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.

Shifted 20% of my Bond funds into Equity Funds (3 Feb 2010)

I mentioned in my previous blog post that if markets went down further, and are down 10%, I would shift some of my bonds into equities. I waited a couple of more days, during which I added another $3,000 into equities, but it seems like we have reached a certain lull in the market. Things are still quite volatile, as can be seen by sometimes very wide swings in the market, but we seemed to have reached a certain “support” point.

Now, I would clarify here first, I am not a chartist, and it is unlikely that I will ever be. I prefer to focus on fundamentals and adopt a longer term mentality then just two weeks or 3 months. But I was bullish at the start of the year, and nothing that has happened since has really changed the fundamentals of the global recovery we see taking place. This means that when markets fall lower, I get tempted to put even more into equities.

Its just as well I forced myself to rebalance my portfolio in December, and even though I was bullish equities, I ended up moving some money into my bond funds because my equity funds had outperformed the bond funds by spades in 2009. Thus, I now have nearly $52,000 in bond funds, and so if I feel that I want to take advantage of a market correction to add back into my equity funds, I can.

However, instead of adding everything, I shifted 20%. Here’s how I see things going. In actuality, most Asian markets are not even down 10% yet, they are only down around 7 to 8%. But overall, I am bullish for the year, so this could be as low as they go before markets start to recover again. However, nothing is ever a sure thing in life. So, I look at worst case scenarios and alternate scenarios.

Firstly, at this stage, I don’t see a double dip recession happening. And even in recession years, a big market crash would typically be 30% down from their peaks. Assuming a worst case scenario (which I don’t believe will happen). I would want to be 100% into equities if markets are down 30% because we would probably be at or near the bottom by then already. Markets are only down 8% at this point, so instead of shifting all of my bond funds into equity funds, I shift 20% instead. This then allows me more leeway to shift more of my bond funds into equities if markets happen to fall further.

The more likely scenario is that markets will soon stabilise, and as the global recovery continues to take hold, start to move north again. In this case, I would probably regret not having shifted everything in bonds into equities, but having a lessor return is something I can live with. You can’t get everything exactly right. I am not trying to predict we are at a bottom for this year. If I knew for sure, I would shift everything into equity funds straight away.

The whole concept of rebalancing, and having some allocation into both equity and bond funds is about managing risk. Hence, my actions over the last two weeks. So, while I would take opportunity to make some shifts like I have done, I recognize that if markets do recover and move back into a bullish mode, then it would be wiser to shift back to my original allocation at the start of the year then. Just in case people are curious, I shifted $3,000 from the Fidelity High Yield Bond Fund into Aberdeen Pacific Equity, and I shifted $8,000 from INF EF Emerging Market Bond Fund into Aberdeen Asian Smaller Companies fund

Certainly though, I will be watching markets closely at this point. Do I think we are at the bottom for this year? I wouldn’t know, since short term sentiment can change very quickly. However, I don’t believe the fundamentals have changed in any major way over the last two weeks, so, the correction has made me more aggressive in my portfolio positioning.

How markets have fared since the year started (26 Jan 2010)

We are nearly one month into the new year. Thus far, commodities had a good start, but are now seeing more downward pressure. Based on 24th January prices, the commodities funds within the alternatives space are on average up 1.31% year to date while resources funds are down 3.79%. Technology is doing better, with technology funds on average up 2.12% year to date. But the surprise so far at the start of the year has been financials. On average, financial funds are up 3.51%, but this figure was pulled up largely by a huge 9.46% gain from the Parvest equity Europe finance fund, which is up 9.46% year to date. Despite the ongoing worries about the European debt crisis, we have seen European financials recover ground since the start of the year.

Asian equity funds started the year strongly, but subsequently, worries over China’s potential rate hikes caused profit taking to set in. Asian equity funds are down marginally so far year to date. Korean equity funds on average are up 1.43%, Taiwan equity funds are up 0.13%, Greater China funds are down just 0.34%. Markets like Thailand and Indonesia, the strong winners of 2010, have tumbled. Thailand equity funds are on average down 8.43% year to date, and Indonesia equity funds are down 11.86% year to date.

The current jitters are not something I am too worried about. China’s tightening stance against inflation has been well documented since last year. Earnings of companies have remained strong, and this will be a big theme this year. As we have highlighted, we are negative on gold and neutral on commodities. Thus, my portfolio is also conspicuously empty of commodity or resources funds. The Russia equity fund I am holdings is a hedge against oil prices moving up too high, and I am actually glad that oil prices have moderated recently after they were in danger of breaching 100USD per barrel at one point. I am glad I sold off all of my Indonesia fund holdings as well.

So, the surprising stand outs at the start of the year has been Europe finance funds, Italy equity, France and Iberia funds. Some of these, especially the Iberia funds were something few would have dared to touch last year as the European financial crisis erupted. But they have shown surprising strength despite the situation in Europe over its debt woes not fully resolved. But again, sometimes, as I note, it is where angels fear to thread, where there is blood on the streets, there are bargains. If and when there is clarity in Europe and everyone knows that its debt woes are behind it, then Europe markets will see a big jump, and it would usually be too late by then. The situation in Europe remains shaky, but it bears close scrutiny. I added to my European and US holdings at the start of the year simply because I was too overweight in Asia. I don’t regret adding to these two regions one bit. While everyone (including me) remains convinced that Asia’s and Emerging market’s fundamentals are stronger, the growth is stronger, but US and Europe’s valuations are now quite cheap. Where there are bargains from a valuation standpoint, all that is required is a lot of patience, and sooner or later, such markets will be re-rated. US and Europe could be the dark horses for this year, based on their surprising strength at the start of the year.

