Market Timing (26 Mar 2010)

The advisors all advise against it, but everyone all want to do it. Many people all believe that they should time the market. The big stock market crash in 2008 further cemented many investor’s conviction that it was absolutely necessary to time the market. With that in mind, I just wrote a long article about the many pitfalls on market timing for the GM column in the upcoming FSM magazine.

Fear and greed often make us time the market wrongly, so it has to be a very savvy investor who can keep his emotions in check, or one who has taken enough hard knocks from his own investing through the years who will not be swayed. History has not been kind to long term investors in the last 2 years as they would have held their investment to the top of the market in 2008, and then seen several years of gains possibly wiped out within that one year. So, I think it’s futile to dissuade anyone from market timing. Besides, there are many investors who have successfully timed the market and done well too. Also, Fundsupermart will be announcing big price changes soon that may make people want to time the market even more because it is cheap to do so.

Just be aware though that there is always many emotional pitfalls in market timing that will often push you to do the opposite of what you should be doing, which is to buy low and sell high. Also, the shorter the investment time horizon, the more likely market sentiment may drive the market in a different direction as what fundamentals point towards. So, if you do want to market time, please do it with both eyes wide open!

The Best Kind of Rally (17 Mar 2010)

We are now going through what I would term “the best kind of rally”. Why is that? It is because this is the quiet but steady kind of market increases which do not stir up much attention, but it eventually builds up into a bull market. This is the kind of rally that comes off a selloff, like the one we saw in January, and during which there are still concerns aplenty about everything from Greece and the Euro/pound under attack, to the strength of the US recovery.

This is great because it doesn’t draw attention to itself until much later. It’s a slow building kind of rally that can potentially snowball into big gains. A quick and fast 2% to 3% surge in one day, which will draw media attention, will certainly see profit taking the very next day. There are tons of pessimists and detractors who would jump in during a big market surge to question why it is going up so much. But a slow and steady increase is something nobody asks questions about, and one which the media will not cover.

Let’s take the STI index. Just one month ago, it was hovering at 2,750. But now, it is at over 2,900. If it did this with big 3 big 50 point gain days, there would have been the inevitable profit taking, questions on why it can suddenly surge 150 points in too short a time. So, 150 points in 3 days will quickly see it running out of steam and falling back. Yet, 150 points over a month and nobody bats an eyelid. In fact, people hardly even notice! Its not newsworthy at all! The media is more busy covering the latest on Jack Neo or the Thailand mass protests.

I think the market is all set for the next upsurge. It won’t be an eye popping rise, but a more sustained gradual rise. All the bad news has already been said and done to death. People are still talking about US banks’ bad debts, Greece bad debts, China tightening, central bank exit plans and double dip recessions. But its all old news by now. It is fast losing its power to move markets even in the short term now. And all this while, positive economic and company data continues to flow out. The latest is that Singapore’s February non-oil exports grew 23% from a year earlier, and 21% up from January.

It isn’t just Singapore, the whole Asian region is growing fast. Yet, this increasing pace of growth in Asia is being largely ignored by people previously focusing on whether Greece will pull down the Euro, or whether US banks are still hiding tons of debt. Don’t wait until its clear blue skies. Don’t wait until the talk about bad news has died down, because that will only happen when markets have moved much higher such that their strength has muffled these concerns. By then, it would be too late.

There is still time, but before you know it, markets will be a lot higher. Right now, people are still worried, still cautious. Hence, trade volume is still low. But the data that does matter to fundamentals, the economic and company data, these are all continuing their positive trend. If you are like me, and already fully invested, then its just to sit back and wait. For those still waiting, don’t wait too long. We are already in the midst of a rally!

Markets Are Moving Up Again (10 Mar 2010)

It seems like just last week we were still plagued by worries over how Greece’s problems might spread to the rest of Europe, and markets seemed dead. Yet, as of today, when I tabulated how markets have performed over the last one month (as of 8 March), the numbers are revealing. They show that most stock markets have bounced back quite a bit over the last one month. I looked at the category average in the fund selector and drew up a table. Table 1 shows the best performing to worst performing funds on Fundsupermart divided via geography.

