Added another 2k into portfolio

I added another $2,000 into my portfolio. One thousand set aside for DBS Enhanced Income Fund, and another $1,000 into Korea. Actually, I am not just bullish on Korea, I am bullish on Asia as a whole. The March triple disasters that happened to Japan was, in hindsight, exactly the trigger that was needed for markets to go into a full rebound phase.

Before this, we had tensions in the Middle East as an ongoing news, people wondering whether the economic recovery in the US was sustainable or not, whether China would continue to tighten and how that would affect Asia. There was some outflow of monies back to US. In short, the overall sentiment was just cautious with no clear direction.

In the aftermath of Japan’s earthquake, things actually look clearer. Why do I say that? Markets took a hit, and people had reason to be very fearful. And the cause was something you could see and track closely on the TV, with images of the devastation in Japan, and the nuclear power plant plastered across all major news channels. While scary in those few days, the worries have subsided, and markets have since rebounded and can now go into a full upward phase.

My reasoning is this: things don’t look so scary anymore. People are going to start saying “Hey, that was a 9.0 earthquake, followed by a big tsunami, and then nuclear power plant meltdown! If markets survived all that, what else could be even scarier?”

Furthermore, people looking at markets are going to start noticing, “Markets are now going up…is the worst is over? Check the earnings - earnings good? Companies doing well?” And they will find markets backed up by strong corporate earnings. The overall earnings of many markets are all up with some at record levels. Once this thought process sets in, and sense that the worst is over materialises, people will start looking beyond the disasters, and we will see a big rebound in stock markets.

Based on the strong earnings growth trends, markets should be much higher. Markets are cheap at this point in time, and global events, many of which have not substantially affected most of these corporate earnings at all, have largely kept investors cautious, at the sidelines, and downright bearish.

But we have now had a recent selloff - the Japan market crashed 17% within 2 days. Just as markets have a tendency to overcorrect on the downside, they also have the tendency to surge on the upside. I am confident that once we go into a full market rebound, the rise will be significant - not just 5% or 10%, it should be higher.

Markets like Korea, Taiwan, and China, which by right should have actually benefited as demand shifts away from Japan due to reduced production capabilities, actually sold off as well when the fear was at its peak. Now, we will see these markets come back with a vengeance. Look at Korea. Samsung markets everything from chips to electronics and is one of the biggest competitors to Japan’s chip makers and electronic manufacturers. If factories are stopped temporarily in Japan, and supply chain issues affect Japan manufacturers, Korean manufacturers like Samsung will be more than happy to step in and fill up the gap. Last I heard, there was absolutely nothing wrong with Korea’s factories, and they certainly aren’t stopping their production. If there is a gap, and they are asked to step up production, I am sure that they will be most able and willing to do so! So, if Toyota postpones its latest car release in the US because of the quake, then who gains? Hyundai gains because they are going to continue to go full steam ahead in selling their cars.

The only thing stopping me from putting even more money into markets now is because I am still on schedule to move house towards the end of the year, so the saving up for the move and renovation must continue. So, another $1,000 goes into the DBS Enhanced Income Fund and $1,000 also goes into the Lionglobal Korea Fund.

The LionGlobal Japan Growth fund which I bought $2,000 of last Tuesday at $0.532 is now trading at $0.593, or 11.5% higher. So, it was an opportunity buy which has done well. In hindsight, I wished I had placed even more, but let’s not get too greedy. I think the immediate short term profit to be made from the Japan equity market is now past because the Nikkei 225 index has largely recovered a lot of the big losses it suffered on the 14 and 15 March. However, markets like Taiwan and Korea which really should not have fallen, should now pick up pace as Asian markets overall all rebound. I believe the outflows from Asia back into the US is largely over, and so, I am very happy with the way my portfolio is positioned right now. I think things are going to look decidedly more bullish in the second half of the year as compared to now, and a lot of markets, including those in Asia, remain poised to surprise investors with their strength in this year.

