Markets Are Looking Up Again

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

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

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

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

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

Controlling Your Emotions

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

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

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

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

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

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

Invested Another 4k Into Portfolio

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

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

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

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

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

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

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

On Singapore and commodities

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

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

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

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

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

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

One of our Competitors has closed down

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

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

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

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

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

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

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

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

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

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

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

Added In 8k More To Portfolio

Election fever is upon us! It’s exciting times for many of us, it’s the first time we have got to vote. Even for me, a true blue Singaporean that is past 35 years old, I think I have ever only voted once in my entire life previously only, and it was so long ago I hardly remember it. However, exciting as the upcoming elections are, markets still march on!

I just added a further $8,000 into my portfolio. A large proportion will go into a short duration bond fund since my plans to move at the end of the year remains unchanged. It looks like my new home will be finished sometime in July or August, and so, renovations (which is what I am saving up for) can start after.

This time round though, I am adding a new short duration bond fund, which is the new Aberdeen Asian Local Currency Short Duration Bond Fund. (It’s quite a mouthful to say!). It is being sold at 0% sales charge right now on Fundsupermart, and on top of that, Aberdeen is throwing in an additional 10 basis points wroth of units. This means that on my initial investment, I am already up 0.1% (and incidentally, 0.1% is what a savings account would give me after putting my money there for an entire year!).

Also, the Singapore dollar has been one of the strongest currencies in Asia so far this year, and that has probably not helped returns in bonds outside of Singapore, but this will not always be true. It’s simply not possible for the Sing dollar to year in, year out be the best performing currency here (won’t it easy to be a currency trader if that was so!). So, I believe the currency disadvantage which bond funds investing outside of Singapore bonds experienced would eventually even out. In fact, given that the Sing dollar is so strong now, it’s a good time to pick up investments which are non-Sing denominated.

I am adding my money into Europe this time round though, to even things out. I have too much in Asia already, and the last few additions into the portfolio has mostly been all within Asia equities (besides adding to DBS EIF). Europe is interesting because despite all the ongoing problems associated with its debt crisis (Portugal was the latest country to have to approach the EU and IMF for a bailout), the Euro has been strengthening this year so far. And despite all the negative news and hand wringing you see regarding Europe, Europe equity funds have actually been on the rise (Europe including UK equity funds on average are up 8.37% year to date, and the FSMI Europe index is up 4% over the last 3 months).

Let’s not forget again that despite the many troubles in Europe, some of the major powerhouse Europe countries like Germany are in a similar situation to Asia countries in the sense that they are actually growing so fast that they are starting to worry about inflation.

So, I will be adding my $8,000 as follows:

Aberdeen Asian Local Currency Short Duration Bond Fund - $6,000
Parvest Equity Europe Alpha EUR - $2,000

S&P’s Warning will not Halt the Bull

One of the biggest news this week ending 24th April was the credit agency Standard and Poors coming out to warn that there was a one third chance that America’s vaulted AAA credit rating might get toned down a notch over the net two years. The huge amount of debts chalked up by the government and the wrangling between the two parties which almost resulted in the budget not getting passed caused them to put forth this negative outlook.

But since it was just that, a warning, and they didn’t actually lower US’s credit rating. Markets only got rocked for all of one day, after which investors realized that nothing has really changed. Also, good news from the housing starts front, and Apple’s sterling earnings results drove markets right back up again.

US wasn’t wrong to spend the amount of money they did on those stimulus packages. It is showing dividends now with the US economy now back on track. While its true that every country needs to be financially prudent, when a country’s economy is in trouble and needs a boost, it’s the wrong time to worry about fiscal prudence. Look at the European PIG countries. Greece is facing as much as a lost decade of zero growth as the harsh measures aimed at balancing their budget was implemented almost overnight as a condition for them accepting a bailout. US is fortunate in that it is not in such a dire situation, nor will it have to worry about it. The USD remains the main dominant trading currency and China is unable to find any other entity or country which it can sell the 700 billion in US treasuries it holds. That means that US is the only country which can be print money, issue tons of debt, all to bring its economy back on track of recovery.

The long term consequences are that the USD will fall, but at this point in time, America doesn’t care about that. If anything, it makes their exports cheaper. There will also be a continued move of monies into Asia searching for yield, as investors factor in the relative fiscal strength of the Asian countries compared to Europe and US. Thus, Standard and Poors warning is just that – only a warning. It is unlikely that they would actually lower America’s credit rating. Even if they did, it would be something which all bond holders and investors have already known for a while by now, that US would never have warranted a AAA credit rating if not for its unique economic, military and financial importance globally.

Over the next one to two years though, I believe it will still be earnings that will drive stock markets. Already, as seen in the past few weeks, many of the issues like inflation, China interest rate hikes, oil prices, middle east unrest, Europe financial crisis, potential US economy weakness has all been seen to be well factored into markets already. And despite it all, corporate earnings have continued to grow. The latest, from Apple, showed that US companies, contrary to what people think, are actually racking in ever more money. Apple reported that earning almost doubled in their latest quarter. Needless to say, the stock price went up, and helped to drive the tech sector as well.

Technology is seeing a resurgence and I believe there will be a rethink. The iphone, the ipad, facebook and social networks are changing the game again, just like how the internet, the pager, the handphone, and the notebook first changed our habits and brought about the technology boom which peaked in 1999. These changes are far reaching and I believe they will drive the technology sector in a big way over the next 2 to 3 years.

I continue to like the Technology sector and my view on US and Asia hasn’t changed (even if Standard and Poors is now more negative). There was some profit taking in the previous week, which can only be expected after the strong surge in the aftermath of Japan’s triple disasters. But markets are well back on track now, and I strongly believe that the uptrend we will see this year remains intact. There is still time, we are still only at the start of this phase of bull run. But it will be a bull run, and by year end, I think we will be surprised by the extent of the market’s surge by then.