Worst is Over?

Now that a little more time has passed, its possible that when this year is finally over and we look back, the first and second week of August would have been the scariest times markets had experienced this whole year. Of course, we still have a few more months, so it might be too soon to already make such a conclusion. But my opinion is that we should get through the rest of the year without the kind of crash we saw then.

Europe is the problem here. US is not. Despite all the worrying by analysts and economists there of the possibility of another recession, I believe that even if there was some sort of slowdown, it would not be anywhere near as bad as the drop which was experienced after the Lehman Brother’s crisis. At that time, both the financial and property sector in the US took a huge hit, and consumer confidence, which had been pretty high absolutely plummeted. Today, the US consumer is nervously trying to save more, the property sector is barely starting to recover, and so is the finance sector. They say the higher you climb, the harder you fall. I think the US economy has just barely crawled out of the hole it had fallen into after the Lehman Brother’s crisis, so jumping is hardly even on the cards right now. There may be some longer term structural problems with the US, but lots of countries have those.

Europe is a slightly bigger problem simply because the worst that can happen in Europe is much more scary compared to the worst the can happen in the US. Every time another European country faces problems in the debt market, the fear that there will be a European financial meltdown surfaces. And unlike the US, Europe doesn’t have the leeway to freely print money or devalue its way out of trouble. The silver lining is that since everyone has been reading so much about all the doom and gloom that could accompany a Europe financial meltdown, then a lot of this would have been priced into markets already. I read the other day that the market capitalization of just Apple alone was more than that of all the top European banks all added together.

We have a new research article up on how we have upgraded 12 markets and downgraded Europe to 3 stars. The only other time we upgraded several markets to 5 stars was in the aftermath of the Lehman Brother’s crisis. I have already switched two out of three of my bond funds into equity funds. I think I may not have the opportunity to switch the last bond fund over to equity because it may be that the worst is over. We won’t know for sure until the whole year is up, and it doesn’t quite feel like it now yet because everyone is still extremely cautious. However, my personal opinion is that the worst is over.

On a separate more personal note, I have finally gotten the keys to my new home. My wife and I went there over the weekend and we absolutely loved our new place. I think having to wait 3 years for it to finish building probably made us love it more. (Waiting for something always makes it sweeter when you finally get it). But regardless, I will have to sell off my short term duration bond funds soon as we are going to start renovating our new home. I hope as much as possible I won’t have to touch the equity funds I have.

Markets are Stabalising now

Touch wood, but I note that markets are stabalising now. Especially since the price of gold has plummeted from its highs of well over 1800 USD per ounce, I view this as an indication that people are no longer quite as panicky as they were the last few weeks. I don’t like to guess whether we are already at the bottom or not, because it is almost impossible to get the exact day. Nevertheless, we are probably quite close.

The reason why I think we are quite close is because we already started from a relatively low base this year. Its not like markets had been in a bull run for several years (like in 2008), markets were already quite cautious and grappling with various concerns like a double dip recession, the European financial debt crisis and China inflation since last year. Also, there isn’t a property bubble this time round in western countries to burst, that already happened during the Lehman Brother crisis. Companies have mostly been quite conservative, and prudent since the global recession and earnings have actually been quite robust.

Thus, I believe that the 15 to 20% selloff since the highs this year is already plenty and to a certain extent, I think there has been a little too much selling already. If we look back at history, usually the big market crashes which are 30% or more coincide with major recessions or bursting of huge asset bubbles (whether in technology stocks like in 1999, or in the property and financial sectors in 2008). This time though, you would be hard pressed to say that anything is in a bubble at this point, unless that asset is called gold. Just about everything else has sold off substantially this year, even other commodities other than gold!). The crashes resulting in huge selloffs in western markets of over 30% included momentous events like World War 2 (S&P 500 down 60% over 5 years), the Technology bubble bursting, the 1^st oil shock, the great depression, and just relatively recently, the Lehman Brothers crisis followed by the global recession. We would have to be facing another equally momentous kind of crisis for a similarly major market crash to happen now (and barely over 2 years we bottomed out from the last global recession).

Some point to the Euro debt crisis as this possible other event. I believe that the current Euro crisis is a bit overblown to a certain extent. Regardless or not whether the Euro will stay in its current form, or whether or not the Southern Europe countries like Greece, etc default and have to get their debt restructured, those are temporary shocks. Good companies in Europe will continue to produce goods and services which people value and they value will remain. A default and subsequent debt restructuring is actually not the end of the world. Many countries in the past have gone through debt restructuring and the world has continued to move on. Europe, with its hundreds of millions of people, isn’t going to magically disappear off the face of the earth just because some of the weaker countries have overspent and now have to face the music for their overspending. So, keep a cool head, now is the time to look for some bargains and not the time to panic.

Invested $1500 and switched more to equities

Fear is very much prevalent now, with markets sliding every other day, and big drops too. But when there is a lot of fear, it usually means it was a pretty good time to buy. Valuations now are cheap. Even if you have no faith that the western countries like US and Europe can get their act together, Asia will still continue to grow and expand because we have reached a certain critical mass now. While markets haven’t decoupled and if western markets continue to fall, Asian markets will also be affected. However, Asian markets will rebound much faster simply because fundamentally, Asian economies are on a much stronger footing.

I bought another $1500 into Aberdeen Singapore equity on Monday and switched another $11,700 into Aberdeen Asia Smaller Caps as well (the switch buy will take place today on Thursday). As of now, I have switched 2 out of my 3 bond funds into equities. I only have the Fidelity Asian High Yield Bond Fund left. Will wait and see before I commit to switching that. So far, markets are down easily 15% from their peak this year. If it drops further such that we hit bear market territory and the market is down 20 to 25%, I will switch my last bond fund into equities.

I believe the market crash this time round will not be as big a fall as during 2008. Overall valuations of stock markets were much higher then and we were coming off a period of a few consecutive bull run years. This time, for western countries, the economy had barely started to recover, and after a rebound year for Asian markets in 2009, 2010 was a fairly mild year. So, the down side is not that large. In fact, stock markets weren’t really expensive even to begin with before this while crash started, and now they are looking cheap.

We just went through this 2 to 3 years ago. The best time to buy was when everyone is selling in fear. Because no matter how bad things look, markets will eventually recover. If we recovered from the Lehman Brother’s crisis that last time, then we will recover from the US downgrade crisis this time. Actually, US being downgraded to AA+ in itself isn’t even a crisis, because everyone is still willing to lend US money and nobody reasonably expects the US to default on its treasury bonds AA+ or AAA otherwise. But markets are nevertheless falling to this, and sometimes, when enough people sell, it can be a panic onto itself. Right now, fear is prevalent. So, right now, I am buying.

Just added $5000 into portfolio, bargain hunting!

I couldn’t resist it. I had intended to place most of this latest investment of $5,000 into DBS Enhanced Income Fund. But the crash in the US stock market yesterday (4^th August) and the subsequent crash in Asian markets and the Singapore market today caused me to change my mind. Instead, I placed all $5,000 into equities.

If I had the option to postpone my renovation and move to next year, then I would be using the amount I have placed into the DBS Enhanced Income as well into equity funds now. Instead what I have also done is to switch around $14,500 worth of my Fidelity High Yield Bond Funds into equity funds as well.

Thus, my transactions for today (already placed) are as follows:

Buy Aberdeen Asian Smaller Companies - $4000

Buy Aberdeen Singapore Equity - $1000

Switch sell Fidelity High Yield, buy Fidelity Asian Special Situations. (intra switch) – around $14,500 worth (full switch of all units from one fund to another).

Nevertheless, its times like this when I am glad I do have a diversified portfolio which includes both bonds and funds like the Man AHL Trend Fund. Thus, when the market is high by a drop like yesterdays, then I can bargain hunt. Thus, I am increasing my weightage towards equities.

There wasn’t really any particular event that was driving down the US market. A selloff became a rout and before and the US market ended the day down over 500 points, over 4.3%. Asian markets today are reacting to the drop and faring just as badly, with the STI index down 100 points at midday. As I don’t see any major change in fundamentals, the drop makes valuations all the more cheap and thus it’s an attractive time to enter the market, which I am now doing.

An interesting mention about the Man AHL Trend fund. I must admit I was not very impressed by its performance so far as it trended down since the start of the year. It was a managed futures fund which was supposed to be lowly correlated to equity markets movements or even opposite. However, over the last one month, it was up more than 5%, and I expect that it should do well during this couple of days when there is so much volatility. So, it shows that it can be very useful to be diversified into different assets. Thus, when one category of your assets fall and you want to pick up cheap bargains there, you have the leeway to shift from other assets into that asset. This is just like how I am shifting assets from bonds into equities right now to take advantage of the cheap markets on offer now. The more panic there are in markets, the more we need to keep a cool head and look out for bargains.