Added 5k To Portfolio

Today was a tough day for stock markets. The Japan market, which was already down 6.1% on Monday, is currently down 10.55% on Tuesday. The Nikkei 255 index has plunged 1,649 points within the space of two days. Other Asian markets were hit today as well (most are down 2 to 3%), but none as badly as the Japan stock markets. People are very fearful today as the spectre of a nuclear meltdown at the Fukushima nuclear plant weighed strongly on everyone.

But I have observed over the years of investing that invariably, when the fear is palpable, that’s when it’s actually a good time to enter markets. If we were at the top of a cycle, then maybe it wouldn’t. But Asian markets have been slowly declining slightly since February. Japan itself is now down close to 20% within the space of a week. I wish I had more money to add in, but most of it is already invested. But I would still put in some money into Japan equity markets now. Today’s 10% drop was too big a plunge to not tempt me.

I consider it faith that the Japanese people will pick themselves up from this current triple disaster of earthquake, tsunami followed by potential nuclear incident and carry on. They are a very resilient people that transformed Japan into one of the most important economies in the world starting from almost literally nothing in the aftermath of World War 2. When you can pick yourself up after all of your cities have been bombed into ruins and you have had two atomic bombs wipe out 2 cities within a week, then I have confidence they will stand up again and recover from the triple disaster afflicting Japan now.

The unknown element currently causing the panic in markets right now is likely the uncertainty around the nuclear reactor at Fukushima. Especially for the Japanese people, who bear memories of the two atomic bombs, the current potential meltdown of potentially one or more reactors at Fukushima would be felt deeply. Thus, the reaction is likely to be more emotional and extreme. Radiation is something which you can’t see or touch and fear of the unknown can be far greater than fear for something more tangible.

Consider this. They have already evacuated people (more than 180,000) within a 20 km radius around the reactor, and Tokyo itself is close to 200 km away from Fukushima. No radiation fallout is going to affect people in Tokyo (in any significant manner). Nevertheless, people can be irrational when it comes to such things. But I believe the sell off today is overdone, so I added to my Japan equity holdings. So, my 5k addition today is as follows:

DBS Enhanced Income - $1,000

LionGlobal Japan Equity - $2,000

Aberdeen Pacific Equity - $2,000

The $1,000 into DBS Enhanced Income is because my plans to move towards the end of this year doesn’t change no matter what happens in Japan or to stock markets, so I need to continue to set aside money on an ongoing basis. The other 2k each into Japan and Asia is because I feel that the sell off today has made markets cheaper and more attractive.

The selloff may continue in the short term, such things are hard to say. But its also possible that a rebound happens after this. Nevertheless, at current levels already, things are cheap enough for me to add more, and if they do drop further, then I will add in even more. I am confident that investments made now will in hindsight be a good one after one to two years, though at this point in time, they seem to be a scary thing to do.

Natural Disasters

Received news on Friday that a huge magnitude 8.9 earthquake has just struck the pacific near Japan and a tsunami has followed after. Asian markets reacted immediately, as a knee jerk reaction since there will definitely be worries on whether other areas in Asia besides just Japan will be hit by a tsunami. The memories of the last tsunami in Asia that killed thousands is still fresh. The economic damage caused in Japan would have also caused the Japan stock market to plunge on Friday.

Having said all this, from a markets points of view, the reaction will likely be limited to just one day or a few days. While there will undoubtedly be widespread damage in Japan, and possibly other areas, along with many casualties, natural disasters usually do not have the kind of impact that an economic one would have. There is actual physical damage, and people die in natural disasters, unlike a financial crisis or an economic recession, but while markets may crash 30% or more during an economic slump, we are very unlikely to see markets crash like that just from a big earth quake, tsunami, or other natural disaster.

The human tragedy is often far greater for those immediately impacted by a natural disaster as compared to what happens during an economic recession, but the perverse thing is that the overall market impact is usually muted and short term. In fact, the rebuilding after the disaster usually spurs new economic activity, and that actually helps the sectors involved in the rebuilding after the disaster.

