Looking to Add where Opportunities Present Themselves (13 Aug 2010)

A round of corrections has set back many markets. Fears over a double dip recession resurfaced due to weaker US economic data. My view is that these fears will eventually blow over, especially as the earnings of companies continue to improve despite the fears. No one should be surprised that US’s economic recovery is a slow one. The blow they took during the Lehman Brother’s financial crisis and a decade of overspending will take time to recover. That doesn’t mean good companies can’t continue to make money in this kind of environment. And it doesn’t mean Asia and the rest of emerging market economies can’t continue to grow either.

I see such corrections as opportunities and if things go lower, I will certainly be looking to add to my holdings. In fact, I myself did not take advantage of opportunities during the Europe Financial Crisis that occurred in the 1st half of the year. Europe was crashing, along with the Euro. I said in this blog that opportunities should show up. Fundamentally, it shouldn’t be a uniform crash because not all European countries and companies should be affected to the same degree just because of Greece, Spain or even the overall European financial sector. Yet, while I did not sell off my European funds, I did not average down or rebalance into them either although they surely fell far more than my Asian equity funds. Europe equities and the Euro has rebounded now, with the top performing funds over the last one, two months mostly all being European equity funds. Oh well, opportunities like these do slip by, but there will be more.

Once a typical country or region’s stock market has fallen in the tune of 30%, there must be bargains somewhere. A typical country’s economy will surely bounce back after any sort of crisis. It could be from a financial crisis, recession, overexpansion leading to bad debts, but once the shock and selloff has occurred already, markets typically do come back. There are many examples of big selloffs in history, from the Asian financial crisis, Lehman Brothers in US, Black Monday, Oil crisis, but if you had invested after the markets had already dropped 30% or more and remained patient, after two or three years, there’s a very good chance you would be sitting on good gains. The key is to be patient. Even if in the short term, the market remain volatile, you are already getting in cheaper by 30% compared to before the crash, the odds are going to be strongly in your favor as long as you are patient.

One market that has been hit badly only just this year is the China Shanghai index. This market is currently down 25% year to date. Since July 2009 last year, it was down 36%, and yet, July 2009 wasn’t even its all time high. The global uncertainty, especially in the aftermath of the European Financial Crisis plus China’s very aggressive tightening has caused the huge drop. But we are talking about one of the most important economies in our times, and few people would say that China’s economic growth story is over.

The key thing holdings us back, and I confess I get affected as well at times, is the fear of whether a drop will continue. At the peak of the US financial crisis, when Asian markets were down 50%, how many of us would have dared to average down, or invest more. The overall investor mood at this point in time remains a very cautious one. This is despite positive news from many Asian countries and strong earnings growth from many Asian companies. But this means valuations at this point in time are attractive. The Shanghai market, for example, is currently trading at just 15 times PE, near to an all time low.

I am confident that the world will move on from its current problems. Even in US, or Europe, which many of the investors here are inclined to avoid at this stage, there remain many good companies. These will not be held back despite a slow recovery in the US or in Europe. And Asia will forge ahead. However, being diversified is going to be more important going forward because markets will likely be very volatile as investors grapple with double dip recession fears against the continuing improvement of corporate earnings. I am currently very comfortable with my current allocation, and looking to add to my holdings where opportunities might present themselves.

A Lot of Bad News is Priced in Already (5 Aug 2010)

People might be wondering what is happening. On Monday, headlines in the newspapers read “US may see double-digit jobless rate again”. Yet, on Monday, all Asian markets surged up, and the Singapore STI index broke 3,000 points very convincingly. Those who want to look for negative news will find no lack of these. However, increasingly, stock markets seem to be moving up in spite of the bad news. Why is that so?

One of the biggest reasons is that a lot of the bad news has already well publicized, chewed and worried over, and ultimately priced into markets already. For another big crash to happen, it would have to be something totally out of the left field and not what has been talked about for months already.

US slow recovery? That’s been talked about since 2009! Everyone was convinced it would be a W shape, an L shape, A U shape, but definitely anything but a V shape. So, actually, when the initially recovery looked fairly sharp, it caught people by surprise. Now that the momentum is slowing, investors get worried again. But this is old news. Few expected the US economy to go through a sharp recovery. Most expected a fairly slow one, so now that it is performing true to form, it should be no surprise.

The other big worry is about the Euro and Europe’s financial crisis. It started with Greece and swiftly spread to the rest of Europe. Extreme measures had to be taken. But things have stabalised now. The Euro is lower, governments in Europe are falling over themselves to show that they can be financially prudent, and the latest stress tests has restored some confidence that the European banks won’t have a collective meltdown. So, at this point, things would have to really blow up in a big way for Europe to plunge into another crisis.