New Measures to Safeguard Investors

Our regulator the Monetary Authority of Singapore has released new measures and enhanced requirements aimed at safeguarding the interest of investors. These measures apply to unit trusts as well as other financial instruments and will go into full effect starting next year.

Under the new measures, a customer knowledge assessment is needs to be conducted by all distributors in order to assess on whether the consumer has the relevant knowledge or experience to understand the risk and features of the product they are buying. If he fails this assessment, then MAS will not allow “execution only” service to be provided.

This impacts online distributors like Fundsupermart is a major way due to our business model, which is essentially “self execution only”. Online unit trust distributors like Fundsupermart essentially function like online stock brokerages, except that we apply to unit trusts instead of stocks. The customer goes online, does the research himself, and then executes his own unit trust trades. It is generally all “self execution only”.

Now however, with the new measures, all distributors, including Fundsupermart will be performing customer knowledge assessments on our customers. If you pass the assessment, then well and good, you can still proceed with putting through the trades yourself online. However, when you fail, you will be stopped from “self execution” trades. Thus, literally, distributors are required to stop you from proceeding if you are assessed to have failed.

The criteria to fufill the customer knowledge assessment is also very exact. The education and work experience requirements are very specific and such that we expect that only a relatively small proportion of investors will meet either the education or work experience requirement. The transactional criteria is the easiest to meet. This criteria is that the customer must have placed at least 6 transactions in unit trusts or ILPs over the last three years (can be from different distributors). So what will be the impact of all this for unit trust investors?

For the investors, it will clearly result in increased protection. The new customer knowledge assessment is required to be done on all investors investing into unit trust. Furthermore, if they fail the customer knowledge assessment, then they can only be allowed to transact with accompanying investment advice. This will likely have to be provided only by a specialized type of advisor who has the relevant expertise. There will be new procedures that must be added to ensure that these new regulations are met, hence investors might find it more cumbersome to transact in future.

For online platforms like Fundsupermart, the industry impact on this is that we expect business costs to go up. Compliance costs and the accompanying IT costs of implementing this will result in increased cost of doing business, especially in the online unit trust distribution space. As a result, players in the industry may become less keen on the online unit trust distribution business. Some may even choose to drop out of this channel of distribution entirely. (One of our online competitors has already ceased business). Even if there is no reduction in players, its possible that there may be few new distributors interested in entering this area of online unit trust business over time.

This may actually be an advantage to the incumbants in the business. For a market leader like Fundsupermart, for example, we will of course fully implement this and if we have to incur the increased costs, we will go ahead and incur them. Thus, for example, our IT systems are already being changed and modified to accommodate the new compliance changes, and we have hired client investment specialists who will be the ones who provide investment advice to clients who fail the customer. We are committed to this online unit trust business. Others, though when faced with the prospect of implementing this change to their systems or the increased costs, may reconsider. So, we may see some increase in our market share as a result of this. A new entrant to the online business, for example, will generally have much more new customers who will likely fail the customer knowledge assessment. Whereas an existing incumbent like Fundsupermart would already have a large number of clients who have the required number of transactions to meet the investment experience criteria (which is at least 6 transactions over the last 3 years).

Overall, the exchange for all this is increased consumer protection. Like it or not, consumers and distributors alike will all have to adapt to the new measures by the start of next year. We will all need to be ready. Personally though, I believe that regardless of additional measures implemented, the best protection is still educating yourself. All the best investors took their own knocks by putting their own money on the line and learning from their mistakes as markets went up and down. No amount of regulation can guarantee zero losses. In fact, I have never heard of a successful investor who has never ever lost money on a trade before. Even the professional fund managers just aim to get their bets right 60% of the time, which means that they are wrong 40% of the time. The truly successful investors are the ones which picked themselves up and learnt from their mistakes over the years. Its like riding a bicycle, before you can breeze along, you would have first fallen numerous times before you found your balance. No amount of hand holding can prevent that. Thus, my personal take on these new measures is that in the end, as investors, educating ourselves, becoming an experienced investor is our own best way of protection.

Europe finally getting their act together

To be honest, after so much recent dithering by the European leaders, I was not expecting that much from this emergency summit. But I think the threat to Italy and potentially other countries have finally shaken them enough to get their act together. They have just announced a 109 billion Euros bailout package deal for Greece. More importantly, the 440 billion Euro rescue fund which was established last year was given broader powers to help prevent the debt crisis from spreading further. Also, the bailout package allows Greece to roll over maturing debt and pay a lower interest rate on its loans, and private investors will be required to take some losses for the Greek debt they hold.

This is effectively a restructuring, but somehow, it will be a restructuring without necessarily being called a credit event, or a default. Also, they are finally getting together to act in concert as they give much broader powers to the 440 billion Euro rescue fund. In return, it is a given that countries which are financially weak will be scrutinized much more closely and asked (if not forced) to get their house in shape.

While I hesitate to say that this will at once solve all of Europe’s debt problems, it is a good start. The crucial thing is that after weeks of wrangling, Europe is finally coming together in agreement to find a joint solution to this. Right now, the fears over Europe’s debt crisis is probably the single biggest sword hanging over investor’s heads which has resulted in the large swings in stock markets in recent weeks. The sense that European leaders have finally set aside their individual agendas to act for the common good of the whole of Europe will give markets a big confidence booster.

In the weeks to come, if investors can see that Europe is serious about coming together to tackle its debt crisis, we will see a shift in investor sentiment. There may be a substantial rerating of European equities. Not just European equities, US and Asian equities are also relatively cheap at the moment while earnings remain strong. I have been saying that I believe the second half will see a substantial rebound in stock markets globally. This give me even greater confidence now that this will happen. The upcoming months will be an interesting one.

Savings in General

It’s important to save and invest in general. But it’s often one of the hardest things to do. For most, it would be far easier and happier to spend money that it is to save it. Saving money usually means you have to forgo some nice things. And the problem is, the more you save, the more nice things you can buy!

I personally feel that leaving money in your savings account with the intention to invest it once it has accumulated to a certain “amount” is a little counter productive towards actually saving unless you have a lot of discipline. The money sitting there is just too tempting because it is just so easy to access and use. Chances are before you reach your “target” where you will invest it, you would have spent at least some of it on something already.

Furthermore, such savings give very little interest. Singaporeans are currently getting barely 0.12% from leaving money in their savings account. So, if the intention is to accumulate that money until you have a decent amount to invest, then while you are still accumulating, you are earning essentially nothing. And all this while every time you look at that account balance, you will be tempted to spend some of it!

Using dollar cost averaging by adopting a regular savings plan is a good way to instill some discipline to this whole process. This is called paying yourself first. A regular savings plan which can be done with most unit trusts will automatically deduct a specified amount each month from your bank account and invest that into a unit trust. If you are willing to bear the higher risk and do a regular savings account for an equity fund, it’s actually a good thing in the long run because the monthly deduction ensures that you will buy more units when the unit price is low, and buy fewer units when the unit price is high.

Even if you would rather still accumulate because you want to time the market better, you can also choose to do a regular savings plan into a short duration bond fund like the DBS Enhanced Income fund, or the United SGD Fund. These are only just slightly riskier than leaving money in a savings account, but their returns historically has been significantly better than what you get from savings account. Then once you have accumulated enough, or when you think its an appropriate time to enter the market, you can then utilize the amount you have in the short duration bond fund.

Not only does this instill discipline, it also solves the problem of seeing you bank balances grow and getting tempted to spend all of it in a buying spree. It also requires one more step. You have to liquidate your investments first for the money to go back to your bank account, and you will of course think more carefully as you are doing so. Saving in the end is about discipline and being willing to forgo some nice things in the short term for longer term gain. It’s hard, but it’s a necessary step towards building up your wealth. And utilizing regular savings plan is a great way to help instill the discipline to save. I put my wife on a regular savings plan just so that she will regularly set aside money to invest, and this way, both she and I don’t have to worry so much about the timing of her investments.

Added 4k to my Portfolio

Markets were generally up this week, with positive economic data from the US on Thursday night driving Asian markets higher. An upward trend will form in the second half of the year as markets see a rebound. It’s a new quarter, and people can leave the second quarter behind. It was a quarter plagued with Japan being hit by natural and man made disasters, Europe’s debt crisis flaring up again and the US economy also running into a soft second quarter.