The human spirit is a very resilient one, and that is one thing that doesn’t change. No matter how hard a man made or natural disaster strikes us, we will eventually recover from it. But despite that, the human tragedies that happen during such times are always heat wrenching, and those personally affected will bear the memories for life.

The Imbalance between Asia and the Developed World

Europe and US markets have been outperforming Asian markets since the start of the year, so a well diversified portfolio would have benefitted from this. However, there are certain long term issues which are ticking time bombs for US and Europe. Thus, while I have been talking about being diversified into a global portfolio, and to consider alternative investments to hedge against equity risk, I would still have a long term underweight position for developed countries, and a long term overweight position for emerging markets, especially Asia.

These long term trends are also the reason why I believe that any flow of hot monies back to developed markets since the start of the year are temporary at best. The flow will soon reverse. Developed countries like US, US and many European countries are at this point in time fiscally unhealthy, compared to the Asian countries. This is not to say Asia doesn’t have its own set of problems and issues to face too, but in comparison, Europe, US and Japan have far bigger issues.

The biggest of which is the large amount of loans that these developing countries are taking up in order to continue to even function. Already, US is printing money at an extremely unhealthy rate, and both the EU and Japan are also sinking into ever more and more debt. There is nothing wrong with issuing more debt if you are perfectly capable of paying those obligations. But financially, US, many parts of Europe, and Japan are unhealthy. The amount of debt being accumulated is rising to levels which in the long term if they keep piling up, will eventually reach a stage where it would be unsustainable.

Unfunded pensions are another big part of the problem in the developed world (especially in Europe and in the US. These pension systems were set up during the good times when it seemed like the burden on tax payers would not be too much. But many were blank cheque promises to keep on paying people pensions as long as they were alive past a certain retirement age. The problem is that people’s life expectancy in developed countries has been increasing over the decades, and yet, the tax payers base has shrunk (with an aging population). Thus, pension obligations have ballooned.

These are ticking time bombs which are very scary to consider. But they also point even more to a necessary rebalancing in world finance and economics towards Asia ex Japan, which is a net creditor. It is amazing that even now, Asian equities generally form a relatively small portion of a global equities index, when Asia (even without Japan) already accounts for close to 30% of the world’s output. It is also amazing that even now, Asian government debt is still given a lower credit rating than debt issued by developed countries like the US. Ordinarily, you wouldn’t consider a person who is living beyond his means, and maxing out credit card after credit card, sinking ever further into debt as being a “safer” person to lend money to as compared to one who has a lot of cash reserves, and is making more than he is spending. Yet, if countries were people, then Asian countries would be in the second situation, and the US, would undoubtedly be in the first.

The only consolation we can get from the whole situation is that these are long term trends, and they aren’t going to blow up that soon yet. Its unlikely that the US will wake up tomorrow and suddenly find that no one wants to lend it any more money. Its issued bonds continue to be taken up. So, as long as it can continue to print money, and issue ever more bonds, nothing untold will happen …yet.

But what it does mean, is that the long term prospects of US do not look good. This is especially so considering all the debt issued by the US government. Strangely enough, I actually have more confidence in US companies paying off their debt, than I have in the ability of the US government to repay its debt. There are still many good US companies today, many of which are global in nature, and have strong businesses, cash rich, and who will have no problems repaying their debt. I can’t quite say the same for the US government (short of borrowing ever more money to pay existing debts).

There will be a rebalancing at some point. In fact, the long term strength of Asian currencies is already one way this imbalance is being addressed, the long term strength of Asian equity markets will be another. So, I continue to believe strongly in the prospects of Asian equity markets, and indeed, Asian debt markets as well. The only bonds I have in developed world today, are US high yield corporate bonds. I have more in Asian high yield, emerging market bonds, and I am starting to accumulate more SGD short term duration bonds as well. And even though I shifted some monies back to US and European equity markets at the end of last year, I remain heavily overweight in Asian markets.

The recent volatility and fund flows are temporary. In comparison, the long term imbalances between Asia, the developing world, and the developed countries like US, Japan and Europe are definitely not temporary. These are deep seated and eventually, some day, will become be resolved one way or another. And I believe that an upward trend in Asian markets (both equity and bond), in Asian currencies, will be one of the results of these imbalances are being addressed.

