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.