However, overall, my portfolio was just 2.3% over the last 3 months so I really have no grounds to be feeling down. In fact, with a lot of the worries now behind us, the second half of this year is looking good and I am confident that equity markets will make up for the lost ground.

I added another $4,000 into my portfolio today as follows:

DBS Enhanced Income Fund - $3,000
Aberdeen Asia Smaller Companies - $1,000

Now, the reason I am adding so much more to a short term duration bond fund has nothing to do with how I see markets. Given a choice, I would certainly rather add most of it to equities. However, my new home is almost about to TOP, and that means spending money time is coming up! So, I continue to add to a very low risk fund like DBS Enhanced Income, but one that will still enable me to beat normal savings accounts returns. Thus far, the DBS Enhanced Income is already up more than 1.4% year to date, which no matter how you square it, is a lot better than 0.1% I am getting from my savings account or a possible 0.43% if I had placed it into a 12 month fixed deposit. Furthermore, it demonstrated it resilience over the last 3 months. Despite volatile markets during that time (I had one equity fund which was down nearly 10%), the DBS Enhanced Income fund was up 0.14% over the same period. So, for money which you know you are going to take out within a couple of months, like my case, its just more prudent to keep it in a parking facility type fund like the DBS Enhanced Income.

Anyhow, I am looking forward to getting the keys to my new home, and for a much better second half of the year for equity markets!

Markets are rebounding!

Last week confirmed the trend that markets are now rebounding from their lows caused by the uncertainty over the Greek debt crisis amongst other things. As the Greeks pushed through with their austerity measures, IMF agreed to the additional loans to Greece. This alone was a strong stabaliser to the markets.

I said two weeks back that either way, they will sort this problem out, or the markets will force them to. And now that Greece at least as enough funding to last it until the end of the year, markets will move on. Positive data from US manufacturing also helped boost last week’s sentiment. The decisive victory by the opposition party in the Thai elections has also brought much needed stability to the Thailand political landscape and with the military saying they will not step in, things are also looking up for Thailand.

I am confident that the second half of 2011 will see a strong rebound by markets. We may already be seeing it starting to happen now already. But basically, despite worries about Europe, about the US economy, and China tightening, plus Japan being hit by the tsunami, Asian markets held up alright. Some were down just marginally since the start of the year, while others were flat. The key reason why I believe there wasn’t that much downside was because markets were already cheap to begin with.

Rarely have we ever seen markets which are seeing such strong earnings growth being priced so cheaply. Rarely have we seen such strong economic growth numbers tempered by such caution and even outright pessimism. Looking at the performance of the Singapore market as an example, would you have believed that our economy just did 15% growth last year, and that even this year we are looking at 4 to 6% growth? The kind of breathtaking economic performance of Asia’s many countries should have seen markets in Asia hit all time highs by now, but most Asian market is off their all time high some as much as 20 to 30% off.

Thus, I was not so worried even when the worries in May and June brought some corrections in markets. Fundamentally, I felt that the US economy was just hitting a soft patch and the latest economic data appears to reaffirm that. Europe’s debt crisis will take a long time to sort out, but the key thing to remember is that Europe’s corporate health is very different from the fiscal health of its governments, and even there, there are key differences. Greece’s economic health cannot not be compared to Germany’s economic health. Also, not every single European company is drowning in high levels of debt and facing high interest rates to roll over those debts.

Markets are outright cheap at this point in time. Even developed markets are trading at PE levels of 9 to 12 times forward PE for next year. And Asian markets, even with their substantially higher growth and strong balance sheets are trading at only slightly higher valuations.

Another key thing which has me confident that the best is yet to come is that oil prices are moderating. At the earlier part of the year, we were looking at oil prices of above $110 USD per barrel at one point. But since then, they have fallen to below 100 USD per barrel. This is significant because very high prices are the one thing that can potentially derail Asian economies which I worry about. This is because Asia’s strong growth has already caused inflation to become a worry, and high oil prices will only fuel inflation further.

Thus, I viewed the recent drop in oil prices with no small amount of relief as this reaffirmed my view that Asia’s economic growth would be sustainable. In fact, the many measures taken by the various Asian governments against rising inflation would have the long term effect of allowing the upcoming economic growth period to be a much more sustainable as opposed to one driven to a short but dizzy height due to asset bubbles forming, only to see it crashing down soon after.

The next upcoming 3 years at least will be good ones for Asia. The shift of economic centre from the west to Asia will only hasten. Amidst all this, it is a matter of time before stock markets in Asia also rise to take into account the growing importance of Asia’s markets. Amidst all this, one just needs to be patient. When the rebound in markets come, as what we are seeing now, I fully expect it to be a significant one. Asia’s markets have been depressed for too long taking into account its very strong fundamentals and cheap valuations. The west may have reason to be cautious, but Asia should not.

As long as one is well diversified, you can be quite confident entering markets at this point in time. A lot of the fears and concerns are old news already and well priced into the market. Just don’t leave out bond funds from the equation when investing and you should be able to handle any of the relatively short and small corrections which will occur every now and then in the coming 2 to 3 years. Asian and emerging market bonds will be very interesting as well in the coming 3 years. If the growth of Asia’s economies makes Asian equity markets look attractive, then the weakness of the west’s public finances make Asia and emerging market debt look like “must buys” when ranked up against western debt.

It may take a while, but in time to come, the markets will price all this in. Asian markets should cumulatively be of a much bigger market capitalization than they are today. In a similar vein, it is unbelievable that some western countries can still have their debt being priced and treated as AAA grade and some of Asia’s debt is still being viewed as “emerging market” and hence being assigned a lower credit rating. Whether by the continued long term inflows of money into Asia, and the appreciating currencies, stock markets, or bond markets, the markets will eventually correct this disparity. And as they do, the investor who is positioned correctly will gain from this.

Markets Are Looking Up Again

It's odd what sometimes just one week can do. Last week, the STI index was at around 3000 points, and many were wondering if it would go lower. Markets are much better this week. The Greece crisis has now stabilised as European Union leaders agreed to launch a fresh bailout package expected to total 120 billion Euros for Greece. The condition is that Greece passes through an austerity package next week, and unless they want to be broke by mid-July, chances are it will be passed through.

The Federal Reserve had a press conference on Wednesday where they reiterated that interest rates will be kept at the current near zero levels for an extended period of time and when asked how long that is, Ben Bernanke specifically said “at least two to three meetings … and I emphasize at least”. Ben Bernanke also repeated their view that they expected inflation to fall.

The calm and confident press conference given by the Federal Reserve has helped to calm markets worried over the pace of the US economic recovery and over potential rising inflation.

In any case, the recent pessimism in markets has also had the effect of driving down oil prices. In addition, the International Energy Agency had announced that its members would release 60 million barrels of petroleum into the market, causing a further drop in oil prices, with the Nymex WTI contract price for oil dropping to 91.02 USD on Thursday. The lower oil prices will be welcomed by Asian countries which are still grappling with rising inflation.

Overall, markets are recovering this week as investors gained much confidence that the world is not headed off into some crisis in one form or another. As I mentioned in my blog entry one week ago, it's important to control your emotions when markets are down, sometimes the best bargains in fact can be found after a bout of bad news had driven the market down. At current levels, and if the concerns remain pretty much the same concerns which have been plaguing us since last year (Europe debt crisis, oil prices and inflation, China tightening and US growth potential slowdown), then I am confident that downside for markets will be limited because valuations are quite cheap at this point. Upside on the other hand, can potentially be quite substantial because we are certainly still in a very cautious mood, so the swing back towards a bullish market sentiment will be a big one.

Controlling Your Emotions

Its been a tough few weeks in stock markets. A combination of things including Greece debt woes, worry over the US economy and China tightening has combined to keep downward pressure on markets. Year to date, a fair number of funds are in the erd, though not by a large percentage. Most are down 5 to 8%.

It is time like this when investors’ patience are tested the most. Take heart in that most people invested into equities. Only those that have stayed in bond funds and short duration bond funds are relatively happy at this stage. Even so, Its not the time to panic. Controlling ones emotions is probably the most crucial at this point. Markets can and will eventually rebound, but selling out when they are depressed runs the risk that when they do rebound, investors will be caught out.

Frequently, when the market rebound happens, there is no particularly significant event that can forewarn investors. Its literally quite possible that 4 months on, we could still be facing the same issues of China tightening, Europe grappling with debt woes and a US economy which is not exactly roaring ahead. And yet, it is also quite possible that with the same environment, there is a market rebound. This is like what happened in 2009. In the aftermath of the Lehman Brothers crisis, the rebound started in March 2009, and yet at that time, was the situation different from 3 months ago in December? It was not.

