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.