Added 4k to my Portfolio

Markets were generally up this week, with positive economic data from the US on Thursday night driving Asian markets higher. An upward trend will form in the second half of the year as markets see a rebound. It’s a new quarter, and people can leave the second quarter behind. It was a quarter plagued with Japan being hit by natural and man made disasters, Europe’s debt crisis flaring up again and the US economy also running into a soft second quarter.

However, overall, my portfolio was just 2.3% over the last 3 months so I really have no grounds to be feeling down. In fact, with a lot of the worries now behind us, the second half of this year is looking good and I am confident that equity markets will make up for the lost ground.

I added another $4,000 into my portfolio today as follows:

DBS Enhanced Income Fund - $3,000
Aberdeen Asia Smaller Companies - $1,000

Now, the reason I am adding so much more to a short term duration bond fund has nothing to do with how I see markets. Given a choice, I would certainly rather add most of it to equities. However, my new home is almost about to TOP, and that means spending money time is coming up! So, I continue to add to a very low risk fund like DBS Enhanced Income, but one that will still enable me to beat normal savings accounts returns. Thus far, the DBS Enhanced Income is already up more than 1.4% year to date, which no matter how you square it, is a lot better than 0.1% I am getting from my savings account or a possible 0.43% if I had placed it into a 12 month fixed deposit. Furthermore, it demonstrated it resilience over the last 3 months. Despite volatile markets during that time (I had one equity fund which was down nearly 10%), the DBS Enhanced Income fund was up 0.14% over the same period. So, for money which you know you are going to take out within a couple of months, like my case, its just more prudent to keep it in a parking facility type fund like the DBS Enhanced Income.

Anyhow, I am looking forward to getting the keys to my new home, and for a much better second half of the year for equity markets!

Markets are rebounding!

Last week confirmed the trend that markets are now rebounding from their lows caused by the uncertainty over the Greek debt crisis amongst other things. As the Greeks pushed through with their austerity measures, IMF agreed to the additional loans to Greece. This alone was a strong stabaliser to the markets.

I said two weeks back that either way, they will sort this problem out, or the markets will force them to. And now that Greece at least as enough funding to last it until the end of the year, markets will move on. Positive data from US manufacturing also helped boost last week’s sentiment. The decisive victory by the opposition party in the Thai elections has also brought much needed stability to the Thailand political landscape and with the military saying they will not step in, things are also looking up for Thailand.

I am confident that the second half of 2011 will see a strong rebound by markets. We may already be seeing it starting to happen now already. But basically, despite worries about Europe, about the US economy, and China tightening, plus Japan being hit by the tsunami, Asian markets held up alright. Some were down just marginally since the start of the year, while others were flat. The key reason why I believe there wasn’t that much downside was because markets were already cheap to begin with.

Rarely have we ever seen markets which are seeing such strong earnings growth being priced so cheaply. Rarely have we seen such strong economic growth numbers tempered by such caution and even outright pessimism. Looking at the performance of the Singapore market as an example, would you have believed that our economy just did 15% growth last year, and that even this year we are looking at 4 to 6% growth? The kind of breathtaking economic performance of Asia’s many countries should have seen markets in Asia hit all time highs by now, but most Asian market is off their all time high some as much as 20 to 30% off.

Thus, I was not so worried even when the worries in May and June brought some corrections in markets. Fundamentally, I felt that the US economy was just hitting a soft patch and the latest economic data appears to reaffirm that. Europe’s debt crisis will take a long time to sort out, but the key thing to remember is that Europe’s corporate health is very different from the fiscal health of its governments, and even there, there are key differences. Greece’s economic health cannot not be compared to Germany’s economic health. Also, not every single European company is drowning in high levels of debt and facing high interest rates to roll over those debts.

Markets are outright cheap at this point in time. Even developed markets are trading at PE levels of 9 to 12 times forward PE for next year. And Asian markets, even with their substantially higher growth and strong balance sheets are trading at only slightly higher valuations.