There was no clear indication at that point in time that the global economy was rebounding. I remember back in March people were still talking about a L shaped recovery. Everyone was still struggling and the economic indicators coming out then were horrendous. Yet, March saw a very significant rebound. And by the time economic indicators appeared which showed a recovery, that was many months later, and a lot of the market recovery had already happened.

Valuations are cheap at this point, and that is precisely because here are so many concerns worrying investors at this point. But this is an environment which an investor should actually be more comfortable with when investing as opposed to one which is all rosy clear blue skies. You know that with the current pessimism out there, you are not buying into equity markets expensively.

Just make sure you are diversified, with a certain amount into bond funds which can given you some stability through this, and wait out this current time. Some of the best bargains are found when people are fearful. And while I would not say that we are at the maximum fear stage at this point, we are certainly further within that spectrum then in the “greed” spectrum currently.

Invested Another 4k Into Portfolio

Investors are nervous this few weeks. The nonfarm payrolls data coming out of the US were well below expectations. 54,000 jobs created in May is a bad number no matter how much you spin it, especially when there are 13.9 million people out of work in the US where unemployment rate remains at a high 9.1%. The ongoing problems with Greece doesn’t help. The market can quite clearly see that Greece will need some of its debt restructured no matter how unwilling the EU is on the matter. And given the lagging nature of economic data, the numbers currently coming out of Japan which are mostly for April will be horrible since April will see the full impact of the triple disasters that hit Japan.

Despite all this though, I still put in $4,000 into my portfolio. $2,750 went into the DBS Enhanced Income fund. No matter what, I am still moving into my new place at the end of the year, so saving up for the renovation and the move will continue. The other $1,250 went into my Parvest Europe Alpha fund. The reason being that my portfolio remains heavily weighted towards Asia, and I am finding Europe interesting now.

It's not that Asia is no longer attractive. If it wasn’t I wouldn’t have so much of my portfolio into it. But Asia’s the “safe” investment bet actually. Everyone knows the long term growth story for Asia. And the shifting of the economic centre from the west to Asia will happen this century. It’s a matter of time, and as it happens, so will the market capitalization of Asia rise relative to western markets.

However, Europe is interesting to me currently because it is the beaten down market that nobody wants to look at. Because of Greece, nobody wants to touch Europe with a ten foot pole. Europe equities are not for the faint of heart right now. There is so much uncertainty. It has been one year already since the Europe crisis started, but its like an ongoing train wreck. However, that’s why its interesting. Will this all end badly for Europe? Nobody knows at this point. But there are a lot of people who would have much vested interest at least not seeing Europe spiral down into a financial disaster that will rock other markets as well. Also, while all this uncertainty remains, good companies in Europe, which are not going to be affected in a major way are being traded at low valuations because of the overall negative perception of the region right now.

There remains a lot of negativity with most markets right now. That also means that there is opportunity. A lot of equities are not showing their true value yet. Many companies are actually making a lot of money. They are cash rich, have surging sales, and their costs are not necessarily going up that much since they are not aggressively hiring. (They don’t have to since its an employers market in the west). The situation at the corporate level is very different from the debt ridden governments of the west who have to tackle massive deficits. Many markets are at record high earnings, and yet their market levels are well off their all time highs, as much as 20 off. This means that there is a lot of caution and negativity priced into markets already. And we have seen that because from last year till now, it has been all about the European crisis, whether the US economy can get back on its feet again, China’s rate hikes, and we can now add Japan’s triple disasters to the long list of worries as well.

However, a lot of this are priced into markets. Valuations across the board at this point are not expensive. The last time we were seeing such record high earnings in 2007, people were celebrating. Valuations were much higher. Today, even though earnings in many markets have risen back to the same level, and in some markets even passed it, people are more inclined to be cautious instead. Markets are at least 20% off from the 2007 all time highs. But eventually, I believe these concerns will eventually ebb and sentiment will shift towards the positive. Especially as earnings of companies continue to remain strong. But it is when these concerns are still strong, that’s when good bargains are there to be had. When there is no more uncertainty, markets would have zoomed away already.

So, I am happy to put in more now while markets are still cheap. I would have put in even more if not for my house move at the end of the year. (But let’s not get greedy here either, nothing is a sure thing and no matter what, I can’t tell my wife we can’t afford to move at the end of the year!). So, I will continue to put the bulk of new monies into short duration bond funds for now. After I have settled into my new place and paid for all of the renovation and moving expenses, then I can see to putting my monies to harder work in riskier markets.

On Singapore and commodities

A bit more of a Singapore focus. Now that the general elections are over, we have various economic data and news coming, all of which point that Singapore’s growth this year is likely to stay relatively robust. For starters, Singapore’s domestic wholesale trade increased by a seasonally adjusted 10.3% in the first quarter compared to the 4th quarter.

Singapore’s economy as measured by gross domestic product (GDP) grew 8.3% in the 1st quarter this year compared to the 1st quarter of last year. The strong performance was better than expected and comes off 2010, where in itself, Singapore’s economy grew by a record 14.5%. On a quarter on quarter basis, the Singapore economy grew by a huge 22.5%. The ministry of trade and industry has now revised our official 2011 growth forecast from 4 to 6%, to a range of 5 to 7%. I personally expect it to be revised up further again as we go along.

The two integrated resorts have had a strong positive impact on tourism and with the higher number of tourists, this has increased spending in Singapore. The gradual recovery in the global economy has also helped our export oriented industries and thus, the manufacturing sector has led the way for growth in the first quarter, surging by a massive 75.4% quarter on quarter. We remain quite positive on Technology this year as consumer demand has been very robust and will allow the sector to continue to grow strongly even after the inventory restocking has been completed.

The commodities market in recent weeks have suffered a rather large hit, and some investors are exiting this sector. Increasingly, I believe there is some rotational play as investors run from one asset class to another in search of returns and yield. It can be rather dangerous to play follow the herd, and I would not recommend doing such rotational play. It is generally very hard to predict accurately why and when a sector might come into favor or fall out of favor. Certain asset classes like equities and bonds are so called “evergreen” so they will always have a place, and they are large enough such that such hot money stampeding in and out will not cause as big a swing in prices as compared to commodities. I personally feel that the huge volatility in commodities have been driven not by fundamentals or demand swings but more by this speculative hot money flowing in and out of the sector.

I am actually a bit relieved that there is a correction in commodity prices now. This is because it will take some pressure off the rising inflation experienced by many Asian countries in this part of the region. More than anything else, I feel that overly high commodity prices, driven up not by demand, but more by speculators will impede and pull back Asia’s economic growth.

Markets are gradually swinging back into an uptrend again, though there continue to be hiccups now and then. The latest include the focus on IMF’s chief, which was charged with sexual assault. Ultimately, such news are short term noise which will not affect market fundamentals. What is happening is that many companies continue to report strong earnings. The overall mood now is still very much one of cautiousness, which is why I still believe the best is yet to come. Many markets, including Asian ones, as well as Europe and the US should not be seeing such low valuations based on the strong earnings which companies are reporting. Investor sentiment can and will change, and my portfolio is already well positioned to catch that uptrend when it comes!

One of our Competitors has closed down

Ordinarily, you would think that being the general manager at Fundsupermart, I should be celebrating that one of our online competitors have closed down. I am not. Its actually a sad event. Finatiq was one of the earliest distributors online along with us. They were a few months earlier than us. I remember the excitement when we both started out in the industry with the slogan that our sales charge was half that of the industry norm (which was 5% at that time).

It has been more than ten years already, within the blink of an eye. I believe we have had a big impact on the unit trust industry, and we have brought sales charges of the entire industry down over the years as well. But they are now ceasing as a business. Truth to be said, none of the unit trust distributors are earning big bucks. If we were, I don’t believe Finatiq would have had to close down. In fact, the traditional online unit trust distributor business model has and needs to change because it is unsustainable in the long term.

There are only two platforms in Singapore – iFAST Financial and Navigator. Fundsupermart belongs to iFAST Financial, and Dollardex belongs to Navigator. Navigator, if you look at their financial statements, have been losing money every single year since 2004, with the exception of 2007, which was a huge bull run year. And they have been losing money in the tune of millions, not thousands.

We have been slowing bleeding each other, as we aggressively cut sales charge over the years. It started at 2.5%, but look at where we are now - there are fund promotions where we are giving 0% sales charge on funds. Investors have been huge beneficiaries, and they are happy. But again, everything is a business. There are directors and shareholders to answer to. How do you justify a business if it is losing money every other year?