Added $1,500 to DBS Enhanced Income Fund

I just added $1,500 into the DBS Enhanced Income Fund. Is this because I am cautious about markets, given the shifting of some hot money from Asia markets back to US markets? No, it’s for a very different reason. I am using the DBS Enhanced Income fund as a savings fund for a relatively short term goal. I will be shifting at the end of the year to my new home. It’s a condominium in Bishan that has been under construction. Its expected to TOP sometime this year (rumors say end of 3rd quarter). We will likely make our big move near end of this year.

So, I have got one year (or slightly) less as a time horizon, and I need to set aside some money for it. Now, I could do two things. I can either invest whatever I save as per normal, hope that markets are to shoot up by the end of the year, and liquidate whatever I have to only at the end of the year, at the time I need money for stuff like renovation, furniture and things like that. Or I can setup a fund which is low risk, very stable, but at least still delivers a return better than the 0.1% that savings accounts gives right now.

I choose the latter. Not because I don’t believe this year is a bull run year (I do). But nothing is for certain or guaranteed where investments are concerned, and the problem is, the timing of my move is more or less fixed. There could be any number of factors which delay a full blown bull run this year. Sometimes, an unforeseen crisis crops up, and it could keep markets down for a couple of months. For most of my portfolio, it’s not an issue. If fundamentals haven’t changed, then I won’t shift anything at all. But for this case, the goal is not a movable one (not unless the developer runs into significant delays in completing the condominium). I can’t very well tell my family.

“Sorry, markets are still down, I am waiting for that best time when they have surged up, before I sell some of my holdings, and in the meantime, we are staying put!”

Well, I could say that, and then end up being consigned to sleeping on the sofa for the next 3 months, not to mention having my family all lose respect with me. So, generally, it’s not an option.

Taking the risk and just selling out of market regardless of how they are at that point is not very advisable either. I learnt a harsh lesson about this myself back in 2008. It was May 2008, markets were falling, but haven’t quite crashed through the floor yet. We were then already looking out for a home purchase in Bishan area, but hadn’t committed ourselves to any one particular property. I was in the process of trying to convince my wife that we should just wait until 2011, the year before our son goes to primary 1, and just buy a resale property then.

But we came across a new condominium launch in Bishan (which was so rare, we absolutely had to check it out). And they loved it, and one thing led to another, and suddenly, I found myself putting in a deposit on the property. And buying a property is supposed to be one of the biggest financial decisions that most people make in their lifetimes. (At least the amount of money it involves would make it so).

Once you make your deposit, the subsequent payments soon follow. And so, I found myself selling out of many of my funds at exactly a time when markets were falling, and I was actually quite unwilling to do so. In hindsight, it turned out alright, because after I sold out over $90,000 worth, the market crashed even more. But who knew then? In any case, now I know that if I am going to make a big capital commitment sometime in near future, then it’s safer to put it in a low risk type of fund that isn’t going to crash 40% in a global market meltdown.

I could probably be forgiven about the house purchase thing, since I didn’t know my family was going to fall in love with that condominium and we would end up buying a property 3 years before we actually planned on moving. But now, with the property nearing completion, if I make the same mistake one more time, then I deserve to sleep on the couch for the next 3 months!

So, I will likely be putting all future contributions this year into the DBS Enhanced Income fund, which is only just slightly higher risk than a savings account, but with a return that is more than 10 times higher. Up till the point when I need to use it for renovation, moving, furniture, etc. If the market goes up, like I believe it would, would I be sorry? No! Because I already have monies invested. So, let’s remember not be too greedy here. And if things turn out differently, at least I wouldn’t need to sell my existing holdings. The DBS Enhanced Income fund won’t be affected one bit by how markets are doing, and I can safely sell that at the end of the year with no qualms what so ever.

