Investors have been through a rocky 2 weeks. Ireland seemed on the verge of bankruptcy and needed to be bailed out by the IMF and the EU. But just when that appeared to be sorted out, the government was in danger of falling. Fresh elections could be held as early as in two months time. China was busy putting in new measures to curb the flood of hot money unleashed that was flooding in after America’s quantitative easing, and control inflation, and to top it off, North Korea took this time to fire artillery at South Korea, causing some property damage and casualties.
If not for the fact that I intend to rebalance my portfolio soon because the end of the year if coming up, I would happily have put in more money into equities now. All 3 concerns happening now can be considered politically driven, and one thing I have observed about most political events, their effect on the stock markets are usually quite short term. Let’s go through each of these.
First of all, Ireland. It was just this year that the Euro financial crisis hit and many European funds are still down this year in SGD terms. But there was already a huge reserve set aside to address this issue. Ireland is just one of the financially weaker that now needs to tap into this reserve. Markets got worries because the danger of the government falling meant that a new government might not accept the bailout, and if that happened, would it fracture the Euro.
However, this is a very remote possibility. No matter how much the Irish people might rail against the harsh budget cuts and belt tightening that comes with the bailout package, they have no other alternative lender. No one else is going to lend them that much money, and its not like they can hold a big asset fire sale to raise the amount either. They could do without the loan of course, but it would literally mean cutting themselves off from all international funding, and without foreign currency, they wouldn’t be able to buy any foreign goods and services. Unless they literally want to cut themselves off from the rest of the world, it is hardly an option.
So, they can take it out on their current government, bring in a new one, but even the new government would come in, take a look at the grim picture facing them and then will still end up accepting the bailout package, with all of its conditions in the end. Europe is very interesting right now. There is enough bad news that there must be some bargains there. Its just that this is going to be a long drawn out issue, and every time the next European country faces problems in the bond markets and is forced to accept a bailout, we will have these concerns surface all over again. So, investing into Europe now is going to require a lot of patience. There won’t be any quick gains, but for those who are willing to wait (and I think 3 years is going to be a minimum for Europe), then the current valuations are very cheap for Europe.
North Korea’s shelling of South Korea is another so called political event. It is almost certainly motivated politically. If a country really wanted to invade, it is not going to just shell an island. It will do far more than that. The danger is more that South Korea gets pushed beyond a certain point, such that it feels that it must take military action in the face of aggression. Has it reached that point yet? Probably not.
China’s tightening measures against the flood of money unleashed by America’s quantitative easing is the one that has the most direct economic and market impact in the longer term. Today, China has replaced the US as many of Asia’s biggest export market. China’s continued strong economic growth is one of the key drivers within Asia. If too much tightening causes China’s economy to falter, Asia would definitely feel the repercussions.
However, again from the China government’s perspective, they don’t want to see the China economy crash anymore than the rest of us. They are in the process moving two to three hundred million people from the rural areas to the cities. That is a huge number of jobs, housing, infrastructure and more that they need to create for these people. They can’t afford to have their economy crash and have millions of people jobless on the streets. And it is not like they don’t welcome foreign investment, since it was foreign investment that has resulted in such strong growth in the costal cities. However, if too much hot money flows in, inflation and over speculation in selected sectors will create problems too.
So, I personally feel that they will try all sorts of means and ways to curb too much inflow of hot money, inflation and speculation, but they will try not to touch interest rates too much. This is because raising interest rates is a very crude tool to guide economic policy, and they want to see China’s economy continue to grow strongly as well.
Thus, I am not so worried about what is currently happening. I think this year has been a big year of worry. Rarely has there been so many different things cropping up all within one year for investors to worry over, yet despite everything that has happened, most markets are on track to end the year with gains. It’s a classic case of climbing this wall of worry. There is lots of worry about, but the market will take two steps forward for every step back, and hence, over one or two years, will still move upwards. In this type of situation, the key is to remain calm, and be patient. These worries will eventually recede and when they do, we will see a significant rise in markets then.
In the meantime, the end of the year is coming up soon, so don’t forget to rebalance your portfolio! I will be doing this as well in the coming weeks.
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