I did not wish for Finatiq to close down. In fact, my first purchase of a unit trust was through Finatiq! It was only after I joined Fundsupermart that I made all my unit trust investments through Fundsupermart. I am sad that they have closed down. This industry has been a cutthroat one.

People complain about inflation over the years, about how a bowl of Mee used to cost $3, and it now cost $4.50, even $5. The case has worked in reverse for unit trusts. 5% sales charge became 2.5% when online distributers entered the fray, then it has now halved again to 1.25%, and the trend is that it will go even lower. So, while everything from rent, to electricity, to people’s salaries have gone up, sales charges keep on coming down. This is akin to the bowl of mee costing $3, coming down to $1.50, then $0.75, and still going lower!

And has the product changed? It has actually improved! There are much more funds now investing into all sorts of asset classes. There is free switching. There are more online tools. More articles, more webcasts, more research, and even an iPhone app! All these have made unit trust investing much better than it was in the past. But all these have been done while sales charges have now shrunk to a fraction of what they were originally. This is as if that bowl of mee has not only seen its prices drop from $3 to less than a dollar, but along the way, you got free entertainment, better ingredients and a host of other benefits on that same bowl of mee. Where can I find a bowl of mee like that for less than a dollar these days?

I don’t know what the remaining competitors are going to do going forward, but I see that such a business model in an environment of ever-decreasing sales charges has to change. Unless there is some sugar daddy out there happy to keep on pouring millions of dollars of good money into this venture, otherwise, at some point they will ask, “When is the business going to be profitable? When will the bleeding stop?”

And every business, no matter how big it grows, cannot run away from that fundamental fact, that in the long-term it has to be profitable or it will perish. How do you be profitable if all your costs (rental, salaries, maintenance etc) keep on going up, but your profit margin keeps on shrinking? It took us 5 years to become profitable after we started, if we had started with a sales charge of 1.25%, would it have taken us 10 years? How many shareholders are willing to put up with a company that has to lose money for ten years before it starts to become profitable?

For now, the online distributors have been content to keep on lowering sales charge in an ever downward-spiraling price war. But such a business model is unsustainable in the long-term and has to change. We were already forced to change our business model because we recognised the trend in this business and where it was leading us.

Eventually, our competitors will be forced to change their business models as well. Not unless they have some sugar daddy supporting them, and if they do, I would love to have his number!

Added In 8k More To Portfolio

Election fever is upon us! It’s exciting times for many of us, it’s the first time we have got to vote. Even for me, a true blue Singaporean that is past 35 years old, I think I have ever only voted once in my entire life previously only, and it was so long ago I hardly remember it. However, exciting as the upcoming elections are, markets still march on!

I just added a further $8,000 into my portfolio. A large proportion will go into a short duration bond fund since my plans to move at the end of the year remains unchanged. It looks like my new home will be finished sometime in July or August, and so, renovations (which is what I am saving up for) can start after.

This time round though, I am adding a new short duration bond fund, which is the new Aberdeen Asian Local Currency Short Duration Bond Fund. (It’s quite a mouthful to say!). It is being sold at 0% sales charge right now on Fundsupermart, and on top of that, Aberdeen is throwing in an additional 10 basis points wroth of units. This means that on my initial investment, I am already up 0.1% (and incidentally, 0.1% is what a savings account would give me after putting my money there for an entire year!).

Also, the Singapore dollar has been one of the strongest currencies in Asia so far this year, and that has probably not helped returns in bonds outside of Singapore, but this will not always be true. It’s simply not possible for the Sing dollar to year in, year out be the best performing currency here (won’t it easy to be a currency trader if that was so!). So, I believe the currency disadvantage which bond funds investing outside of Singapore bonds experienced would eventually even out. In fact, given that the Sing dollar is so strong now, it’s a good time to pick up investments which are non-Sing denominated.

I am adding my money into Europe this time round though, to even things out. I have too much in Asia already, and the last few additions into the portfolio has mostly been all within Asia equities (besides adding to DBS EIF). Europe is interesting because despite all the ongoing problems associated with its debt crisis (Portugal was the latest country to have to approach the EU and IMF for a bailout), the Euro has been strengthening this year so far. And despite all the negative news and hand wringing you see regarding Europe, Europe equity funds have actually been on the rise (Europe including UK equity funds on average are up 8.37% year to date, and the FSMI Europe index is up 4% over the last 3 months).

Let’s not forget again that despite the many troubles in Europe, some of the major powerhouse Europe countries like Germany are in a similar situation to Asia countries in the sense that they are actually growing so fast that they are starting to worry about inflation.

So, I will be adding my $8,000 as follows:

Aberdeen Asian Local Currency Short Duration Bond Fund - $6,000
Parvest Equity Europe Alpha EUR - $2,000

S&P’s Warning will not Halt the Bull

One of the biggest news this week ending 24th April was the credit agency Standard and Poors coming out to warn that there was a one third chance that America’s vaulted AAA credit rating might get toned down a notch over the net two years. The huge amount of debts chalked up by the government and the wrangling between the two parties which almost resulted in the budget not getting passed caused them to put forth this negative outlook.

But since it was just that, a warning, and they didn’t actually lower US’s credit rating. Markets only got rocked for all of one day, after which investors realized that nothing has really changed. Also, good news from the housing starts front, and Apple’s sterling earnings results drove markets right back up again.

US wasn’t wrong to spend the amount of money they did on those stimulus packages. It is showing dividends now with the US economy now back on track. While its true that every country needs to be financially prudent, when a country’s economy is in trouble and needs a boost, it’s the wrong time to worry about fiscal prudence. Look at the European PIG countries. Greece is facing as much as a lost decade of zero growth as the harsh measures aimed at balancing their budget was implemented almost overnight as a condition for them accepting a bailout. US is fortunate in that it is not in such a dire situation, nor will it have to worry about it. The USD remains the main dominant trading currency and China is unable to find any other entity or country which it can sell the 700 billion in US treasuries it holds. That means that US is the only country which can be print money, issue tons of debt, all to bring its economy back on track of recovery.

The long term consequences are that the USD will fall, but at this point in time, America doesn’t care about that. If anything, it makes their exports cheaper. There will also be a continued move of monies into Asia searching for yield, as investors factor in the relative fiscal strength of the Asian countries compared to Europe and US. Thus, Standard and Poors warning is just that – only a warning. It is unlikely that they would actually lower America’s credit rating. Even if they did, it would be something which all bond holders and investors have already known for a while by now, that US would never have warranted a AAA credit rating if not for its unique economic, military and financial importance globally.

Over the next one to two years though, I believe it will still be earnings that will drive stock markets. Already, as seen in the past few weeks, many of the issues like inflation, China interest rate hikes, oil prices, middle east unrest, Europe financial crisis, potential US economy weakness has all been seen to be well factored into markets already. And despite it all, corporate earnings have continued to grow. The latest, from Apple, showed that US companies, contrary to what people think, are actually racking in ever more money. Apple reported that earning almost doubled in their latest quarter. Needless to say, the stock price went up, and helped to drive the tech sector as well.

Technology is seeing a resurgence and I believe there will be a rethink. The iphone, the ipad, facebook and social networks are changing the game again, just like how the internet, the pager, the handphone, and the notebook first changed our habits and brought about the technology boom which peaked in 1999. These changes are far reaching and I believe they will drive the technology sector in a big way over the next 2 to 3 years.

I continue to like the Technology sector and my view on US and Asia hasn’t changed (even if Standard and Poors is now more negative). There was some profit taking in the previous week, which can only be expected after the strong surge in the aftermath of Japan’s triple disasters. But markets are well back on track now, and I strongly believe that the uptrend we will see this year remains intact. There is still time, we are still only at the start of this phase of bull run. But it will be a bull run, and by year end, I think we will be surprised by the extent of the market’s surge by then.

The Wonders of Technology

The iPhone has changed the habits of my household. Even though only my wife and I each have one, it has become a key consumer product which my entire family uses. At work, it’s a phone, and on MRTs, we use it to serve the net, load up useful applications (or just game apps as well). It’s a lot easier to open up an app on a crowded MRT than it is to take a book or newspaper out and start reading. In fact, given the very heavy crowds I face during the morning rush hour and on return trips as well (The East West line is always packed), I often feel very embarrassed pulling out a book to read because I am afraid it will take up much needed “body” space in the press of bodies. Opening up a phone app on the other hand takes up far less space.

