The Wrath of Nature - Katrina & Rita

The Month of August was an Excitingly Quiet Month.

Let us reviewed what has happened so far and it's complicated to your investment portfolio

The Wrath of Nature

Two weeks after Hurricane Katrina, Hurricane Rita waltzed into town. Concerns of massive damage of another natural disaster at the Gulf of Mexico do not bode well for the market. This is because most of the critical oil facilities are located at the Gulf. Shortage of oil will lead to high oil prices and ultimately, leads to a sluggish US economy. Oil prices spiked back to $70 as Hurricane Rita breach the American borders. The market was held hostage by a natural disaster. The relief was that the wrath of Rita subsided into a simple tantrum and not much damage was caused. Oil prices subsided back to $65. After the disaster, there are two schools of thoughts.

School 1: The economy will be spurred by the reconstruction efforts.

In this school of thought, economists think that the Fed will stop rising interest rates and may even lower it, in view of a potential slowdown in the growth US economy. The capital spending by the government in an effort to rebuild the economy will lead to economic stimulation which of course, will lead to corporate profits and increase of the share prices.

School 2: The economy will be slowed due to inflation

In this school of thought, economists think that the cons of the rebuilding effort will be more than that of the pros. The rebuilding efforts will exhaust the government coffers, which much of it is already used to finance the recent wars. Oil prices will continue to rise, leading to an acceleration of inflation. These factors will lead to the Fed in deciding to further raise interest rates in a bid to curb inflation. We all know that rising interest rates is not beneficial for corporate profits because it will increase the cost of borrowing for corporate expansion. This will lead to a slowdown in the stock market.

Given these conflicting school of thought, what should we do? In this kind of uncertain economic climate, it is even more important to adopt the strategy of a diversified portfolio because we will not have an idea where the economy is going next. At this point of time, the market is fairly valued and economic conditions of post Rita are uncertain. There are certainly still room for growth but returns will not be as extensive as the last few years. The current IPP strategy is designed for these kind of economic uncertainties. There should not be any major change in our strategies for now.

Terrorist Attacks in Bali

This is an assuring event.Why do I give this opinion even though people were hurt and killed? This is because the Indonesian market actually rose instead of falling due to the terrorist attacks. It gives the indication that investors are certain of the economic growth of the Indonesian market and terrorist attacks will not derail the potential growth. 5 days after the bombing, the Indonesian market rose another 1.5% in a single day. Interesting

Given such adverse conditions and the market did not move into a downturn gives a testimonial of the strength of the global economy. We may see a further run in the market soon. The best is yet to come. Stay invested.