Switching Focus towards Tech and Small Caps (28 Apr 2010)

I made quite a few switches and two purchases today. These are summarized as follows:

1) Switched all holdings in DWS Noor Precious Metals to Henderson Global Technology (about $10,000 worth)
2) Switched all holdings in Fullerton Asian Financials to Henderson Global Technology (about $5,000 worth)
3) Switched all holdings in ING RF Emerging Markets to United Global Emerging Markets Portfolio (about $20,000 worth).
4) Purchased S$1,000 worth of Henderson Global Technology Fund
5) Purchased S$ 500 worth of Aberdeen Asian Smaller Caps Fund

So, what’s the rationale of the switches and purchases? Mainly, I am switching out of precious metals and financial services into technology. For precious metals, I believe the upswing for such commodities has been largely priced into the market. Preciously, there was the added fear that with the weakness in the USD and the global financial system, commodities was the one place to be and I held some of it as a hedge.

Increasingly, we are seeing signs that the whole world is clearly coming out of the financial crisis of Sep 08. (Its one and a half years already, its about time!). Markets are looking ahead and the story for commodities is no longer so compelling. Previously, I liked financials because they had been beaten down during the September 08 Lehman Brothers crisis. Indeed, the Fullerton Asian Financials fund earned me a 53% profit. However, I see some dampeners on financials going forward.

These include rising interest rates and growing regulation. The growing regulation presents especially a challenge. Many developed countries want to claw back money from financial institutions that they bailed out during the Sep 08 crisis. So, they are imposing additional taxes and such. To further protect investors, there is also a whole flood of regulation getting pushed through which would make selling financial products far more onerous and difficult. Finally, in Asia, which is going through a V shaped recovery, there is growing government intervention to cool down a rising property market. These measures will curb loan growth.

In contrast, the technology sector is looking better each day. The global recession previously hit tech companies as well. Now however, the recovery is filtering through to the consumers as well. There has been increased retail sales in US and in Asia. Singapore, one of the exporter countries of tech products saw its latest industrial production surge by 43% year on year last month (beating economist forecasts by a mile). The surge was due to strong resurgence in biomedical production as well as semiconductor chip production. Electronic shipments are accelerating as consumer confidence comes back.

Think of it from a from-the-ground point of view. The global economy is recovering. People are still worried, but getting increasingly confident. While they may not plunge into the huge spending ways of before the Sep 08 crisis that soon, spending will certainly increase from the belt tightening levels during the recession. And tech products will be a big sought after consumer item to spend that money on. After all, technology progresses very fast, so within one to two years, the next generation of tech products will be looking very appealing to consumers. You also have Apple coming out with Ipad, newer versions of Iphone. You have Avatar bringing greater awareness to 3D, increased demand for newer fancier TV screens. So, while people might not be confident enough to splurge on a brand new sports car, a tech product is certainly cheap enough for some self reward and indulgence! The tech sector has been the whipping boy amongst investors since the 2000 technology bubble crash for too long. After ten long years, it would certainly be time for investors to relook this sector with fresh eyes. I think Technology is on the verge of a new resurgence. Hence, my shifts into Technology within my portfolio.

Another area I like is small caps. I already have a fair amount in Aberdeen Asian small caps, so just added a bit more to the fund. I think that in a resurgence of the global economy, at first, it’s the blue chips that will get the most attention. But increasingly, a lot of the recovery will be priced into the clue chips and the best bargains will no longer be in those, but instead in the small caps. As always, be diversified, but I am seriously thinking of shifting more weightage towards small caps as more and more of the good news gets priced into the blue chips. As risk appetite increases with the fading of memories of the last big crash of 2008, we will see more and more funds flow into small caps.