Once we reach home, we are swarmed by our two kids, and at this stage, they are old enough to play with some of the kids apps. So, nowadays, they are so excited to see us, and the first thing my son does when he sees us, is to ask for our iPhone…sigh. Even my mum in law likes the mahjong app which is on it as well, so we got an iPad (so that the screen is bigger), and she plays with that as well.

So, the iPhones are used so much that they have to be charged every day. And we continue to find new and interesting apps to use, or to play with. I now secretly double check the FSM app for the valuations and earnings growth of the various markets before I go on any TV interview so that I get the latest up to date values.

I think these new technologies sometimes bring people’s distances further though, if you allow yourself to get too caught up. Sometimes, my wife and I will be standing right next to each other, taking the MRT home, and we are both looking at our iPhones. Or we want to spend some time with our kids but they want to play with our iPhones instead!

In office as well, colleagues are so surprised when they find out I don’t have MSN, because they are so used to using that to communicate as well. Its just that for me, I want think human interaction is still the best, so if someone is only a few steps away, I would rather walk that few steps and talk to that person face to face than send MSN messages through the computer.

Technology is a great enabler, and I have no doubt that smart phones (including the iPhone) are changing our habits as we speak. So, Fundsupermart has to evolve with the times as well. It’s an exiting time for all of us, where we live in a great era where technologies can move so fast that gadgets and habits can change several times within a lifetime. The pager has already gone extinct, and who knows if the laptop is on its way out (with the iPad and similar gadgets) taking its place. The handphone has become much much more than just a phone now as well.

The same goes for companies and for people as well. Everyone has to keep on moving forward. To stand still is to risk being left behind.

A Signal that the Bull Market is here

One would have thought that last week would have been a terrible week for stock markets. We had China raising interest rates for the 4th time since last October, ECB also jumped into the act, raising interest rates by 0.25%, Portugal had to go to the EU and IMF requesting to be bailed out, and to top it off, long suffering Japan experienced a 7.1 scale earthquake “aftershock”. However, Asian markets, including the STI index has been going from strength to strength this week, and almost all markets are higher on Friday close compared to where they started out on Monday (including the Japan Nikkei 225 index!).

What is happening? The key thing is that many of these news have all been factored into markets already. The first time something unexpected happens, it hits markets, people worry about it, and markets react. But the second time, the third time something similar happens, markets will hardly react to it because they worried about it so much previously the first time already. And often, the concern was overdone. The first time China hikes rates, markets feared on whether its economy would stumble into a halt. Now, 4 rate hikes later, and with the China economy still showing strength, China markets no longer react when a rate hike is announced.

Similarly, the first time the European financial crisis took hold, there was a substantial dip in global markets. When the second country went to the EU and IMF for money, there was a reaction too, because it seemed to affirm worries that this might spread. But by the time we come to Portugal requiring a bailout, markets have long moved past this because the previous round, they were worrying whether all the PIG countries and even Spain would require a bailout, so this news is now having little impact on stock markets here.

Japan’s 7.1 scale aftershock last week also did not stop markets from their upward move. It was far milder than the scale 9 quake, but it drove workers temporarily from the stricken nuclear power plant. Nevertheless, even the Japan market itself also ended the week higher.

I believe we are going into bull territory now. When you have so much negative news happening in one week, and yet it fails to faze investors, that means that most of these bad news are already priced in already. So, if that’s the case, it would take something totally new, unforeseen to cause further negative reaction. Otherwise, if more news going forward is still on things like China tightening, bailouts in Europe, or the Japan nuclear power plant, then these are not going to prevent markets from their upward trend going forward.

But there will not be a trigger or event for a bull run. There never is. Things like improving earnings, a recovering US economy and Asia continuing to power ahead in growth are not one off events. They don’t happen over one or two days, nor are they dramatic in any way. So, if you are looking for an obvious event driven signal that the bull market has arrived, you won’t be able to find one. But for me, the past week of market resilience, and strength despite so much negative news happening in the week is that signal to me that a bull market is up ahead. By this time, I am already fully invested. I look forward to how markets will turn out in the coming months with great interest and anticipation.

Markets are Rebounding

Markets have started to rebound from the prior two weeks when the triple disasters in Japan were very much in the limelight. Actually, its not that overnight, there is no more danger of a radiation leak from that stricken nuclear reactor in Japan. Its just that after two weeks of worrying over the aftermath, waiting to see what happens, investors have come to the realization that while Japan continues to grapple with that nuclear power plant, life still goes on.

The key thing is that other parts of the world, and indeed, even other parts of Japan doesn’t come to a standstill just because there is a possibility of nuclear radiation spreading from the confines of the Japan power plant. People are still buying cars, electronics, going on holidays (even if they give Japan a miss for now), and going to work. Even in Tokyo, life goes on, though the rationing of power has admittedly affected some of the bustle there.

We are now seeing a rebound in markets as people reconsider the impact of what has happened in Japan. While admittedly it’s a tragedy, they are realizing that outside of Japan, any financial and economic impact is surprisingly minimal. Some areas or industries might even see additional business. Take for example Singapore tourism arrivals. The February tourist arrivals rose 15.4% to hit a record high of 990,000 (source Singapore tourism board). And the tourism board is expecting 12 to 13 million tourism arrivals in 2011. Did they come out with a revised down figure now in the aftermath of the Japan quake? No, they didn’t because if you are planning to visit Singapore, what happens hundreds of kilometers in a Japan power plant is hardly going to change your mind. In fact, some people who planned to visit Japan, may decide to visit somewhere else instead, and its possible they consider Singapore as well.

I think the outflows from Asia to the US, and the triple disaster in Japan has resulted in a previously overly bearish mood amongst investors in Asia. From a global standpoint, Asia has actually gotten more attractive, because valuations are still cheap, the growth remains high, and now one of our biggest export markets US is also picking up steam in its recovery.

For the Singapore STI index, I believe 3,600 is still within reach for end of this year and we haven’t changed our forecast for it to hit 4000 points by end of next year. Too bullish? Let’s wait and see. I think many Asian markets will surprise investors with their strength this year.

Added another 2k into portfolio

I added another $2,000 into my portfolio. One thousand set aside for DBS Enhanced Income Fund, and another $1,000 into Korea. Actually, I am not just bullish on Korea, I am bullish on Asia as a whole. The March triple disasters that happened to Japan was, in hindsight, exactly the trigger that was needed for markets to go into a full rebound phase.

Before this, we had tensions in the Middle East as an ongoing news, people wondering whether the economic recovery in the US was sustainable or not, whether China would continue to tighten and how that would affect Asia. There was some outflow of monies back to US. In short, the overall sentiment was just cautious with no clear direction.

In the aftermath of Japan’s earthquake, things actually look clearer. Why do I say that? Markets took a hit, and people had reason to be very fearful. And the cause was something you could see and track closely on the TV, with images of the devastation in Japan, and the nuclear power plant plastered across all major news channels. While scary in those few days, the worries have subsided, and markets have since rebounded and can now go into a full upward phase.

My reasoning is this: things don’t look so scary anymore. People are going to start saying “Hey, that was a 9.0 earthquake, followed by a big tsunami, and then nuclear power plant meltdown! If markets survived all that, what else could be even scarier?”

Furthermore, people looking at markets are going to start noticing, “Markets are now going up…is the worst is over? Check the earnings - earnings good? Companies doing well?” And they will find markets backed up by strong corporate earnings. The overall earnings of many markets are all up with some at record levels. Once this thought process sets in, and sense that the worst is over materialises, people will start looking beyond the disasters, and we will see a big rebound in stock markets.

Based on the strong earnings growth trends, markets should be much higher. Markets are cheap at this point in time, and global events, many of which have not substantially affected most of these corporate earnings at all, have largely kept investors cautious, at the sidelines, and downright bearish.

But we have now had a recent selloff - the Japan market crashed 17% within 2 days. Just as markets have a tendency to overcorrect on the downside, they also have the tendency to surge on the upside. I am confident that once we go into a full market rebound, the rise will be significant - not just 5% or 10%, it should be higher.

Markets like Korea, Taiwan, and China, which by right should have actually benefited as demand shifts away from Japan due to reduced production capabilities, actually sold off as well when the fear was at its peak. Now, we will see these markets come back with a vengeance. Look at Korea. Samsung markets everything from chips to electronics and is one of the biggest competitors to Japan’s chip makers and electronic manufacturers. If factories are stopped temporarily in Japan, and supply chain issues affect Japan manufacturers, Korean manufacturers like Samsung will be more than happy to step in and fill up the gap. Last I heard, there was absolutely nothing wrong with Korea’s factories, and they certainly aren’t stopping their production. If there is a gap, and they are asked to step up production, I am sure that they will be most able and willing to do so! So, if Toyota postpones its latest car release in the US because of the quake, then who gains? Hyundai gains because they are going to continue to go full steam ahead in selling their cars.