Another key thing which has me confident that the best is yet to come is that oil prices are moderating. At the earlier part of the year, we were looking at oil prices of above $110 USD per barrel at one point. But since then, they have fallen to below 100 USD per barrel. This is significant because very high prices are the one thing that can potentially derail Asian economies which I worry about. This is because Asia’s strong growth has already caused inflation to become a worry, and high oil prices will only fuel inflation further.

Thus, I viewed the recent drop in oil prices with no small amount of relief as this reaffirmed my view that Asia’s economic growth would be sustainable. In fact, the many measures taken by the various Asian governments against rising inflation would have the long term effect of allowing the upcoming economic growth period to be a much more sustainable as opposed to one driven to a short but dizzy height due to asset bubbles forming, only to see it crashing down soon after.

The next upcoming 3 years at least will be good ones for Asia. The shift of economic centre from the west to Asia will only hasten. Amidst all this, it is a matter of time before stock markets in Asia also rise to take into account the growing importance of Asia’s markets. Amidst all this, one just needs to be patient. When the rebound in markets come, as what we are seeing now, I fully expect it to be a significant one. Asia’s markets have been depressed for too long taking into account its very strong fundamentals and cheap valuations. The west may have reason to be cautious, but Asia should not.

As long as one is well diversified, you can be quite confident entering markets at this point in time. A lot of the fears and concerns are old news already and well priced into the market. Just don’t leave out bond funds from the equation when investing and you should be able to handle any of the relatively short and small corrections which will occur every now and then in the coming 2 to 3 years. Asian and emerging market bonds will be very interesting as well in the coming 3 years. If the growth of Asia’s economies makes Asian equity markets look attractive, then the weakness of the west’s public finances make Asia and emerging market debt look like “must buys” when ranked up against western debt.

It may take a while, but in time to come, the markets will price all this in. Asian markets should cumulatively be of a much bigger market capitalization than they are today. In a similar vein, it is unbelievable that some western countries can still have their debt being priced and treated as AAA grade and some of Asia’s debt is still being viewed as “emerging market” and hence being assigned a lower credit rating. Whether by the continued long term inflows of money into Asia, and the appreciating currencies, stock markets, or bond markets, the markets will eventually correct this disparity. And as they do, the investor who is positioned correctly will gain from this.

Markets Are Looking Up Again

It's odd what sometimes just one week can do. Last week, the STI index was at around 3000 points, and many were wondering if it would go lower. Markets are much better this week. The Greece crisis has now stabilised as European Union leaders agreed to launch a fresh bailout package expected to total 120 billion Euros for Greece. The condition is that Greece passes through an austerity package next week, and unless they want to be broke by mid-July, chances are it will be passed through.

The Federal Reserve had a press conference on Wednesday where they reiterated that interest rates will be kept at the current near zero levels for an extended period of time and when asked how long that is, Ben Bernanke specifically said “at least two to three meetings … and I emphasize at least”. Ben Bernanke also repeated their view that they expected inflation to fall.

The calm and confident press conference given by the Federal Reserve has helped to calm markets worried over the pace of the US economic recovery and over potential rising inflation.

In any case, the recent pessimism in markets has also had the effect of driving down oil prices. In addition, the International Energy Agency had announced that its members would release 60 million barrels of petroleum into the market, causing a further drop in oil prices, with the Nymex WTI contract price for oil dropping to 91.02 USD on Thursday. The lower oil prices will be welcomed by Asian countries which are still grappling with rising inflation.

Overall, markets are recovering this week as investors gained much confidence that the world is not headed off into some crisis in one form or another. As I mentioned in my blog entry one week ago, it's important to control your emotions when markets are down, sometimes the best bargains in fact can be found after a bout of bad news had driven the market down. At current levels, and if the concerns remain pretty much the same concerns which have been plaguing us since last year (Europe debt crisis, oil prices and inflation, China tightening and US growth potential slowdown), then I am confident that downside for markets will be limited because valuations are quite cheap at this point. Upside on the other hand, can potentially be quite substantial because we are certainly still in a very cautious mood, so the swing back towards a bullish market sentiment will be a big one.

