to Set Aside Money for Next Year! (1 Oct 2010)

I am currently in a bit of a dilemma now. Next year, I am moving house, and I need to set aside money for some renovation, and sigh, I think I will probably have to finally buy a car too. So, I need to set aside money for these things next year, but yet at this point in time, I really would love to put in that money into investments instead!

This is because we are in special sweet spot in the market currently. Earnings are really high, interest rates are low, and yet, because of some concerns, many markets, including Asia, are trading at cheap valuations! I have almost $370,000 invested into equity funds and only $42,505 into bond funds, but I would love to add even more to my equities. But doing so would bring my equity exposure even higher, so I must discipline (force) myself not to do this.

Also, I can’t (or at least I shouldn’t!) put so much money into investments because I need to start setting aside money for the renovation and car purchase next year. Putting them into investments, especially equity funds, is risky simply because the time horizon is very short. I could be taking out this sum of money within one year. And when you have a time horizon of just one year, lots of things can happen to temporarily delay or even derail their value.

Take for instance if we were to go back to October last year. Now, at that point in time, equities were cheap too, and earnings were also steadily moving up. In fact, I was also confident about markets exactly one year ago. But a couple of things happened, and while they did not exactly cause a market crash, they did cause a lot of volatility. We had concerns about central bank exit policies at the start of the year, China and other Asian countries since then started to clamp down on the property market, and in May, we had a European financial crisis.

Actually if valuations were lofty then, all these together would have certainly crashed the market. But instead, Asian markets retreated maybe 8 to 10%, then came charging back. This actually lends me even greater confidence that we are currently at a sweet spot in markets. If all these things plus fear of a double dip recession couldn’t bring about a market crash, it’s because fundamentally, things are improving, earnings are rising, and valuations are cheap! Hence, the downside is simply not high compared to the potential upside.

But back to topic, the problem is if an investor with only a one year or less horizon went into equities in October last year, he would be sitting on relatively small gains at best, and if he was forced to exit in May or June, he might even have been sitting on losses. Yet, the outlook for markets has never been better. I feel that all the event and concerns of this year has just only postponed the next phase of the bull run, and if anything, gave investors more time to accumulate and invest into equity markets.

But here’s where the dilemma comes. No matter how bullish I am about markets, a one year horizon is simply too short. Just as the one year since last October has proved, even when the market outlook looks good, certain events could cause a temporary fall or push back the anticipated uptrend. Being forced to sell out and then seeing the market run up after that is going to be really frustrating.

But this is money which I know I will be spending. I can’t exactly say “Let’s move into our new home, and because the market didn’t quite turn out how I expected, we aren’t going to do any renovation!” I suppose a car purchase can be postponed, since we haven’t had a car all this while, but renovation is going to be a non-negotiable expense item.

So, I need to be a lot more careful with this money which I am setting aside for my renovation and car purchase next year. Putting it into equity funds, no matter how bullish and confident I am, would appear to be the irresponsible thing to do. Certain things will cause a lot of anguish. In the unlikely (but still possible) event of a loss, being forced to sell out or top up even more money will feel very tough. But worse than that would be if I had to disappoint my family and tell them I need to postpone say renovations or a car purchase because of market conditions.

Instead, given that I already have substantial positions in the market, it’s just more prudent to set aside the money, but choose not to invest it into equity funds. I may make less (I am quite confident markets will go up and that will happen), but at least I will have the peace of mind, and when the time comes next year, the money will be there for the renovation and the car. Yes, my anticipated profits might be less, but let’s not get too greedy here. There will be other opportunities, and by then, if what I anticipate comes to pass, then I will already be sitting on hefty profits.

It’s the right and prudent thing to do … but wow, it is hard to force myself not to buy equity funds now!