The Future Muddies. No Clear Sight to Immediate Conclusion

The month of September has been a very volatile month with markets whipping up and down on every good or bad news. Asian markets have been hit severely as compared to Europe and US and are the worst performing markets despite better fundamentals. The future of Greece remains uncertain. The reaction of the EU political will remains uncertain. The possibility of passing a new job creation bill by Obama is also uncertain. All this uncertainty is certainly weighing on the markets. Let’s take a brief look of some of the major good and bad of the month:

-          The Federal Bank of US announced a plan to swap long term treasuries with shorter term treasuries in an effort to lower long term interest rates. The plan, labeled as “Operation Twist” failed to impress investors. Economic indicators from US are mixed and doesn’t really tell us much from what we already knew: The US economy is slowing down.

-          Gold and precious metals were put on pressure after a record run and corrected from the peak of more than $1850 to low of $1600. The US treasuries rallied after assurance from market action that the S&P credit downgrade of US treasuries hasn’t dented its traditional role of haven of safety.

-          Approval by the German parliament to expand the European Financial Stability Facility helped to restore some positive sentiments to the European Crisis but data from Greece increasingly points to a crisis in making unless European leaders pull their act together.

-          The Asian currencies dropped sharply relatively to both USD and EURO as foreign investors sold off “risky” Asian assets and remitted the monies to their home countries. Asian equities corrected sharply and is underperforming the global markets despite stronger fundamentals.

-          China manufacturing continues to be strong lowering the fear that a hard landing may prevail for the 2^nd largest economy in the world. Japan economy is recovering rapid from the Great Earthquake. YEN rose sharply against SGD making the Japanese stock market one of the best performer in the Singapore fund universe despite little movement in the stock market itself.

September saw investors milling around like headless chickens, unsure of the future and dissecting every piece of news with great relish. It is of no surprise that investors prefer to stick to cash under such volatile and uncertain conditions. Irrationality is taking place as can seen from the panicky withdrawal of funds from Asian markets, which is still doing very well relative to the European and US markets thanks to the growing domestic demand of middles classes in China, Indonesia and India. One of the reason why the newsletter is late is for me to formulate scenarios and plans to tackle this difficult investment period.

Muddy Waters

“The water is muddy” as the saying goes.

Based on my set of indicators, there is no clear decision to be made: To get out to cash or to hold on to our present aggressive stance. Macro economic indicators are still accommodating with ultra low interest rates and loose monetary situation. Government around the world may start pumping in government incentives to reignite their economy despite blooming trade and budget deficit in the Western world. It is always better to let your political successors deal with the problem of larger deficit than to get ousted from office due to a sharp recession. However, with the probability of Greece defaulting and political will of European leaders still in limbo, the chances that sentiments overruling any fundamentals are getting higher every moment.

Technical indicators are unclear. Asian equities are clearly on a downtrend. However, markets in the eye of the storm: US, Eurozone are actually doing much better with many of the markets including US moving sideways. Germany and Switzerland markets are even trending upwards during the past month. This indicated that there are some support at this level in the Western world.

In short, anything can happen that can push the markets either way rapidly with little or no time of reaction.

My dilemma is on how to capitalize on any of the scenarios and try to make the best of situation. As I explained in my past newsletters, funds switches usually doesn’t react to the situation in time and many of the actions must be preemptive… which is highly difficult to achieve at this point of time. If I should switch out all to cash and bonds right now and the situation improves next day, the investors will be worse off as they will miss out a big portion of the market rally. On the other hand, if I stick to the aggressive portfolio, the volatility may be too much for most investors to bear. In the longer term, appreciation of the values of the stock market is certain given that the markets around the world are cheap. 

The Best Solution Today...

The best solution in my opinion:

1)      Ride out the volatility and trust that the market will recover in time

2)      Have some cash at hand to capitalize on any panic

3)      Stick to fundamentally strong economies: Korea, Indonesia, China, to catch strong rallies should they occur

I am still positive about that the market is oversold and is irrational at this point of time. Therefore, my allocation at this moment of time will be 80% riskier assets while keeping 20% in safer assets until the waters are clearer. I will recommend moving some funds to Lion Global Singapore Fixed Income Investment as an opportunity fund, while letting the rest of the portfolio weather the volatility. There will be no movement in the precious metal area as the market just corrected sharply and some observation time is needed before we can tell if the correction is an opportunity or prelude to more falls in the future. I have attached the fund fact sheet with the newsletter. As of 1 Oct 2011, the average portfolio has lost around 6.7% for the month of September. Attached is the fund performance as usual with the best and worst performer in the fund universe as comparison.