China tightening was the other worry this year. This was not withstanding the fact that China’s economy was red hot and to prevent asset bubbles from developing, putting on some brakes was really needed. The Chinese government was right to order the banks to rein in lending, and to curb the property market. A lot of the measures are all in place, they have taken the edge off the stock market, and while the property market in China remains resilient, at least it has stabalised instead of going on a one way trajectory upwards into bubble territory. China has walked the fine line between too much economic growth and pulling back very well and I don’t expect China to be the region which might suddenly develop a crisis that would cause a reversal to the upwards trend we have been seeing.

The positive to all this is that while earnings have been strong since the year started, valuations are not much higher because the stock market itself, after going through the correction in May, has not quite rebounded to this year’s high yet. This means there is still more room for equity markets to move up. Also, I believe that unless it is something none of us expect, otherwise, there are few big issues I see in the coming months which would cause a market crash or disrupt the upward trend we are seeing now. All the biggest worries are well documented, covered and talked to death already. The market won’t be surprised by such things as US’s slowing growth, Europe’s financial troubles, or China tightening, and hence it won’t react to it in a big way.

On the contrary, I expect equity markets to slowly continue their upward rise over the next two to three months, and gathering steam towards the end of the year as investor confidence continues to rise. No further earthshaking bad news is good news. The same old concerns are also good news because they are discounted already. Asia economies will continue to recover strongly this year and the next even as the developed countries slowly pick up their feet. As investors come to the realization that strong growth can happen in Asia even with the developed countries dragging  their feet, confidence will return to investors in a big way, and that is when the equity markets will take off.

In the meantime, be patient and don’t get too greedy as markets rise. But in the same vein, don’t panic every time there is some profit taking from some bad news. I am confident that we are in a rising market and as such, bad news that causes short term dips are great buying opportunities during such times.

Don’t Get Too Greedy Now (23 July 2010)

Markets continue to climb steadily. The STI index is close to 2970 currently. There is actually not much volume, which shows that a lot of investors remain cautious. This is actually a good sign. A steady rally that occurs as investors climb a wall of worry will last longer than one that boosts the market up for a just a short period of time, then swiftly runs out of steam.

There are lots for investors to worry about if they want to. The US economy, which has previously been recovering swiftly (to everyone’s surprise), is now slowing in its rate of recovery. Its latest ISM Manufacturing index still indicated growth, but it was not as strong as expectations. The US Federal Reserve chairman Bernanke’s latest comments on the US economy did not foster much confidence either. Furthermore, although Europe has now stabalised and the Euro has also now stopped falling, their financial problems will take some time to sort out.

But its easy to get too caught up with the bad news. One key indicator which I often go back to, is valuations, and right now, valuations for many markets remain very attractive. This shows that many companies are growing their earnings, but their stock prices have not been driven up because investors are still so cautious.

But on a personal level, I shifted $10,000 from equities (Aberdeen Pacific Equity fund) into bonds (Fidelity Asian High Yield Bond Fund). Does this mean I am turning negative on the market? A firm no to that! For me, my long term asset allocation was to strive and have 10 to 15% of my portfolio in bond funds, while the rest are in equity funds. This way, if there are falls in markets, I can shift from bond funds into equity funds while they are cheaper during these times. This year so far, I have done it twice already, the latest during the May sell off. So currently, I am considered heavily overweight into equities, even more so than my target long term allocation.

So, this shift of $10,000 into Fidelity Asian High Yield Bond fund is to move back towards my long term allocation. In truth, it is not enough, I would still remain overweight at this point. But my intention, is that as the market continues to rally, I would gradually then shift some more from my equity funds back into my bond funds. This gradual way of adjustment allows me to continue to enjoy the upside for my remaining equity funds, but I am locking in some of my profits which I made when I shifted from my bond funds into equity funds during the selloffs this year.

Volatility will always be a part of markets. If we have diversified portfolios, and we maintain discipline and not get emotionally driven towards our investing, then volatility in itself is not so scary. From the peak of the market in end March, to the April/May selloffs, when markets fell on average 10%, my portfolio fell from $379,000 to $353,000, so I lost $26,000 during that period of sell off. But I did not panic and sell any of my equity funds, and in fact shifted money from bond funds to equity funds. Now, even though markets have recovering, and still not at the previous March peak, my portfolio is already back to near the March levels.
The key thing for many investors now is to not get too greedy. If you are already into equity markets at this point, then don’t let rising markets cause you to double your equity holdings and such. By all means, enjoy the ride up, but realistically, it will be a gradual one, without the kind of eye popping returns of last year. In fact, lock in some profit occasionally as the market rises to that your allocation towards equity funds do not get too large. We must remember that although certain regions like Asia have done much better than what economists expected, there are some headwinds currently. So, keep an eye on your portfolio, try not to let it get too heavily overweight in equities as stock markets recover.

