Investment updates! Getting into the Best of Both Worlds

Dear Friends,

As you may have noticed by now, I have done up a transaction for you recently for your investment. I will attempt to explain my rationale in the following email.

Firstly, is the consideration whether the market will continue to move up or it will soon correct. A correction is a matter of time, but the problem is when, how deep and how high will the current market continue to run before a correction. The issue is, everything is pretty uncertain these days. We have bad reports coming in about potential crisis points, like commercial real estate problem in US, credit cards implosion, withdrawal of stimulus too sharp and too early resulting in a sharp double dip “W” recession, rising inflation. On the other hand, we are getting good and sometimes mixed data from the economy. Nevermind mixed: Having mixed is better than worse. So at this moment in time, let’s see what could happen:

1) The market may continue to run with a consistent stream of good info. However, the upside is running into strong headwinds with the market being trending upwards with care, unlike the explosive run we saw from March to June. There could still be money to be made but the danger gets greater everyday without a good correction.

2) A steep correction will occur sooner or later but the question is, how deep will it be? How long? My guess is that, the correction will be short and sharp averaging 10-15%. I dun think it will hit March low again unless an implosion of Lehman magnitude occurs. One big reason is because fund managers, along with yours truly, has been waiting for a good, low risk, entry point for the clients. So far, there is none yet. Therefore, any sharp drop will result in fund managers piling in and the market will snap back in a hurry with a pretty shallow bottom.

3) Corporate ratings will continue to recover from the historical low as confidence starts to creep back. The issue with subprime at one moment in time, is that banks are so fearful of each other that they are not buying the bonds from each other and the rating companies did not help by downgrading masses in a hurry in order to compensate for their mistakes in Lehman, AIG and citi. A sharp correction in the equity market may not necessary impact the corporate bond market that much as compared to the Lehman days.

So the trick is to position the portfolio in a way that they can still capture any rise in the market if the market continues its climb and at the same time, be prepared for any sharp drop and take the opportunity to enter the market. I have basically identify 3 assets, that prob will still do okie when the market climbs and will not get hit too much shld a market correction does take place.

Asset 1: China

I was mentioning that the global equity market generally lacked an entry point. The only exception is the china market which has correction close to 20%. http://finance.yahoo.com/q/bc?s=000001.SS As I mention in previous articles, China could well be an indicator of things to come. With a nice correction and a compelling growth story, China is prob the most attractive market to enter right now. I prefer Schroder BRIC in this case it provides some diversification and the fund does invest in a huge chunk into china. With a correction already in place, any sharp correction in the global stock market may not affect it that much. CPF doesn’t allow BRIC so I used a pure china fund instead.

Asset 2: Gold

Every girls’ 2nd favorite metal, after platinum. Gold had a pretty boring year in 2009. It started the year $900, it is still hovering at $900 despite peaking above $1000 in the last few week. The good news for gold is that the USD has fallen quite drastically, and is expected to drop further back to the pre lehman days. Inflation is slowing creeping back into the market again and this may force the hand of the fed and government to reduce the stimulus faster than they would like to. With its defensive property and the weakening USD, it looks like a sure bet no matter where the market goes. As for oil, I am not as optimistic after its run from $35 to $75. There are a couple of factor working against it, like falling demand and high supply. So, that’s why I swap gold for oil this time round. For CPF, we are not allowed to invest in gold (Quite silly! They allow tech and china that dropped up to 80% but don’t allow gold??) so I swapped in a general resource fund instead with good exposure to miners.

Asset 3: Corporate and Developed countries bond

Bonds was like a toxic waste right after the crash of Lehman bro. Nothing was safe except for the safest: US Treasuries. The bond market had a pretty bad year last year. With the corporate ratings and confidence improving by day, the bonds that are deemed to be potential toxic are becoming attractive again. The bond market had a pretty good run along with the equity market and will still continue to do so as confidence returns. The corporate bonds are also give attractive yield right now. Other bonds which are interesting are bonds of developed countries like Korea, Sweden that are offering pretty good yield and probably will be pretty safe for now. So whether the stock market corrects of not, the bond market will still continue to do well: Not as spectacular as equities but still decent 8-10% return a year. They will also act as ammunition once the market corrects where we will enter more aggressive.

So in short, what I trying to do is to create portfolio that can generate decent recent and probably be able to withstand what ever correction comes along. This is a pretty delicate period. If we move everything in and the market do double dip which our government keep warning us about, we will be caught and stuck for another year or 2. If we don’t invest, the stream of good news may continue and there goes the market, without us in it. So, the best thing to do now, is to try to get the best of both worlds!