Depositing my children’s Ang Bao money

Happy Chinese New Year! Most of the visiting is over. My kids, being the responsible, sensible children they are, took all the red packets (Ang Bao) they received, and gave it back to us so that I could save and invest it for them. (In truth, they are still at the stage where an Ang Bao is just a brightly colored red packet which is good for only a moment’s entertainment before they are glad to dump it on mum to get rid of it.)

Anyway, so after tabulating their monies. I invested $500 in unit trusts into each kid’s Fundsupermart account. As I look at their holdings, I can’t help feeling just a tinge of envy. Wow, kids these days are rich. They have thousands of dollars kept in trust for them by their parents from gifts, ang bao money, and in my case, investment returns to compound it as well. My son, who is five years old, going on six has made a $1,835 profit on his portfolio. My daughter, just two years younger, also has a $957 profit on her portfolio. I calculate that with what she already has, even if she only gets $500 from ang baos every year into this account and nothing else, but assuming it grows at an annualized 10% per year, she would have $62,000 by the time she hits 21 years old. Wow, that’s a very big sum of money to have when you have just started working. I am going to have to make sure I teach them both the importance and value of money so that they don’t just recklessly spend it all the moment I hand it to them.

While my kids continue their own journey through life, the good thing about having an investment savvy father, and being at their young age is that they aren’t going to aware about the volatility in markets, nor would they care. (They are more interested in playing their mother’s iPhone.) Which is just as well because some investors would have been alarmed by the recent unrest in Egypt. The entire middle east appears to be seething with instability, and given the amount of oil in the region, not to mention the potential violence that can be unleashed there if things get out of hand, its no wonder investors are turning a worried eye there. Yet, the odd thing is that markets in Europe and US have been surprisingly buoyant despite all the alarming news coming out of the middle east. In Asia, despite strong economic growth in general, concerns over China tightening, and some fund flows from emerging markets back into US and developed markets have seen some sell down in Asian markets.

US is in an especially interesting place now. It doesn’t have the kind of public debt problems that Europe has to deal with, nor is there any danger that the US currency can crash or break apart (its too important are irreplaceable at this stage to go down that route). Yet, valuations are not considered too high, and earnings are zooming away even as the economy shows clear signs of recovery. If you haven’t got any exposure into US, then for the sake of diversification, it makes sense to consider getting some.

Despite my optimism on the US market, it doesn’t mean I have turned negative on Asia. If the largest economy in the world gets on its feet and really starts to run, then that can only be good news for the global economy, and for Asia as a region as well, since exports would benefit from a strong global economy. Given Asia’s own economic strength, and with valuations still relatively cheap, I believe it’s a mater of time before Asian markets resume an upward climb again.

Middle East is a wild card at this stage. While China, and many parts of Asia’s tightening measures against inflation is well expected, and really shouldn’t be a cause of a major sell off. Investors heavily weighted in Asia need to be patient for now. There isn’t any fundamental reason why Asia should fall while developed markets rise. While the middle east is volatile still, the fact that markets like US, which arguably has far more to lose from the middle east blowing up than Asia have been rising rather than falling despite all the turmoil there happening there should be seen as a signal that at least from an investor’s perspective, things are not at a stage where they would have a fundamental impact on whether the US economy or US markets. And in that same vein, then the impact on Asia’s economy, and markets should be relatively muted as well.

Well, in any case, at this stage, my two children couldn’t care less about the Middle East, and the way I am investing their ang bao monies, I won’t let it affect me either. Their portfolio is very long term, since they won’t be touching the money until they are 21 years old. Hence, with such a long horizon in mind, I have chosen to place each year’s ang bao monies into just one equity fund to keep things simple. I am confident that over the long years, despite stock market’s ups and down, the general trend over such a long period will continue to be upwards, and thus, when they finally reach 21, I would be ready to hand over a sizable sum to them. I can then claim credit to have been a good steward of their monies (though in truth, I took the lazy way out and didn’t have to do much at all, ha!). I hope that time don’t arrive that soon yet though. They are very lovable and cute right now and I hope they don’t grow up too fast!

How markets have fared since the year started

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.