On the flip side, if you have been staying out of markets all this time, then you may want to consider putting some of that money to use because returns from keeping them in savings accounts are so low currently. While bond funds, especially the Asian high yield bond funds I personally like right now are definitely riskier than a savings account, I think its well worth the risk.

(PS: I haven’t updated my portfolio yet, because I just put in the trade today. I will update my portfolio when the transactions are completed.)

The Quiet Rally (7 July 2010)

Slowly but surely, stock markets are resuming their climb. I was saying that markets have stabalised and people coming back after the world cup would be surprised. We are seeing it happen now. Despite all the worries and talk about the western world slowing down, Asia’s economies continue to forge ahead, and Asian markets continue to climb steadily.

The Singapore stock market as represented by the STI index is back to within shouting distance of 2900 points. Other than the China market which has been more disappointing, most other Asian markets have shown surprising resilience and these last 2 months. Just two weeks ago, it felt like things were still pretty bad. But if we look at our funds nows, we would be struck with the strong resilience of markets. On top of that, if you had been holding a good fund, which was holding good stocks throughout these two weeks, then any losses would have been very minimal.

As an example, my main core Asian equity funds were Aberdeen Pacific Equity and Aberdeen Asian Smaller Companies. This year has been so volatile yet, since the start of the year, Aberdeen Pacific Equity is up a marginal 0.26% (based on prices as at 5 July). Aberdeen Asian Smaller Companies, which is actually a higher risk fund given it focuses more on small caps, is up 8.96% for the year.

Its been the Europe and US equity funds I held which have dragged things down. But even with them, the entire portfolio is down just 2.84% over the last 6 months, and things will improving by the day, and I would argue that Europe especially would definitely be throwing up some bargains at this point in time. I am not going to sell any of my European unit trusts, as I believe they are holding on to quality European companies which will rebound and rise after Europe settles down.

The bond funds I have held have also helped to add stability to my portfolio. The high yield bond funds are giving 6 to 8% yield on an annualized basis. The Fidelity Asian High Yield Bond Fund (USD) had the following recent 3 dividend payouts.

3 May – 0.45% yield
1 June – 0.61% yield
1 July – 0.60% yield

Where else would I be able to get 0.6% each month! In a savings account, even if I put in over $100,000, I would be lucky to get 0.6% per year rather than per month. I would happily bear the higher risk that these high yield bond funds incur for the huge difference in yield. Asian companies are doing well currently, business in Asia is booming and getting funding is not too difficult at all. Look at China, even in a year where their stock market is one of the worst performing in the region, they are having a massive IPO to raise over 30 billion SGD from the market from one single Agricultural Bank of China offering.

I acknowledge the inherent higher risk that high yield bond funds come with compared to say Singapore bond fund, but at this point in time, given Asia’s outlook, I don’t see any big recession in the offing for Asian economies. Many of the Asian governments have actively taken steps to curb inflation, to curb bank lending (in China’s case), and to keep a lid of asset bubbles forming. They are doing the right things to keep things from getting out of hand. Even China allowing its currency the Yuan to rise, is giving some outlet to the huge flow of monies from investment inflows and current account surpluses to China.

I am eagerly awaiting the “next phase” up in markets. It won’t be quite as spectacular as the rise we had in 2009. But there is still some decent upside left in markets and I think a lot of investors will be surprised as markets quietly continue to creep up. Of course, as always, keep diversified. I have already shifted twice from bond funds into equity funds this year already, so I confess I am rather heavily overweighted equities at this point in time. As markets go up, I will be locking in some of my equity profits back into my bond funds.

Psycologically, this is actually quite difficult, because if markets go up from here, the more you have in equity funds, the better your profits. But ultimately, its about not being too greedy when markets are up, and not panicking when markets are down. I forced my self to shift more into equities when markets were down this year. So, in the same vein, as markets rebound, I will force myself to lock in some profits and shift to a more neutral weighting that is not so heavily overweight in equities.

We are seeing a quiet rally; Europe is leading the pack! (18 June 2010)

It’s the kind that catches people by surprise. There isn’t any particularly earth shaking news happening. People are busy watching the world cup, and volume is very low everyday in the stock market. Yet, markets are quietly rallying. However, if I mentioned which regions had the biggest rallies over the last one week, I think many people would be taken by surprise by the answer.

