How markets have fared since the year started (26 Jan 2010)

We are nearly one month into the new year. Thus far, commodities had a good start, but are now seeing more downward pressure. Based on 24th January prices, the commodities funds within the alternatives space are on average up 1.31% year to date while resources funds are down 3.79%. Technology is doing better, with technology funds on average up 2.12% year to date. But the surprise so far at the start of the year has been financials. On average, financial funds are up 3.51%, but this figure was pulled up largely by a huge 9.46% gain from the Parvest equity Europe finance fund, which is up 9.46% year to date. Despite the ongoing worries about the European debt crisis, we have seen European financials recover ground since the start of the year.

Asian equity funds started the year strongly, but subsequently, worries over China’s potential rate hikes caused profit taking to set in. Asian equity funds are down marginally so far year to date. Korean equity funds on average are up 1.43%, Taiwan equity funds are up 0.13%, Greater China funds are down just 0.34%. Markets like Thailand and Indonesia, the strong winners of 2010, have tumbled. Thailand equity funds are on average down 8.43% year to date, and Indonesia equity funds are down 11.86% year to date.

The current jitters are not something I am too worried about. China’s tightening stance against inflation has been well documented since last year. Earnings of companies have remained strong, and this will be a big theme this year. As we have highlighted, we are negative on gold and neutral on commodities. Thus, my portfolio is also conspicuously empty of commodity or resources funds. The Russia equity fund I am holdings is a hedge against oil prices moving up too high, and I am actually glad that oil prices have moderated recently after they were in danger of breaching 100USD per barrel at one point. I am glad I sold off all of my Indonesia fund holdings as well.

So, the surprising stand outs at the start of the year has been Europe finance funds, Italy equity, France and Iberia funds. Some of these, especially the Iberia funds were something few would have dared to touch last year as the European financial crisis erupted. But they have shown surprising strength despite the situation in Europe over its debt woes not fully resolved. But again, sometimes, as I note, it is where angels fear to thread, where there is blood on the streets, there are bargains. If and when there is clarity in Europe and everyone knows that its debt woes are behind it, then Europe markets will see a big jump, and it would usually be too late by then. The situation in Europe remains shaky, but it bears close scrutiny. I added to my European and US holdings at the start of the year simply because I was too overweight in Asia. I don’t regret adding to these two regions one bit. While everyone (including me) remains convinced that Asia’s and Emerging market’s fundamentals are stronger, the growth is stronger, but US and Europe’s valuations are now quite cheap. Where there are bargains from a valuation standpoint, all that is required is a lot of patience, and sooner or later, such markets will be re-rated. US and Europe could be the dark horses for this year, based on their surprising strength at the start of the year.