The only thing stopping me from putting even more money into markets now is because I am still on schedule to move house towards the end of the year, so the saving up for the move and renovation must continue. So, another $1,000 goes into the DBS Enhanced Income Fund and $1,000 also goes into the Lionglobal Korea Fund.

The LionGlobal Japan Growth fund which I bought $2,000 of last Tuesday at $0.532 is now trading at $0.593, or 11.5% higher. So, it was an opportunity buy which has done well. In hindsight, I wished I had placed even more, but let’s not get too greedy. I think the immediate short term profit to be made from the Japan equity market is now past because the Nikkei 225 index has largely recovered a lot of the big losses it suffered on the 14 and 15 March. However, markets like Taiwan and Korea which really should not have fallen, should now pick up pace as Asian markets overall all rebound. I believe the outflows from Asia back into the US is largely over, and so, I am very happy with the way my portfolio is positioned right now. I think things are going to look decidedly more bullish in the second half of the year as compared to now, and a lot of markets, including those in Asia, remain poised to surprise investors with their strength in this year.

Added 5k To Portfolio

Today was a tough day for stock markets. The Japan market, which was already down 6.1% on Monday, is currently down 10.55% on Tuesday. The Nikkei 255 index has plunged 1,649 points within the space of two days. Other Asian markets were hit today as well (most are down 2 to 3%), but none as badly as the Japan stock markets. People are very fearful today as the spectre of a nuclear meltdown at the Fukushima nuclear plant weighed strongly on everyone.

But I have observed over the years of investing that invariably, when the fear is palpable, that’s when it’s actually a good time to enter markets. If we were at the top of a cycle, then maybe it wouldn’t. But Asian markets have been slowly declining slightly since February. Japan itself is now down close to 20% within the space of a week. I wish I had more money to add in, but most of it is already invested. But I would still put in some money into Japan equity markets now. Today’s 10% drop was too big a plunge to not tempt me.

I consider it faith that the Japanese people will pick themselves up from this current triple disaster of earthquake, tsunami followed by potential nuclear incident and carry on. They are a very resilient people that transformed Japan into one of the most important economies in the world starting from almost literally nothing in the aftermath of World War 2. When you can pick yourself up after all of your cities have been bombed into ruins and you have had two atomic bombs wipe out 2 cities within a week, then I have confidence they will stand up again and recover from the triple disaster afflicting Japan now.

The unknown element currently causing the panic in markets right now is likely the uncertainty around the nuclear reactor at Fukushima. Especially for the Japanese people, who bear memories of the two atomic bombs, the current potential meltdown of potentially one or more reactors at Fukushima would be felt deeply. Thus, the reaction is likely to be more emotional and extreme. Radiation is something which you can’t see or touch and fear of the unknown can be far greater than fear for something more tangible.

Consider this. They have already evacuated people (more than 180,000) within a 20 km radius around the reactor, and Tokyo itself is close to 200 km away from Fukushima. No radiation fallout is going to affect people in Tokyo (in any significant manner). Nevertheless, people can be irrational when it comes to such things. But I believe the sell off today is overdone, so I added to my Japan equity holdings. So, my 5k addition today is as follows:

DBS Enhanced Income - $1,000

LionGlobal Japan Equity - $2,000

Aberdeen Pacific Equity - $2,000

The $1,000 into DBS Enhanced Income is because my plans to move towards the end of this year doesn’t change no matter what happens in Japan or to stock markets, so I need to continue to set aside money on an ongoing basis. The other 2k each into Japan and Asia is because I feel that the sell off today has made markets cheaper and more attractive.

The selloff may continue in the short term, such things are hard to say. But its also possible that a rebound happens after this. Nevertheless, at current levels already, things are cheap enough for me to add more, and if they do drop further, then I will add in even more. I am confident that investments made now will in hindsight be a good one after one to two years, though at this point in time, they seem to be a scary thing to do.

Natural Disasters

Received news on Friday that a huge magnitude 8.9 earthquake has just struck the pacific near Japan and a tsunami has followed after. Asian markets reacted immediately, as a knee jerk reaction since there will definitely be worries on whether other areas in Asia besides just Japan will be hit by a tsunami. The memories of the last tsunami in Asia that killed thousands is still fresh. The economic damage caused in Japan would have also caused the Japan stock market to plunge on Friday.

Having said all this, from a markets points of view, the reaction will likely be limited to just one day or a few days. While there will undoubtedly be widespread damage in Japan, and possibly other areas, along with many casualties, natural disasters usually do not have the kind of impact that an economic one would have. There is actual physical damage, and people die in natural disasters, unlike a financial crisis or an economic recession, but while markets may crash 30% or more during an economic slump, we are very unlikely to see markets crash like that just from a big earth quake, tsunami, or other natural disaster.

The human tragedy is often far greater for those immediately impacted by a natural disaster as compared to what happens during an economic recession, but the perverse thing is that the overall market impact is usually muted and short term. In fact, the rebuilding after the disaster usually spurs new economic activity, and that actually helps the sectors involved in the rebuilding after the disaster.

The human spirit is a very resilient one, and that is one thing that doesn’t change. No matter how hard a man made or natural disaster strikes us, we will eventually recover from it. But despite that, the human tragedies that happen during such times are always heat wrenching, and those personally affected will bear the memories for life.

The Imbalance between Asia and the Developed World

Europe and US markets have been outperforming Asian markets since the start of the year, so a well diversified portfolio would have benefitted from this. However, there are certain long term issues which are ticking time bombs for US and Europe. Thus, while I have been talking about being diversified into a global portfolio, and to consider alternative investments to hedge against equity risk, I would still have a long term underweight position for developed countries, and a long term overweight position for emerging markets, especially Asia.

These long term trends are also the reason why I believe that any flow of hot monies back to developed markets since the start of the year are temporary at best. The flow will soon reverse. Developed countries like US, US and many European countries are at this point in time fiscally unhealthy, compared to the Asian countries. This is not to say Asia doesn’t have its own set of problems and issues to face too, but in comparison, Europe, US and Japan have far bigger issues.

The biggest of which is the large amount of loans that these developing countries are taking up in order to continue to even function. Already, US is printing money at an extremely unhealthy rate, and both the EU and Japan are also sinking into ever more and more debt. There is nothing wrong with issuing more debt if you are perfectly capable of paying those obligations. But financially, US, many parts of Europe, and Japan are unhealthy. The amount of debt being accumulated is rising to levels which in the long term if they keep piling up, will eventually reach a stage where it would be unsustainable.

Unfunded pensions are another big part of the problem in the developed world (especially in Europe and in the US. These pension systems were set up during the good times when it seemed like the burden on tax payers would not be too much. But many were blank cheque promises to keep on paying people pensions as long as they were alive past a certain retirement age. The problem is that people’s life expectancy in developed countries has been increasing over the decades, and yet, the tax payers base has shrunk (with an aging population). Thus, pension obligations have ballooned.

These are ticking time bombs which are very scary to consider. But they also point even more to a necessary rebalancing in world finance and economics towards Asia ex Japan, which is a net creditor. It is amazing that even now, Asian equities generally form a relatively small portion of a global equities index, when Asia (even without Japan) already accounts for close to 30% of the world’s output. It is also amazing that even now, Asian government debt is still given a lower credit rating than debt issued by developed countries like the US. Ordinarily, you wouldn’t consider a person who is living beyond his means, and maxing out credit card after credit card, sinking ever further into debt as being a “safer” person to lend money to as compared to one who has a lot of cash reserves, and is making more than he is spending. Yet, if countries were people, then Asian countries would be in the second situation, and the US, would undoubtedly be in the first.

The only consolation we can get from the whole situation is that these are long term trends, and they aren’t going to blow up that soon yet. Its unlikely that the US will wake up tomorrow and suddenly find that no one wants to lend it any more money. Its issued bonds continue to be taken up. So, as long as it can continue to print money, and issue ever more bonds, nothing untold will happen …yet.

But what it does mean, is that the long term prospects of US do not look good. This is especially so considering all the debt issued by the US government. Strangely enough, I actually have more confidence in US companies paying off their debt, than I have in the ability of the US government to repay its debt. There are still many good US companies today, many of which are global in nature, and have strong businesses, cash rich, and who will have no problems repaying their debt. I can’t quite say the same for the US government (short of borrowing ever more money to pay existing debts).