Table 1 (Average Performance of funds in area)

	1 month		1 month		1 month
Australia	11.31%	China	7.61%	Italy	5.63%
Brazil	10.22%	Asia ex India ex Japan	7.46%	Germany	5.62%
Latin America	10.22%	Hong Kong & Singapore	7.01%	Taiwan	5.54%
BRIC	8.48%	Thailand	6.98%	US centric	5.38%
Korea	8.32%	Russia	6.73%	Asia Inc Japan	5.12%
Asia ex Japan	8.18%	Indonesia	6.46%	Iberia	5.06%
Eastern Europe	8.06%	Asia Pacific ex Japan	6.40%	Singapore	4.83%
India	7.96%	Hong Kong	6.33%	Turkey	4.47%
Emerging Markets	7.95%	South East Asia	6.32%	Middle East & North Africa	2.17%
China and India	7.76%	France	6.29%	Japan	1.84%
Greater China	7.70%	Europe Inc UK	6.14%	Vietnam	1.47%
Malaysia	7.68%	Global	5.75%

As table 1 shows, Australia, Brazil, Latin America, BRIC and Korea funds were the strongest performers on average over the last one month. Everything went up. Its was mainly a difference of how much. If your equity fund actually fell over the last one month, it would have been an oddity. Not surprisingly, Asia, and emerging markets funds, having stronger fundamentals and growth prospects, rebounded more strongly than developed markets. At the bottom of the table, Japan and Vietnam equity funds disappointed. I turned to look at the sector funds now in table 2.

Sector	1 month
Resources	12.51%
Gold and minerals	11.08%
Materials	9.47%
Finance	8.80%
Property	6.55%
Energy	5.50%
Technology	5.17%
Utilities	0.35%

The performances of the sector funds suggest that resources, gold and finance funds have bounced back in a big way. Commodity and resource related funds are again a favorite. Finance is quite close to the top as well though, which is surprising given the large amount of bad news and potential crisis that the sector always seems to generate. I believe its because it is priced cheaply at the moment. Lots of people don’t dare or wouldn’t touch finance stocks with a ten foot pole right now, but very often, it is such times when there are the best bargains to be had. So, the finance funds could still give us a shock yet as this year plays out.

	1 month
Emerging Market Bond	0.31%
Short Duration Bond	0.26%
Singapore Bond	0.04%
Global Bond	-0.14%
Asia bonds	-0.18%
High Yield	-0.41%
Investment grade	-1.29%

The biggest underperformers this month were the fixed income funds. Its not really that they are bad as an asset class. Indeed, when volatility is very much present in stock markets, as it was in January and February, investors appreciate the stability bond funds bring. But now, in hindsight, it looks like my decision to shift 20% of my bond funds into equity funds in February was a good one. Bond fund returns are likely to stay relatively low given the still abnormally low interest rate environment throughout much of the world. But given the high degree of volatility in markets, I think most of us would still appreciate having at least some bond funds, low return or otherwise.

My sense of the current situation is that a lot of the bad news in recent times like Greece’s bad debts, China tightening, Central bank exit plans, and such have now all run their course in the media. So, these are mostly all factored into markets already. In the midst of these, the global economy continues to grow, with Asia and emerging markets leading the way. So, with much of the bad news already factored in, I believe that the upcoming few months would see gains in most stock markets as positive earnings data and economic data continues to filter through. For those still waiting on the sidelines, don’t wait too long. When markets rally, the speed at which they do so can often catch many investors unawares. Looking at just table 1 and 2 alone, I think many of us would have been shocked that some of the funds have gained close to 10% within the last one month alone.

