Market Correction! Bought 6k More (22 Jan 2010)

The correction in the last two days has been swift and sharp. At the time of writing, the STI index is down 100 points within just two trading days. However, I just bought $6,000 into my portfolio. The investment were as follows:

Schroders Latin America Equity Fund - $2,000
Aberdeen Singapore Equity Fund - $2,000
LionGlobal Korea Fund - $2,000

Why am I buying now? Because I see this as a correction. The main reasons why the market is falling is due to fears on China tightening its policies to curb inflation. The worry about China tightening is not a new one. There has been fears of the China government coming in to “cool” the market since last year. It did not stop the flow of money into China, and China’s inflation has continued to move upwards. According to China’s statistics bureau, inflation went up by a higher than forecast 1.9% in December.

The market fears anything that might mean less liquidity. And China is currently experiencing too much liquidity. China may raise interest rates by the end of June, and increase banks’ reserve requirements. On January 12, the People’s Bank of China raised lenders’ reserve requirements, also to curb liquidity.

In the end, we can’t have it both ways. Last year, and even now, there are concerns that potential asset bubbles may be forming in Asia, in particular in property. Seeing how badly the bursting of a property bubble can hurt an economy, I am sure no Asian government wants to go down that path. They would rather risk some unhappiness and volatility in markets now, rather than a much more severe one that might occur if such bubbles are allowed to continue forming unchecked.

Actually, I suspect that markets know this as well. Rationally, people understand. China is not in the same stage of economic cycle as US. China is experiencing very strong inflows, rising inflation, and potential asset bubbles. There is nothing “fragile” about China’s economic growth right now. If anything, the government is worried about overheating rather than like US, some double dip recession. But markets will be unhappy with the moves, and short term wise, there will be a knee jerk reaction because the immediate effect is that there will be liquidity drained out of the system, and that is likely to have an impact on the stock market.

However, I remain confident that fundamentally, Asia’s growth track remains strong. So, by tackling the potential problems that might arise, a longer term growth trend will remain intact. Markets are often near sighted, and in this case, they are focusing on the short term effects of China’s policy tightening. I believe that after the dust settles, and as China’s economy continues to grow, but with less fears that asset bubbles could develop, then we will see a surge back again in Asia’s markets. So, I took the opportunity during the two day’s corrections to put in more money.