I just switched out my holdings in Fidelity Europe High Yield Bond Fund into Aberdeen Pacific Equity, and added another $3,000 to my portfolio. And all $3,000 went into Aberdeen Asian Smaller Caps Fund. So, essentially, I am heavily overweight into equities at this point. Actually, I didn’t even want to look at my holdings, because I knew that with how markets have been falling since last week, it wouldn’t be a pretty sight.
However, it is also at such times, when I put in more money into equity funds. I still have about 10% in two bond funds (a US high yield bond funds and an emerging market bond fund), but I am at this point in time 90% into equities.
The current European woes with Greece debt and the Euro taking a pounding seems to drag on and on. Unfortunately, there isn’t any fast resolution to that messy situation in the EC. It will just need time to be sorted out. Time and a lot of political will because they will have to make sure Greece goes through with the tough measures (bitter medicine) required to get itself out of its current bankrupt state. (And let’s be honest, if the EC didn’t come in to help out Greece, it would have had to go bankrupt just like Iceland). Another area where political will is needed, would be when taxpayers in the other countries like Germany are presented the bill required to bail out Greece. They are not going to like it.
This brings me to my next topic. I think high yield bond funds are safer than general bond funds which hold sovereign debt at this point. It’s a rather controversial opinion because generally, high yield bonds are rated as higher risk than sovereign debt from G7 countries and developed countries which are the bonds which many global bond funds like to hold. But at this point, the whole EU is coming under strain due to the fall in the Euro, and the run on the Euro is revealing the weaknesses in the EU bloc. There are countries there, which without the Euro, and the EU, would have been downgraded to junk status without hesitation from rating agencies. The only reason they are still credit worthy is because they have the backing of the entire EU bloc. This makes the entire EU bloc risky though, because they are helping to soldier the risk of these financially weaker countries onto themselves. As a result, the Euro is falling.
At this point in time, Asian high yield bonds and US high yield bonds look more attractive because there is much less currency risk. US, as the base currency, is always where the money flows to when investors are spooked. So, as Euro falls, the US dollar can only strengthen. Asia, with minimal exposure to Europe, and growing fast, will continue to see inflows. The west are even clamering for China to let the renminbi appreciate, so Asia’s currency will stay strong.
Another reason is that I feel that the potential default risk in Asia and US high yield bonds is actually lower and less destructive than the default risk in sovereign country debt. High yield bond fund managers look very closely at companies before deciding whether to take up their debt issues. And with the generally recovering economic environment, most companies are well able to service their debts, roll them over, and obtain new debt. Even if there are a few company defaults, given the huge number of issues that a high yield bond fund will hold, the impact will be minimal.
Sovereign debt is more complicated in a way. There are the main G7 bonds which tend to make up a relatively large part of any indicative index. And there are a limited number of countries whose sovereign debt have a very credit high rating. Countries with a low rating tend to fall into the emerging market category like Latin America, Eastern Europe and some Asian countries. Yet, the developed countries’ sovereign debt ratings I feel at this point is looking risky. Many developed countries have issued huge amounts of debt in order to finance their huge stimulus packages in the aftermath of the US financial crisis. So, their finances aren’t anything to shout about. At the same time, it is arguably far far harder for a country to rein in itself if it has overspent (like Greece) as compared to a company. A company is free to fire staff, cut costs, etc, but political fallout from the citizens if a country tries to increase taxes and cut civil service staff or pay will be tremendous.
Thus, I feel that high yield bonds, corporate bonds for the most are looking far more attractive than sovereign debt at this point. It is easy to avoid Europe currency exposure if you wish to. Just stick to region specific type bond funds like US high yield, or Asia bond fund, or Asian high yield bond fund. Unlike the stock market, or the bond market, currency is a two way street. The Euro can’t just drop by itself, it has to drop vis a vis the USD or vis a vis some Asian currency.
There will come a time when it would be interesting to go into Europe markets and look for bargains. But at this point, I would err on the side of caution. So, yes, while I think markets have corrected enough for me to increase my exposure into equities, I am sticking to Asian equities for now. Asian small caps will look more and more interesting as time goes by as well. This is because many of these small cap stocks tend not to have any European exposure, unlike some of the larger blue chips which might have a global presence. I am confident that Asia will continue to grow, and while the markets are ducking for cover right now. Eventually, as the dust settles in Europe, confidence will return to Asia as investors see that Asia continues to grow despite what is happening in Europe. And as confidence returns, we will see a rapid rebound in Asian markets. Hence why I am shifting some of my bonds into equities, and topping up another $3000 more into equities as well.
We have to be patient at times when it comes to investing. Focusing on the current fear in the market will inevitably cause one to panic. I believe things will look vey different within 6 months to a year’s time so I am not focusing too much on the current negativity in markets.
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