Controlling Your Emotions

Its been a tough few weeks in stock markets. A combination of things including Greece debt woes, worry over the US economy and China tightening has combined to keep downward pressure on markets. Year to date, a fair number of funds are in the erd, though not by a large percentage. Most are down 5 to 8%.

It is time like this when investors’ patience are tested the most. Take heart in that most people invested into equities. Only those that have stayed in bond funds and short duration bond funds are relatively happy at this stage. Even so, Its not the time to panic. Controlling ones emotions is probably the most crucial at this point. Markets can and will eventually rebound, but selling out when they are depressed runs the risk that when they do rebound, investors will be caught out.

Frequently, when the market rebound happens, there is no particularly significant event that can forewarn investors. Its literally quite possible that 4 months on, we could still be facing the same issues of China tightening, Europe grappling with debt woes and a US economy which is not exactly roaring ahead. And yet, it is also quite possible that with the same environment, there is a market rebound. This is like what happened in 2009. In the aftermath of the Lehman Brothers crisis, the rebound started in March 2009, and yet at that time, was the situation different from 3 months ago in December? It was not.

There was no clear indication at that point in time that the global economy was rebounding. I remember back in March people were still talking about a L shaped recovery. Everyone was still struggling and the economic indicators coming out then were horrendous. Yet, March saw a very significant rebound. And by the time economic indicators appeared which showed a recovery, that was many months later, and a lot of the market recovery had already happened.

Valuations are cheap at this point, and that is precisely because here are so many concerns worrying investors at this point. But this is an environment which an investor should actually be more comfortable with when investing as opposed to one which is all rosy clear blue skies. You know that with the current pessimism out there, you are not buying into equity markets expensively.

Just make sure you are diversified, with a certain amount into bond funds which can given you some stability through this, and wait out this current time. Some of the best bargains are found when people are fearful. And while I would not say that we are at the maximum fear stage at this point, we are certainly further within that spectrum then in the “greed” spectrum currently.

Invested Another 4k Into Portfolio

Investors are nervous this few weeks. The nonfarm payrolls data coming out of the US were well below expectations. 54,000 jobs created in May is a bad number no matter how much you spin it, especially when there are 13.9 million people out of work in the US where unemployment rate remains at a high 9.1%. The ongoing problems with Greece doesn’t help. The market can quite clearly see that Greece will need some of its debt restructured no matter how unwilling the EU is on the matter. And given the lagging nature of economic data, the numbers currently coming out of Japan which are mostly for April will be horrible since April will see the full impact of the triple disasters that hit Japan.

Despite all this though, I still put in $4,000 into my portfolio. $2,750 went into the DBS Enhanced Income fund. No matter what, I am still moving into my new place at the end of the year, so saving up for the renovation and the move will continue. The other $1,250 went into my Parvest Europe Alpha fund. The reason being that my portfolio remains heavily weighted towards Asia, and I am finding Europe interesting now.

It's not that Asia is no longer attractive. If it wasn’t I wouldn’t have so much of my portfolio into it. But Asia’s the “safe” investment bet actually. Everyone knows the long term growth story for Asia. And the shifting of the economic centre from the west to Asia will happen this century. It’s a matter of time, and as it happens, so will the market capitalization of Asia rise relative to western markets.

However, Europe is interesting to me currently because it is the beaten down market that nobody wants to look at. Because of Greece, nobody wants to touch Europe with a ten foot pole. Europe equities are not for the faint of heart right now. There is so much uncertainty. It has been one year already since the Europe crisis started, but its like an ongoing train wreck. However, that’s why its interesting. Will this all end badly for Europe? Nobody knows at this point. But there are a lot of people who would have much vested interest at least not seeing Europe spiral down into a financial disaster that will rock other markets as well. Also, while all this uncertainty remains, good companies in Europe, which are not going to be affected in a major way are being traded at low valuations because of the overall negative perception of the region right now.