Added Kids’ Ang Bao to Their Accounts (2 Mar 2010)

It has been a long time since I actually logged in to see how my kid’s investments were doing. After all, those are going to be there until they reach at least 21 years old, unless it is used for their university education. And right now, they are barely 3 and 5 years old this year.

The last time I checked their accounts was around a year ago, shortly after Chinese New Year, and at that time, I remembered their holdings were showing losses. But I was quite sure that if the investment horizon is very long (in this case, more than 15 years), then I am very confident that it would be substantially higher by the time I finally hand the account over to them.

But lo and behold, when I checked their accounts just now, both were back in the black now. What a difference one year makes! In any case, it is after Chinese New Year. And during Chinese New Year, they got Ang Baos (Red Packets). At this stage, my 3 year old daughter just plays with a particular Ang Bao if it has very nice colors, and then drops it on the floor after she loses interest. My son is slightly better, he passes it to his mum, but he has no interest in it either.

So, we consolidate all their Ang Bao after Chinese New Year, and now I am going to invest some of it into their unit trust investment account. Their portfolios are very straight forward. They only have two funds. One is an Asia Pacific equity fund and the other is a Singapore equity fund. They have no bond funds. The reason being that they don’t need it. Bond funds are there to provide stability, to reduce volatility. This is especially important if you don’t have a particularly long time horizon. But in this case, consider my children.

Do they care if the market slumps? Nope. All they care about right now, is whether we bring them to the playground downstairs to play. So, things like market volatility, portfolio volatility is irrelevant to them. They are not going to panic and take out everything at the bottom during a stock market crash. They aren’t going to scream at their dad and demand that everything be switched to a low risk low yielding savings account to “protect” their money.

Are their investment horizons long? Yes, in this case, well over 15 years, if not longer. 15 years is a long time. You could sometimes fit several market cycles into a 15 year period. Will equities outperform bonds over such a long period? It would. So, since volatility is not an issue in this case, then I would go for the asset class that would have a better performance over a very long term instead going for a more “balanced” type of portfolio.

In this same vein, I think those kids accounts, savings accounts are good in principle, but bad in execution. If you are committed to setting the money aside for your kids and you understand investing, then it shouldn’t go into a savings or kids account. The interest rate is so low you would be lucky to beat inflation. Right now, bank savings accounts will only give you 0.1%, and kid’s saving account interest rates are usually similar.

So, for my own kids, I place them into equity fund investments. I am confident that over a period of more than 15 years, they will beat the interest rates that banks are offering right now. All I need to do, is to withstand the volatility in the meantime, and can I kids handle it? Yes they can!

For example, the Singapore equity fund that both the kids have is the Aberdeen Singapore Equity Fund. Its actual annualised bid to bid performance over the last ten years is 9.28%. (Based on 26 Feb prices). This means that $10,000 invested ten years ago would be worth $24,288 or 140% more. In the same vein, $10,000 put into a savings account giving just 0.1% per year would give only $10,100 after ten years.

Assuming the fund keeps up its performance, and gives the same annualized performance over 20 years. This means that after 20 years, the same $10,000 would now be worth $58,994 while the one in the savings account would still only manage $10,201. To me, its quite clear. Am I willing to risk market volatility (which doesn’t have any effect on my kids) for substantially better returns over a very long period? The answer to that is a big “Yes!”

When my kids are old enough next time to start learning about money, I hope to use their own investment accounts to show them how money grows over time, and how much of a difference there is between “saving” money vs “investing” money.

On Exit Programs and Central Bank Tightening (22 Feb 2010)

The US Federal Reserve increased its discount rate on Friday from 0.5% to 0.75%. This is the interest rate which it charges banks for emergency loans. The move set the market abuzz last Friday and contributed to the fall in markets on Friday as there were fears on whether this was a shift in monetary policy for the Federal Reserve. (Currently the Fed Fund rate stands at a historic low of 0.25%).