Heavy Correction These Few Days. Look out for Bargains! (26 Jan 2010)

After the drop in markets last week, today saw another major selloff. Markets are getting spooked with the heavy selling. There isn’t really a major reason. But nevertheless, people are pointing to China tightening was the major culprit, with the new US proposed regulations on the finance sector as oil on the fire. When people want to explain a selloff, any reason will do.

China has been talking about tightening since last year. If we are worried about asset bubbles forming in Asia, then what they are doing right now is exactly what is needed to cool down a red hot economy that is in danger of over heating. But cooling the economy comes with less liquidity, and so, people are selling off in reaction to that. On a fundamental level though, China’s economy may now be allowed to continue a high rate of growth without necessarily having asset bubbles developing and bursting, bring all that growth to a big halt.

For investors who had been waiting for a correction so that they can buy in again (for those that missed the boat in 2009), now is a great time. Right now, it is a lot of negative sentiment and fear which is driving the selling. It isn’t because economic fundamentals haven’t been improving. The latest numbers for Singapore industrial production just came out, and those were great. Manufacturing output increased by 18.1% in December on a seasonally adjusted month on month basis. And that is the first time we had an increase in the last 5 months. The electronic and chemicals output all saw double digit increases (electronics output up 57.3% yoy, chemicals output up 27.7% yoy). The external environment is improving.

So why have markets been going down this past few days since last Thursday? Heavy profit taking and fear is driving this. The investors that went in last year are sitting on hefty gains, the last few days have made them fearful and some want to lock in their profits. I didn’t wait till now, I already rebalanced my portfolio back in December, I hope many of you did as well.

Now is the time to look for bargains. I will be monitoring this closely. When most of the markets are down 10% from its peak this year, I will shift some money from my bond funds over to equities. If markets pause after this round of corrections, then regain their confidence as economic fundamentals continue to improve, we will see a strong rebound. Fear and negative sentiment could push markets down 15% to 20% even from their peak, but if that happens, I will shift close to all of my bond holdings into equities. It would be a rare opportunity and I firmly believe that if that opportunity happens and is presented to me, I would jump at it.

Looking at your holdings, you won’t be very happy, especially if you have been monitoring them every day. Seeing them drop daily can be depressing and scary. But market cycles are common, and market corrections can easily see the market shift down 10% or more. Just remember, the best buys are made when everyone is selling, not when everyone is buying. So, if you are feeling rotten about how markets are doing now, yet you dare to buy, just like I did last Friday, it might not necessarily be a bad thing. Another thing to remember, you can’t always get it exactly at the “bottom”, somewhere near is good enough. The boat which was originally departing has come back for now, would you board it?

Market Correction! Bought 6k More (22 Jan 2010)

The correction in the last two days has been swift and sharp. At the time of writing, the STI index is down 100 points within just two trading days. However, I just bought $6,000 into my portfolio. The investment were as follows:

Schroders Latin America Equity Fund - $2,000
Aberdeen Singapore Equity Fund - $2,000
LionGlobal Korea Fund - $2,000

Why am I buying now? Because I see this as a correction. The main reasons why the market is falling is due to fears on China tightening its policies to curb inflation. The worry about China tightening is not a new one. There has been fears of the China government coming in to “cool” the market since last year. It did not stop the flow of money into China, and China’s inflation has continued to move upwards. According to China’s statistics bureau, inflation went up by a higher than forecast 1.9% in December.

The market fears anything that might mean less liquidity. And China is currently experiencing too much liquidity. China may raise interest rates by the end of June, and increase banks’ reserve requirements. On January 12, the People’s Bank of China raised lenders’ reserve requirements, also to curb liquidity.

In the end, we can’t have it both ways. Last year, and even now, there are concerns that potential asset bubbles may be forming in Asia, in particular in property. Seeing how badly the bursting of a property bubble can hurt an economy, I am sure no Asian government wants to go down that path. They would rather risk some unhappiness and volatility in markets now, rather than a much more severe one that might occur if such bubbles are allowed to continue forming unchecked.

Actually, I suspect that markets know this as well. Rationally, people understand. China is not in the same stage of economic cycle as US. China is experiencing very strong inflows, rising inflation, and potential asset bubbles. There is nothing “fragile” about China’s economic growth right now. If anything, the government is worried about overheating rather than like US, some double dip recession. But markets will be unhappy with the moves, and short term wise, there will be a knee jerk reaction because the immediate effect is that there will be liquidity drained out of the system, and that is likely to have an impact on the stock market.

However, I remain confident that fundamentally, Asia’s growth track remains strong. So, by tackling the potential problems that might arise, a longer term growth trend will remain intact. Markets are often near sighted, and in this case, they are focusing on the short term effects of China’s policy tightening. I believe that after the dust settles, and as China’s economy continues to grow, but with less fears that asset bubbles could develop, then we will see a surge back again in Asia’s markets. So, I took the opportunity during the two day’s corrections to put in more money.