There remains a lot of negativity with most markets right now. That also means that there is opportunity. A lot of equities are not showing their true value yet. Many companies are actually making a lot of money. They are cash rich, have surging sales, and their costs are not necessarily going up that much since they are not aggressively hiring. (They don’t have to since its an employers market in the west). The situation at the corporate level is very different from the debt ridden governments of the west who have to tackle massive deficits. Many markets are at record high earnings, and yet their market levels are well off their all time highs, as much as 20 off. This means that there is a lot of caution and negativity priced into markets already. And we have seen that because from last year till now, it has been all about the European crisis, whether the US economy can get back on its feet again, China’s rate hikes, and we can now add Japan’s triple disasters to the long list of worries as well.

However, a lot of this are priced into markets. Valuations across the board at this point are not expensive. The last time we were seeing such record high earnings in 2007, people were celebrating. Valuations were much higher. Today, even though earnings in many markets have risen back to the same level, and in some markets even passed it, people are more inclined to be cautious instead. Markets are at least 20% off from the 2007 all time highs. But eventually, I believe these concerns will eventually ebb and sentiment will shift towards the positive. Especially as earnings of companies continue to remain strong. But it is when these concerns are still strong, that’s when good bargains are there to be had. When there is no more uncertainty, markets would have zoomed away already.

So, I am happy to put in more now while markets are still cheap. I would have put in even more if not for my house move at the end of the year. (But let’s not get greedy here either, nothing is a sure thing and no matter what, I can’t tell my wife we can’t afford to move at the end of the year!). So, I will continue to put the bulk of new monies into short duration bond funds for now. After I have settled into my new place and paid for all of the renovation and moving expenses, then I can see to putting my monies to harder work in riskier markets.

On Singapore and commodities

A bit more of a Singapore focus. Now that the general elections are over, we have various economic data and news coming, all of which point that Singapore’s growth this year is likely to stay relatively robust. For starters, Singapore’s domestic wholesale trade increased by a seasonally adjusted 10.3% in the first quarter compared to the 4th quarter.

Singapore’s economy as measured by gross domestic product (GDP) grew 8.3% in the 1st quarter this year compared to the 1st quarter of last year. The strong performance was better than expected and comes off 2010, where in itself, Singapore’s economy grew by a record 14.5%. On a quarter on quarter basis, the Singapore economy grew by a huge 22.5%. The ministry of trade and industry has now revised our official 2011 growth forecast from 4 to 6%, to a range of 5 to 7%. I personally expect it to be revised up further again as we go along.

The two integrated resorts have had a strong positive impact on tourism and with the higher number of tourists, this has increased spending in Singapore. The gradual recovery in the global economy has also helped our export oriented industries and thus, the manufacturing sector has led the way for growth in the first quarter, surging by a massive 75.4% quarter on quarter. We remain quite positive on Technology this year as consumer demand has been very robust and will allow the sector to continue to grow strongly even after the inventory restocking has been completed.

The commodities market in recent weeks have suffered a rather large hit, and some investors are exiting this sector. Increasingly, I believe there is some rotational play as investors run from one asset class to another in search of returns and yield. It can be rather dangerous to play follow the herd, and I would not recommend doing such rotational play. It is generally very hard to predict accurately why and when a sector might come into favor or fall out of favor. Certain asset classes like equities and bonds are so called “evergreen” so they will always have a place, and they are large enough such that such hot money stampeding in and out will not cause as big a swing in prices as compared to commodities. I personally feel that the huge volatility in commodities have been driven not by fundamentals or demand swings but more by this speculative hot money flowing in and out of the sector.

I am actually a bit relieved that there is a correction in commodity prices now. This is because it will take some pressure off the rising inflation experienced by many Asian countries in this part of the region. More than anything else, I feel that overly high commodity prices, driven up not by demand, but more by speculators will impede and pull back Asia’s economic growth.

Markets are gradually swinging back into an uptrend again, though there continue to be hiccups now and then. The latest include the focus on IMF’s chief, which was charged with sexual assault. Ultimately, such news are short term noise which will not affect market fundamentals. What is happening is that many companies continue to report strong earnings. The overall mood now is still very much one of cautiousness, which is why I still believe the best is yet to come. Many markets, including Asian ones, as well as Europe and the US should not be seeing such low valuations based on the strong earnings which companies are reporting. Investor sentiment can and will change, and my portfolio is already well positioned to catch that uptrend when it comes!