Its not Asia, though Asia has rallied as well. The biggest rallies have been seen by the European region. Many European equity funds have rallied 7 to 10% over the last one week (as at 17th June). Granted that they were the most badly hit over the last six weeks and many are still down 10 to 15% even after the rally these few days. However, my point is that often, these rallies sneak up on us before we even realise it.

Is it time to start to look for bargains in Europe now? The biggest bargains happen after the biggest crashes. The bigger the crash, the more bargains there are. And certainly, what Europe has just gone through over the last 6 weeks wasn’t a mere correction. There was real panic in the markets there. I believe most investors here avoided being hit too badly as most were severely underweight Europe (including me). But now that Europe has been bashed down, and is showing signs of stabalising, is it time to look for bargains?

But has Europe’s problems been solved? Definitely not! They are in for more pain in the days ahead, particularly for the countries that have run up large deficits and are now struggling to control them for fear of being singled out and cruxified in the bond markets (if they haven’t already). But a key thing to note about stock markets is that you can’t wait until everything has cleared and blue skies are out. By that time, the first stage of the rally would have largely passed you by, and that often has some of the biggest gains. So similarly for Europe. Its problems are not going to be solved within a few weeks, however, has the European equity market already factored in most of the bad news?

We have to remind ourselves, the global economy is actually still in a recovery mode, and in actual fact, many of the European countries are forecast to see some sort of recovery this year as well, including Germany. Furthermore, the primary culprit of the financial crisis that erupted there was Greece. Even if you include some other problematic cases like Portugal, even Spain, it does not add up to the whole of Europe. Europe is far bigger than just Greece, Portugal and Spain.

One problem with investing into Europe is that if the Euro continues to fall further against the Sing dollar, they would reduce gains even if its stock markets went up. But again, the question is whether a lot of the bad news has already been factored into existing decline in the Euro already. It has already fallen by 15% against the Sing dollar since 6 months ago. That’s a massive drop considering it such a core important currency. Also, the drop in the Euro would have made Europe’s exports cheaper.

Since I already have some holdings in Europe, I am content to wait and monitor further at this point. But if the main economic data flowing out from UK, Germany, France remains positive, then Europe would soon become more and more interesting as a place to look for bargains.

Of course the European financial crisis affected all markets, and emerging markets, including Asia also took a hit. So, valuations are cheap there now as well. In fact, After European funds, the next best performing funds in the past one week are the emerging market equity funds. It is too soon to say that these will lead the rest out of the pack as the rebound in markets take hold, but given that markets have just started to stabalise only last week, its all the data we do have at present.

Ultimately though, investing is about being patient, and having the guts to ignore emotions of fear when the markets are crashing, and similarly, to get cautious about being greedy, when markets are booming. We don’t have to always get it at the exact low point (that is often impossible). On a fundamental basis though, with Asian exports continuing to look healthy (Singapore’s latest NODX numbers were great), there is reason to be optimistic. It doesn’t feel like that coming off the last few weeks of volatility, but I strongly believe that in the end, valuations are more important. And valuations of many equity markets are cheap right now. Even Asia, with its highest growth, is trading at only 12 times PE, and some countries within Asia are even cheaper. No doubt if we looked hard at Europe and broke it up into different countries, we would probably turn up a few very cheap markets as well.

I wish I had more investible money at this point, but most of it is already invested! Anyway, I will end off by saying that I am excited currently and looking to see where there might be bargains. I believe that daring to enter now (or at least soon) will reap bigger rewards than waiting too long. I have also just updated my holdings online. I apologise that I haven’t updated them under my profile, so those who are interested can see how I am currently positioned. (And yes, I do have both European equity funds and Latin American equity funds at this point in time).

The World Cup and Markets (11 June 2010)

A lot of people will be losing sleep watching world cup matches these two weeks. Would it have any impact on stock markets. Overall, I believe volume will be lower. More retail investors might be staying on the sidelines as they devote more energy watching the matches. However, the institutional players and people’s job is to look at markets every day will still be around. What that means though is that if some unexpected news were to surface, we could see greater market movements because the actions of fewer investors will be needed to skew the market in either direction.

Overall though, I don’t expect the world cup to cause markets to fall. There is no fundamental reason why it should. Lower volume does not necessarily mean a falling market. In fact, some large gains in markets happen when volume is low, especially after a drop. In the US, Americans are not really into soccer much, so there would be very minimal impact. It is in soccer mad Europe where we are likely to see the quietest markets, especially since the time zone is similar. In Asia, where the timing of the matches means that most people would be watching the matches at night plus there are few Asian teams represented, it shouldn’t have as much impact either.

