Some Light in the Tunnel - Market Soars Back

The month of October has been a very eventful month with emotions and tension at the peak. The market volatility is very high, some traders even commenting ,”It feels like 2008 again!” On the brighter side, good news from the USA and Euro zone has helped to pushed global sentiments back up and the world economy seems to be on a better footing now. Let’s Recap what has happened for the month of Oct:

-          US advance GDP data showed that the economy expanded at a 2.5% clip during the third quarter. That exceeded the 2.3% growth rate that had been broadly expected to follow the 1.3% increase in output posted in the prior quarter. 

-          European Union's (EU) plan aimed at improving the continent's precarious financial conditions boosted global markets. Although specifics weren't released, participants were pleased that the plan will increase the euro zone bailout fund to about $1.4 trillion, recapitalize banks, and cut Greece's debt obligations by 50%

-          70% of US companies reported solid Q3 earnings and beat expectations, despite fear of a double dip recession persisted throughout that period. This put US economy on a stronger footing and warded off rumours of a double dip recession.

-          Commodities prices staged a strong rally as investors now believe that the world economy is not as bad as they expected. The Euro rescue plan assured the commodities market further.

-          Thailand flood situation worsen and the stock market underperformed the rest of the world. Companies around the world faced industrial parts and commodities shortage as a result of the flood.

End of Tunnel? Not Yet…

Major media around the world are warning about potential doom and gloom ahead, even with the improvement in the financial measures put in place by the Euro zone. I tend to agree with some of the views but I am not that pessimistic about the world economy. As I mentioned time and time again, we have emerged from a recession never seen since the Great Depression and the Great Recession essentially sent most of the developed nation on a slow grind. The huge Western economy is  like an oil tanker. It takes a while for an oil tanker to halt its reverse and to pick up the momentum to move forward again. Macro indicators are accommodative and we will see the economies get better, but toppling and crashing into a couple of ice-bergs along the way. The way forward by all means is not clear, but by spotting opportunities ahead, we will be able to minimize damages and improve returns. The coast is clear for now, at least till the start of next year.

The Greece problem has been delayed, at least for now. With the 50% cut in debt obligations, Greece have bought more time to restructure their economy, and bought more time for the Euro Zone to devise a plan on getting Greece kicked out of Euro, in an orderly fashion… In my opinion, the entire Euro debt crisis is a positive development in the long run. The recent problems have brought to light serious structural problems on the EU concept and allow key EU members to tighten and amend their rules so that similar incidents will not occur in the near future again. In the first place, the European Union is a revolutionary concept in modern economics and it should not come at a surprise that no plan works perfectly. This episode will lay the foundation for more sustainable growth, at least in the next 10-15 years.

The China Property Market Shows Signs of Cracking

A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. Read Here . How does the Chinese property market affects Singapore? Apparently, Chinese nationals are the top foreigner buyers of Singapore property, accounting for one quarter of the sales to non Singaporeans.  As a whole, foreign private property buyers made up 16 percent of the 6,368 purchases in the first quarter, constituting the highest proportion of non-Singaporean transactions since data were first made available in 1995. Read Here . Earlier in October, Asian currencies and markets tanked as western countries cashed out of emerging markets to buffet against any fall-out from the Euro crisis. This is despite the clear superior fundamentals Asian markets have over the troubled western economies. The same local biases will happen once the China property market suffers a hard landing. Chinese property owners will liquidate their position in Singapore to protect their positions back home. Singaporeans, with their highly leveraged property investments, will be hit hard. Compared to the stock market where most Singaporeans do not take a leverage and has the ability to hold, a property market crash will be much more disastrous than a stock market crash. Whether China suffers a hard landing or a soft landing, it will be almost impossible to predict given the lack of historical precedence and lack of transparent data from the Chinese government. Similar to the Shanghai Stock Index crash, The Chinese has gotten an appetitizer on what their first ever property crash ,since the embracement of capitalization, tastes like.

The Strategy Forward

I have moved a portion into Singapore bonds as a form of insurance in case of a disorderly default by Greece. The risk is averted for now, at least until the end of the year. There is no reason not to ride on the positive goodwill generated by recent events. I have picked US market for 2 main reasons: First Reason is that the US economy is still at the recovery stage and it always make sense to invest in countries slight behind at the economic cycle. Secondly, with a still uncertain European market, and worries about the Chinese property market, the American stock market is still the most resilient of all the markets in the world. It will performs the best whenever there are a peppering of uncertainty along the long road of uncertainty. The bet on the Korean market paid off with a handsome 17% month on return, despite some initial big volatility right after the switch. Commodities fund made a come-back after a significant correction during the last few months. Sad to say, the Thailand flood has affected our SEA positions and is not performing as well as expected. A Sharp 5% appreciation of SGD against the Indonesian Rupiah also wiped out a chunk of the performance from our Indonesian position. I expect the SEA to perform once the flood problems in Thailand subsides and catches up with the rest of the world in the rally. We will probably take some profit off our Korean positions early next year. For those who stay put with the BRIC or with full equity exposure, I will switch you into US once the market rally slows down.

Attached are 2 performance Chart. One is the index performance chart in their respective country currencies while the other is the fund performance chart. As usual, the best performing fund and worst in the fund universe is used as comparison.