Many investors are currently worried about changes in policy from central banks. In a way, the many measures taken by central banks across the world in the aftermath of the Lehman Brother’s crisis has fostered a certain amount of expectations. The perception is that the whole world was in danger of plunging into a deep crisis, a deep depression, so extreme measures had to be taken.

Now, though we have clearly put the worst of the crisis behind us, we still want those extremely loose monetary policies to continue. We want rock bottom interest rates to continue, and we want central banks to continue to keep the tap open, and to continue to inject tons of money into the system. In a way, its like falling down, and ending up in crutches. Doctors will recommend trying to walk even while our legs hurt, but initially, we want to stay in our crutches because it hurts. We may even end up relying on them if we don’t recover well precisely because we did not exercise them enough while recovering. As a result, those crutches, which should have been temporary, become permanent.

We are facing the same situation right now. Stock markets, used to the extremely loose monetary policies and massive stimulus packages rolled out by governments all over the world are now reacting negatively at the various pullbacks. So far, the pullbacks have actually been fairly mild. The Fed has not even raised its actual Fed Fund rate. Only the discount rate was raised, and banks these days are hardly utilising it in the first place. Yet, the reaction was still negative.

In my mind, I see it as necessary, and in fact, I would rather it happens and take any correction that comes with it. While we remain at an unrealistically low interest rate environment with loose policies, there will always be the nagging fear of bubbles developing, and any recovery will never be complete, since it was achieved with the “crutches” of government aid. Only when we are back to a more “normal” interest rate environment, and when government policies are lesser based on a crisis type of environment, and yet, the global economy demonstrates that it can still grow, will there be a more sustained increase in markets.

So, my sense is that I would rather not fear any upcoming change of government policy towards tightening. It was good while it lasted, but everyone knows it would never be permanent. Let any jitters and corrections happen now, it will only allow the market recovery later to be longer, and more sustained. Most importantly, keep the bigger picture, and longer-term target in mind.  

Chinese New Year Rally? (9 Feb 2010)

Markets have continued to be volatile. But the Singapore, Taiwan and Hong Kong markets have shown unexpected strength today (Tuesday), after the selloff over the last two weeks. Could this be the start of a Chinese New Year Rally?

Even if it doesn’t start this week, I believe markets will start moving back up in the weeks after the Chinese New Year. Current troubles are mainly those occurring in regions outside of Asia. About Europe, which is where the main concerns seem to lie right now. To me, it is inconceivable that the Eurozone countries will allow the entire Eurozone to be dragged down by just a few country’s troubles. Yes, Greece has problems, but would they be allowed to balloon to such an extent that the Euro comes under jeopardy? I find that extremely hard to believe.

Would the likes of France, Germany, Switzerland, and the many other countries in the EC allow Greece to affect investor’s confidence of the Euro to such an extent that the Euro goes into freefall? I believe they would either bail out Greece, or if they don’t want to foot the bill, even take the more drastic step of delinking Greece’s currency from the Euro.

Notice that now, there is hardly any mention about China tightening any more? The reason is that it was a knee jerk reaction. Now that it is over and done with, as China continues to post strong economic growth numbers, we will see a rally because it shows that despite the tightening, growth can continue. In fact, this will hold true for the other concerns plaguing the market right now, including the current Greece troubles and the Euro coming under pressure.

As the economy continues to improve, many of these concerns will gradually fade away or at least become priced into the market. For now, because of the sharp sell off over the last two weeks, it is a good time for bargain hunting. As always though, maintain some diversification even as you bargain hunt and don’t take on more risk than you can bear. The worst would be if in hind sight, it was good to buy in now if you held it over 2 years, but you failed to hold it because the market then corrected another 5% before it hit bottom this year, and you panicked and sold out at the bottom.

I have only shifted 25% of my bond funds, so I still have 75% of what I started the year with, ready to take advantage of a any further drops. Even if we see a rally from here on, I would mind, because the amount I am shifting into equities is one which I am comfortable with. Sometimes, it better not be too greedy, although its better to be greedy when people are fearful and to be cautious when people are greedy.

