The Quiet Rally (7 July 2010)

Slowly but surely, stock markets are resuming their climb. I was saying that markets have stabalised and people coming back after the world cup would be surprised. We are seeing it happen now. Despite all the worries and talk about the western world slowing down, Asia’s economies continue to forge ahead, and Asian markets continue to climb steadily.

The Singapore stock market as represented by the STI index is back to within shouting distance of 2900 points. Other than the China market which has been more disappointing, most other Asian markets have shown surprising resilience and these last 2 months. Just two weeks ago, it felt like things were still pretty bad. But if we look at our funds nows, we would be struck with the strong resilience of markets. On top of that, if you had been holding a good fund, which was holding good stocks throughout these two weeks, then any losses would have been very minimal.

As an example, my main core Asian equity funds were Aberdeen Pacific Equity and Aberdeen Asian Smaller Companies. This year has been so volatile yet, since the start of the year, Aberdeen Pacific Equity is up a marginal 0.26% (based on prices as at 5 July). Aberdeen Asian Smaller Companies, which is actually a higher risk fund given it focuses more on small caps, is up 8.96% for the year.

Its been the Europe and US equity funds I held which have dragged things down. But even with them, the entire portfolio is down just 2.84% over the last 6 months, and things will improving by the day, and I would argue that Europe especially would definitely be throwing up some bargains at this point in time. I am not going to sell any of my European unit trusts, as I believe they are holding on to quality European companies which will rebound and rise after Europe settles down.

The bond funds I have held have also helped to add stability to my portfolio. The high yield bond funds are giving 6 to 8% yield on an annualized basis. The Fidelity Asian High Yield Bond Fund (USD) had the following recent 3 dividend payouts.

3 May – 0.45% yield
1 June – 0.61% yield
1 July – 0.60% yield

Where else would I be able to get 0.6% each month! In a savings account, even if I put in over $100,000, I would be lucky to get 0.6% per year rather than per month. I would happily bear the higher risk that these high yield bond funds incur for the huge difference in yield. Asian companies are doing well currently, business in Asia is booming and getting funding is not too difficult at all. Look at China, even in a year where their stock market is one of the worst performing in the region, they are having a massive IPO to raise over 30 billion SGD from the market from one single Agricultural Bank of China offering.

I acknowledge the inherent higher risk that high yield bond funds come with compared to say Singapore bond fund, but at this point in time, given Asia’s outlook, I don’t see any big recession in the offing for Asian economies. Many of the Asian governments have actively taken steps to curb inflation, to curb bank lending (in China’s case), and to keep a lid of asset bubbles forming. They are doing the right things to keep things from getting out of hand. Even China allowing its currency the Yuan to rise, is giving some outlet to the huge flow of monies from investment inflows and current account surpluses to China.

I am eagerly awaiting the “next phase” up in markets. It won’t be quite as spectacular as the rise we had in 2009. But there is still some decent upside left in markets and I think a lot of investors will be surprised as markets quietly continue to creep up. Of course, as always, keep diversified. I have already shifted twice from bond funds into equity funds this year already, so I confess I am rather heavily overweighted equities at this point in time. As markets go up, I will be locking in some of my equity profits back into my bond funds.

Psycologically, this is actually quite difficult, because if markets go up from here, the more you have in equity funds, the better your profits. But ultimately, its about not being too greedy when markets are up, and not panicking when markets are down. I forced my self to shift more into equities when markets were down this year. So, in the same vein, as markets rebound, I will force myself to lock in some profits and shift to a more neutral weighting that is not so heavily overweight in equities.