One of the biggest contributors to market volatility, the Greek crisis and Euro’s fall has now stabalised. So, on that note, barring any unforeseen bad news, I believe markets will continue to stabalise in the coming weeks. People will be watching upcoming economic data rather closely. If there is reassurance that the turmoil in currency markets and Europe has not affected the global recovery taking place, then we can expect to see a rebound in markets in the weeks ahead.

Sovereign risk remains high though. Right now, any country that seems weak financially can expect no mercy from rating agencies, and currency markets. Case in point, the focus on Hungary, nevermind the fact that it is not even part of the Euro currency. I will be switching my holdings in my emerging market bond fund to an Asian high yield bond fund. There isn’t a lot of choices in the Asian high yield bond fund space yet. Currently, it is just the Fidelity Asian High Yield Bond Fund. That’s fine though, because the fund is a good one. I believe that corporate risk is actually lower than sovereign risk at this point, yet one can get more higher yields from being in an Asian High Yield Bond Fund as compared to being in a “safer” global bond fund.

I will also be monitoring markets for bargains. The current market levels are attractive for accumulation. Asia continues to recover strongly. A lot of the concerns right now are at most minor road blocks for Asia. If we continue at the current trend, economic power will continue to shift from the West to the East. I really like Singapore and South Korea markets right now. Singapore is an odd situation. We are looking at GDP growth of as high as 9%, maybe even higher this year. But looking at markets, you would have though we were in recession. In the end, fundamentals will matter more, so I am looking to continue to accumulate more while markets are cheap as I believe that markets will soon resume their uptrend after stabilising these few weeks.

Markets are Stabilising (4 June 2010)

Asian markets look to be stabilising now. I believe most of the fear and panic over the Euro has been priced in by now, and nobody really believes North and South Korea will go to war regardless of how antagonistic the two sides might sound. (If they were fighting you would have thought they have started by now already rather than just trading harsh language).

The key issue which has plagued markets in recent weeks, the falling Euro and the huge debt problems facing Greece, and other countries appears to be ebbing. While it is by no means resolved (it will take some time to clear up their debts), there are enough actions taken by the European governments such that the markets have been reassured. So, while we are not exactly seeing any big rebound in the Euro, it is at least no longer in freefall.

The meltdown in Europe markets and the earlier fall of the Euro did do one thing, it scared the governments in the EC so much that they rallied together to come up with a huge package and more. Because individually, the bond markets were punishing the weaker EC countries as well by driving up the interest rates they needed for further financing of their bonds, many countries other than Greece all got very nervous and a wave of measures were taken by EC governments to cut costs, rein in spending. Basically, everyone was afraid to be the next Greece, and so, fell over themselves to show that their governments were taking active measures to cut down their debt.

All this while, economic data from US and Asia continues to be encouraging. In the US, the ISM’s nonmanufacturing purchasing manager’s index continued to stay above 50 (at 54.4) in May, which continued to signal expansion and growth. Singapore‘s manufacturing also expanded in May for the 13th straight month. One of its components - new export orders index hit a high of 55.4. Another reason why I believe markets are stabilising now is that the sell off has made stocks cheap again. Asia ex Japan markets as a whole are now at valuations of 12.7 times PE ratio for 2010 and 11 times PE ratio for 2011.

Asian companies are mostly reporting positive and growing earnings, while trading at below 15 times valuations in a generally improving economic backdrop. So, while the recent volatility focused investors attention on the negatives, and drove markets down, you can’t ignore fundamentals forever. Asia is taking the lead coming out of this last recession and since Asia is not saddled down by the debt problems which plague a fair number of developed countries, this lead will widen in the coming years. This shift of economic power towards Asia is going to continue, and it will be one of the main reasons why I continue to be bullish Asia for the long term.

As such, I am not afraid to buy more when the markets go through a correction. To be honest, I didn’t much want to look at how my holdings have dropped last week, but I still went in because psychologically, the more unpleasant markets may seem, then that means the cheaper they are, and hence the more opportunities. Take Technology. While Apple is selling so many Ipads that it is delaying some of its global launches because it won’t be able to keep up, yet Technology stocks got sold down along with everything else as well in recent weeks.

So, while you might feel lousy about looking at your investments now, remember that the best buys are made after a selloff when everything is cheap rather than at the height of a bull market when everyone is making tons of money. We have just had such a selloff, and markets have now started to stabalise. so it is now a great time to start looking for bargains!