Invested $2,000 more into a China fund (27 Aug 2010)

Its been a long while since I added to my China fund holdings. But I was not as keen on valuations previously so my holdings in China was a long term one based on the sheer potential of the Chinese economy. Year to date, the China A share market has been one of the worst performers within Asia, down more than 20% and although the H share market has fared better, sentiment there has also been affected to a certain degree.

Valuations for China companies are now very attractive, and all this even while the China economy continues to grow healthily. China is growing at the pace that developed countries like US, Japan can only dream about, but concerns about China’s tightening on bank lending and the curbs on its property market has caused a lot of wind to go out of its stock markets.

Yet, such things make me even more confident that it is alright to add to my China holdings right now. Who ever heard about precautionary measures taken before a huge crash or economic meltdown? US thought its banks and financial companies were the strongest in the world before the Lehman Brothers crisis. And it was doing nothing to prevent subprime mortgages from spiraling out of control. The fact that now in China, you need 50% up front cash just to buy a second property means that it is unlikely that China will face the kind of property crash that US experienced.

And when we finally go back to what is fundamentally happening, it is that China is already gradually becoming more important than US to this region’s prosperity, if it isn/’t already. The South Korean market has been resilient despite all that talk in US about a double dip because nowadays, more than 25% of its exports are to China, while exports to US make up just 11%. Singapore property prices has been pushed up because there are rich investors from China coming over to snap up property here (they are the biggest buyers at Sentosa cove). Where does the rich US investor feature within the Singapore property market? They aren’t mentioned because they are lag so far behind the Malaysians, Indonesians and Mainland Chinese buyers that they are a non-factor.

I don’t believe US will go into a double dip recession, and slowing growth in US doesn’t dim my outlook on Asian markets. It is only if China takes a fall, then will I really worry about Asia. At this point in time though, given the precautionary measures that the Chinese government is already taking, I think the Chinese government can walk the fine line between curbing the worst excesses in its financial and property sector without killing off too much growth in the process.

China and India remains a long term investment and will always have a place in my portfolio. In particular, the speed at which China is moving up the economic ladder cannot be denied. It is already the second largest economy behind US. In Asia, it has surpassed US as the most important market for most countries already. The Chinese A share market has taken a fall but the country’s economy itself is stronger than ever. Thus, I think having some holdings that will participate in China’s growth should be the strategy for most portfolios with some kind of equity holdings. China is simply too big and important to us over the next 2 to 3 decades to be held as part of a supplementary portfolio. Instead, China should be part of the core portfolio. The growth and importance of China is a huge mega trend that is going to remain in place for years and years. This doesn’t mean buy China whenever you want to invest something. For me, China is a long term core holding, and at current valuations, I think it is cheap enough to warrant further investment.

(I have updated my portfolio. The new purchase won’t be reflected though because it is not in the holdings yet.)

Bought $2,000 more into a China fund (27 Aug 2010)

Its been a long while since I added to my China fund holdings. But I was not as keen on valuations previously so my holdings in China was a long term one based on the sheer potential of the Chinese economy. Year to date, the China A share market has been one of the worst performers within Asia, down more than 20% and although the H share market has fared better, sentiment there has also been affected to a certain degree.

Valuations for China companies are now very attractive, and all this even while the China economy continues to grow healthily. China is growing at the pace that developed countries like US, Japan can only dream about, but concerns about China’s tightening on bank lending and the curbs on its property market has caused a lot of wind to go out of its stock markets.

Yet, such things make me even more confident that it is alright to add to my China holdings right now. Who ever heard about precautionary measures taken before a huge crash or economic meltdown? US thought its banks and financial companies were the strongest in the world before the Lehman Brothers crisis. And it was doing nothing to prevent subprime mortgages from spiraling out of control. The fact that now in China, you need 50% up front cash just to buy a second property means that it is unlikely that China will face the kind of property crash that US experienced.