One of our Competitors has closed down

Ordinarily, you would think that being the general manager at Fundsupermart, I should be celebrating that one of our online competitors have closed down. I am not. Its actually a sad event. Finatiq was one of the earliest distributors online along with us. They were a few months earlier than us. I remember the excitement when we both started out in the industry with the slogan that our sales charge was half that of the industry norm (which was 5% at that time).

It has been more than ten years already, within the blink of an eye. I believe we have had a big impact on the unit trust industry, and we have brought sales charges of the entire industry down over the years as well. But they are now ceasing as a business. Truth to be said, none of the unit trust distributors are earning big bucks. If we were, I don’t believe Finatiq would have had to close down. In fact, the traditional online unit trust distributor business model has and needs to change because it is unsustainable in the long term.

There are only two platforms in Singapore – iFAST Financial and Navigator. Fundsupermart belongs to iFAST Financial, and Dollardex belongs to Navigator. Navigator, if you look at their financial statements, have been losing money every single year since 2004, with the exception of 2007, which was a huge bull run year. And they have been losing money in the tune of millions, not thousands.

We have been slowing bleeding each other, as we aggressively cut sales charge over the years. It started at 2.5%, but look at where we are now - there are fund promotions where we are giving 0% sales charge on funds. Investors have been huge beneficiaries, and they are happy. But again, everything is a business. There are directors and shareholders to answer to. How do you justify a business if it is losing money every other year?

I did not wish for Finatiq to close down. In fact, my first purchase of a unit trust was through Finatiq! It was only after I joined Fundsupermart that I made all my unit trust investments through Fundsupermart. I am sad that they have closed down. This industry has been a cutthroat one.

People complain about inflation over the years, about how a bowl of Mee used to cost $3, and it now cost $4.50, even $5. The case has worked in reverse for unit trusts. 5% sales charge became 2.5% when online distributers entered the fray, then it has now halved again to 1.25%, and the trend is that it will go even lower. So, while everything from rent, to electricity, to people’s salaries have gone up, sales charges keep on coming down. This is akin to the bowl of mee costing $3, coming down to $1.50, then $0.75, and still going lower!

And has the product changed? It has actually improved! There are much more funds now investing into all sorts of asset classes. There is free switching. There are more online tools. More articles, more webcasts, more research, and even an iPhone app! All these have made unit trust investing much better than it was in the past. But all these have been done while sales charges have now shrunk to a fraction of what they were originally. This is as if that bowl of mee has not only seen its prices drop from $3 to less than a dollar, but along the way, you got free entertainment, better ingredients and a host of other benefits on that same bowl of mee. Where can I find a bowl of mee like that for less than a dollar these days?

I don’t know what the remaining competitors are going to do going forward, but I see that such a business model in an environment of ever-decreasing sales charges has to change. Unless there is some sugar daddy out there happy to keep on pouring millions of dollars of good money into this venture, otherwise, at some point they will ask, “When is the business going to be profitable? When will the bleeding stop?”

And every business, no matter how big it grows, cannot run away from that fundamental fact, that in the long-term it has to be profitable or it will perish. How do you be profitable if all your costs (rental, salaries, maintenance etc) keep on going up, but your profit margin keeps on shrinking? It took us 5 years to become profitable after we started, if we had started with a sales charge of 1.25%, would it have taken us 10 years? How many shareholders are willing to put up with a company that has to lose money for ten years before it starts to become profitable?

For now, the online distributors have been content to keep on lowering sales charge in an ever downward-spiraling price war. But such a business model is unsustainable in the long-term and has to change. We were already forced to change our business model because we recognised the trend in this business and where it was leading us.

Eventually, our competitors will be forced to change their business models as well. Not unless they have some sugar daddy supporting them, and if they do, I would love to have his number!