Here's wishing everyone a fruitful and prosperous lunar new year! Gong Xi Fa Cai!

Euro Woes and US Jobless Claims (5 Feb 2010)

It’s a sea of red today across all Asian markets. Its not just Asian markets, Europe markets are down and US markets fell last night as well. Oil and gold prices are down too. US jobless claims turned out higher than expected, rocking US markets, then in Europe, the high debts run up by countries like Greece has investors worried it would spread to other European countries that has also run up large public debts. Notice that no mention is made now about China tightening anymore, because that’s old news already.

But should investors be selling out now? Ideally, most of us should already be in a diversified portfolio with some fixed income funds to help stabalise our portfolios. Bond funds don’t make as much money as equity funds, but they are worth their weight in gold during times like these. But unless your portfolio is in a big mess, now is not the time to think about upping your fixed income allocation just because it seems more stable now. Because when the market slumps like this and we switch out from equities into bonds, we are likely just selling out of equities at a low.

Ideally, when we rebalanced your portfolio previously at the end of the year, we would have taken profit from your equities or equity funds. Then now, we would actually be in a position to take advantage of the current volatility to look for bargains in the beaten down equities and slowly accumulate.

On my own personal portfolio, I just switched a quarter of my bond funds into equities. And if the market falls further, I will switch more. I work on a worst case scenario basis. Since we are not back to all time highs, and since markets dropped 50% in 2008, what's the maximum downside to markets? It could range anywhere between 10% to 30%. (Things would have to really collapse for it to fall below that).

Hence, I am prepared to switch gradually the rest of my bond funds into equity funds if the fall continues. This would be in proportion to the extent of the current drop. But even if it never reaches 30% down (in my opinion it won't), and it rebounds whether after falling 10% or 20%, that is fine.

The key thing to note is that in any kind of market slump, things eventually do turn around. Jumping in too early can hurt just as much as jumping into the market too late. But trying to time the exact bottom of the market is likely to be impossible as well. I think most people didn't dare to enter markets back in March 2009.

The main point I am trying to make, always have a diversified portfolio, with some amount into bonds or bond funds. This allows you to take advantage of exactly the market slumps like the one we are seeing now. Be patient, have the daring to go in slowly as everyone is selling out. There will definitely be bargains available. Investing is about not letting your emotions take hold, and also about being patient. Markets are very short sighted, they are falling now because everyone is selling. Although the picture could look very different 6 to 9 months later, markets can’t look that far out. All they care about is that in the immediate short term, US jobless claims numbers are bad, and Greece’s troubles are causing Europe markets and the Euro to take a pounding.

One interesting trend I have noted so far, is that Indonesia, Malaysia and Turkey are still holding quite up quite well. For Indonesia and Turkey, these two are interesting, while I would not have pegged them as strong performers in a year where external trade recovers, they will do well even if the external trade remains bad! That’s because Indonesia and Turkey have large domestic markets, and exports are a relatively small part of their economy. They are to a large extent “self sufficient”. So, it may be a good hedge to consider in counterpoint, even though I still think that external trade should recover this year.

Malaysia on the other hand, is mainly a more defensive type of market, and hot money flows more to other markets than Malaysia. Hence, when investors are spooked and hot money flows in the opposite direction, Malaysia suffers the least.

Well, the weekend is here. My switches will buy in on next Monday (the switch sells happened on Wednesday). I won’t know if Monday, thing are going to get better or worse. Short term fluctuations are notoriously hard to predict. However, I do know that at times like this, do not panic! When the market is frightened, as it is now, every news that comes out will see a negative spin in it. Don’t let it get to you. I doubt if the world will suddenly go into a huge U turn and plunge back into recession again. But it does look like the year of the Tiger is going to be a very bumpy one, so hang on tight! Just make sure not to let your portfolio become so exposed to risk that you can’t even celebrate the Lunar New Year without worrying about it.