And when we finally go back to what is fundamentally happening, it is that China is already gradually becoming more important than US to this region’s prosperity, if it isn/’t already. The South Korean market has been resilient despite all that talk in US about a double dip because nowadays, more than 25% of its exports are to China, while exports to US make up just 11%. Singapore property prices has been pushed up because there are rich investors from China coming over to snap up property here (they are the biggest buyers at Sentosa cove). Where does the rich US investor feature within the Singapore property market? They aren’t mentioned because they are lag so far behind the Malaysians, Indonesians and Mainland Chinese buyers that they are a non-factor.

I don’t believe US will go into a double dip recession, and slowing growth in US doesn’t dim my outlook on Asian markets. It is only if China takes a fall, then will I really worry about Asia. At this point in time though, given the precautionary measures that the Chinese government is already taking, I think the Chinese government can walk the fine line between curbing the worst excesses in its financial and property sector without killing off too much growth in the process.

China and India remains a long term investment and will always have a place in my portfolio. In particular, the speed at which China is moving up the economic ladder cannot be denied. It is already the second largest economy behind US. In Asia, it has surpassed US as the most important market for most countries already. The Chinese A share market has taken a fall but the country’s economy itself is stronger than ever. Thus, I think having some holdings that will participate in China’s growth should be the strategy for most portfolios with some kind of equity holdings. China is simply too big and important to us over the next 2 to 3 decades to be held as part of a supplementary portfolio. Instead, China should be part of the core portfolio. The growth and importance of China is a huge mega trend that is going to remain in place for years and years. This doesn’t mean buy China whenever you want to invest something. For me, China is a long term core holding, and at current valuations, I think it is cheap enough to warrant further investment.

(I have updated my portfolio. The new purchase won’t be reflected though because it is not in the holdings yet.)

Work Life Balance (20 Aug 2010)

Some of you will know this. A Singapore businessman gambled and lost S$26 million at Genting Resort World within 3 days. S$26 million is a huge amount of money which most of us cannot image ever having, not to mention losing it over 3 days. But even this pales beside Mr Terrance Watanabe, who managed to lose 127 million USD during a year long gambling binge in Las Vegas.

I sometimes wonder though if part of this is due to a person being overly focused on work and failing to achieve some proper work life balance. We don’t know who the 50+ years old businessman is, but he really must have been drawn deeply into the thrill of gambling to end up losing so much. The same can be said for Mr Watanabe. He built up a family business into a massive empire over the course of two decades, and did not even get married. He then sold the company in 2000, likely for a massive sum of money. The gambling spree during which he lost over 100 million was in 2007.

I don’t know Mr Watanabe personally, but it seems likely that he focused on his family business and work to the exclusion of everything else in his earlier years, not even getting married, and thus after selling off the business, he had too much time on his hands and did not quite know what to do with himself. Thus, when he stepped into the glittery world of a casino, he was drawn in. He was said to have alcoholic problems as well during that time.

I think this shows that it is important to achieve a good work life balance. In Asia here, we tend to be very workaholic. According to an employment management company, Hudson, Singapore has the highest percentage of respondents in a survey who indicated that they were working more than before.72% of 685 of the respondents in that survey said they worked at least 50 hours a week.

When you put in too many hours into work, burn out, health related problems and other problems may surface. And this also makes the allure of doing crazy things, like gambling your hard earned fortune on the roll of a dice stronger perhaps because it gives people a thrill which they would otherwise have not felt in their busy lives.

People who had been very busy with work for decades, who suddenly put everything down may find that they have lost all meaning or focus in their life. Some, like Mr Watanabe would find themselves drawn to and addicted to activities like gambling and alcoholism which would be self destructive in the long run. Others just fade away. My father mentioned that some of his friends, died within a few years after retirement. They had been too focused on work previously that they simply couldn’t handle the boredom of retirement.

So, while I know I usually talk about investing and stock markets, I do believe it is good to achieve a good work life balance. Even if we are busy, we should take the time to develop some interests outside of work, or simply spend some time with our family. I don’t think people are going to remember what kind of a worker I was at my funeral, but my two kids will certainly remember what kind of father I was, and whether I was there in their lives when it mattered.

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.