There will be a rebalancing at some point. In fact, the long term strength of Asian currencies is already one way this imbalance is being addressed, the long term strength of Asian equity markets will be another. So, I continue to believe strongly in the prospects of Asian equity markets, and indeed, Asian debt markets as well. The only bonds I have in developed world today, are US high yield corporate bonds. I have more in Asian high yield, emerging market bonds, and I am starting to accumulate more SGD short term duration bonds as well. And even though I shifted some monies back to US and European equity markets at the end of last year, I remain heavily overweight in Asian markets.

The recent volatility and fund flows are temporary. In comparison, the long term imbalances between Asia, the developing world, and the developed countries like US, Japan and Europe are definitely not temporary. These are deep seated and eventually, some day, will become be resolved one way or another. And I believe that an upward trend in Asian markets (both equity and bond), in Asian currencies, will be one of the results of these imbalances are being addressed.

Added $1,500 to DBS Enhanced Income Fund

I just added $1,500 into the DBS Enhanced Income Fund. Is this because I am cautious about markets, given the shifting of some hot money from Asia markets back to US markets? No, it’s for a very different reason. I am using the DBS Enhanced Income fund as a savings fund for a relatively short term goal. I will be shifting at the end of the year to my new home. It’s a condominium in Bishan that has been under construction. Its expected to TOP sometime this year (rumors say end of 3rd quarter). We will likely make our big move near end of this year.

So, I have got one year (or slightly) less as a time horizon, and I need to set aside some money for it. Now, I could do two things. I can either invest whatever I save as per normal, hope that markets are to shoot up by the end of the year, and liquidate whatever I have to only at the end of the year, at the time I need money for stuff like renovation, furniture and things like that. Or I can setup a fund which is low risk, very stable, but at least still delivers a return better than the 0.1% that savings accounts gives right now.

I choose the latter. Not because I don’t believe this year is a bull run year (I do). But nothing is for certain or guaranteed where investments are concerned, and the problem is, the timing of my move is more or less fixed. There could be any number of factors which delay a full blown bull run this year. Sometimes, an unforeseen crisis crops up, and it could keep markets down for a couple of months. For most of my portfolio, it’s not an issue. If fundamentals haven’t changed, then I won’t shift anything at all. But for this case, the goal is not a movable one (not unless the developer runs into significant delays in completing the condominium). I can’t very well tell my family.

“Sorry, markets are still down, I am waiting for that best time when they have surged up, before I sell some of my holdings, and in the meantime, we are staying put!”

Well, I could say that, and then end up being consigned to sleeping on the sofa for the next 3 months, not to mention having my family all lose respect with me. So, generally, it’s not an option.

Taking the risk and just selling out of market regardless of how they are at that point is not very advisable either. I learnt a harsh lesson about this myself back in 2008. It was May 2008, markets were falling, but haven’t quite crashed through the floor yet. We were then already looking out for a home purchase in Bishan area, but hadn’t committed ourselves to any one particular property. I was in the process of trying to convince my wife that we should just wait until 2011, the year before our son goes to primary 1, and just buy a resale property then.

But we came across a new condominium launch in Bishan (which was so rare, we absolutely had to check it out). And they loved it, and one thing led to another, and suddenly, I found myself putting in a deposit on the property. And buying a property is supposed to be one of the biggest financial decisions that most people make in their lifetimes. (At least the amount of money it involves would make it so).

Once you make your deposit, the subsequent payments soon follow. And so, I found myself selling out of many of my funds at exactly a time when markets were falling, and I was actually quite unwilling to do so. In hindsight, it turned out alright, because after I sold out over $90,000 worth, the market crashed even more. But who knew then? In any case, now I know that if I am going to make a big capital commitment sometime in near future, then it’s safer to put it in a low risk type of fund that isn’t going to crash 40% in a global market meltdown.

I could probably be forgiven about the house purchase thing, since I didn’t know my family was going to fall in love with that condominium and we would end up buying a property 3 years before we actually planned on moving. But now, with the property nearing completion, if I make the same mistake one more time, then I deserve to sleep on the couch for the next 3 months!

So, I will likely be putting all future contributions this year into the DBS Enhanced Income fund, which is only just slightly higher risk than a savings account, but with a return that is more than 10 times higher. Up till the point when I need to use it for renovation, moving, furniture, etc. If the market goes up, like I believe it would, would I be sorry? No! Because I already have monies invested. So, let’s remember not be too greedy here. And if things turn out differently, at least I wouldn’t need to sell my existing holdings. The DBS Enhanced Income fund won’t be affected one bit by how markets are doing, and I can safely sell that at the end of the year with no qualms what so ever.

Depositing my children’s Ang Bao money

Happy Chinese New Year! Most of the visiting is over. My kids, being the responsible, sensible children they are, took all the red packets (Ang Bao) they received, and gave it back to us so that I could save and invest it for them. (In truth, they are still at the stage where an Ang Bao is just a brightly colored red packet which is good for only a moment’s entertainment before they are glad to dump it on mum to get rid of it.)

Anyway, so after tabulating their monies. I invested $500 in unit trusts into each kid’s Fundsupermart account. As I look at their holdings, I can’t help feeling just a tinge of envy. Wow, kids these days are rich. They have thousands of dollars kept in trust for them by their parents from gifts, ang bao money, and in my case, investment returns to compound it as well. My son, who is five years old, going on six has made a $1,835 profit on his portfolio. My daughter, just two years younger, also has a $957 profit on her portfolio. I calculate that with what she already has, even if she only gets $500 from ang baos every year into this account and nothing else, but assuming it grows at an annualized 10% per year, she would have $62,000 by the time she hits 21 years old. Wow, that’s a very big sum of money to have when you have just started working. I am going to have to make sure I teach them both the importance and value of money so that they don’t just recklessly spend it all the moment I hand it to them.

While my kids continue their own journey through life, the good thing about having an investment savvy father, and being at their young age is that they aren’t going to aware about the volatility in markets, nor would they care. (They are more interested in playing their mother’s iPhone.) Which is just as well because some investors would have been alarmed by the recent unrest in Egypt. The entire middle east appears to be seething with instability, and given the amount of oil in the region, not to mention the potential violence that can be unleashed there if things get out of hand, its no wonder investors are turning a worried eye there. Yet, the odd thing is that markets in Europe and US have been surprisingly buoyant despite all the alarming news coming out of the middle east. In Asia, despite strong economic growth in general, concerns over China tightening, and some fund flows from emerging markets back into US and developed markets have seen some sell down in Asian markets.

US is in an especially interesting place now. It doesn’t have the kind of public debt problems that Europe has to deal with, nor is there any danger that the US currency can crash or break apart (its too important are irreplaceable at this stage to go down that route). Yet, valuations are not considered too high, and earnings are zooming away even as the economy shows clear signs of recovery. If you haven’t got any exposure into US, then for the sake of diversification, it makes sense to consider getting some.

Despite my optimism on the US market, it doesn’t mean I have turned negative on Asia. If the largest economy in the world gets on its feet and really starts to run, then that can only be good news for the global economy, and for Asia as a region as well, since exports would benefit from a strong global economy. Given Asia’s own economic strength, and with valuations still relatively cheap, I believe it’s a mater of time before Asian markets resume an upward climb again.

Middle East is a wild card at this stage. While China, and many parts of Asia’s tightening measures against inflation is well expected, and really shouldn’t be a cause of a major sell off. Investors heavily weighted in Asia need to be patient for now. There isn’t any fundamental reason why Asia should fall while developed markets rise. While the middle east is volatile still, the fact that markets like US, which arguably has far more to lose from the middle east blowing up than Asia have been rising rather than falling despite all the turmoil there happening there should be seen as a signal that at least from an investor’s perspective, things are not at a stage where they would have a fundamental impact on whether the US economy or US markets. And in that same vein, then the impact on Asia’s economy, and markets should be relatively muted as well.

Well, in any case, at this stage, my two children couldn’t care less about the Middle East, and the way I am investing their ang bao monies, I won’t let it affect me either. Their portfolio is very long term, since they won’t be touching the money until they are 21 years old. Hence, with such a long horizon in mind, I have chosen to place each year’s ang bao monies into just one equity fund to keep things simple. I am confident that over the long years, despite stock market’s ups and down, the general trend over such a long period will continue to be upwards, and thus, when they finally reach 21, I would be ready to hand over a sizable sum to them. I can then claim credit to have been a good steward of their monies (though in truth, I took the lazy way out and didn’t have to do much at all, ha!). I hope that time don’t arrive that soon yet though. They are very lovable and cute right now and I hope they don’t grow up too fast!