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.