Words
from Author
Dear Friends,
Through
all the doom and gloom, our portfolio didn’t do too badly and lost
approximately -15.4%. Compared to
Singapore (-17%), India (-35%), China (-20.8%), France (-22.5%), the portfolio
didn’t do half as bad. The portfolio is very aggressive as I am positioning it
for the recovery rally, but the plan got derailed due to a combination of bad
luck and human factors. The portfolio is able to minimize losses due to good
sector and country positioning. The only regret I had was not to move a portion
to US as planned earlier in the year. US is the second best performing market
(+1%) while the best performing market is Indonesia (+1.9%).
Year
2012 will be another difficult year. The question is always whether to cut to
bonds or not to. Valuations of global equities are very cheap as compared to
other asset classes. Monetary policies around the world are loose or are
loosening, while the mega economy of US is recovering nicely in the face of the
Euro crisis. The chief strategy that I will employ will be similar to that of
the 2nd half of the year. Be reactive to the circumstances around
and position the portfolio in sectors where profits are most possible, than
locking in the profits and wait for the next opportunity.
It
has been 4 long years since the start of the financial crisis and the world is
just sorting out its problems. Economists are predicting doom and gloom for
2012. But hey, economists have been consistently predicting the wrong outcome
for the last 4 years, so if they are still wrong for 2012, we will have a
pretty good year.
Let’s
pray that the Mayans are wrong, the economists are wrong and our government is
wrong. 2012 will be a good year.
Yours Sincerely,
Lye Wen Song Xeo
Themes
of 2011
In
2011, there is a divergence of directions in the movement of gold and gold
mining stocks. Historically, the directions of the price of gold and gold
mining stocks move in tandem, and gold mining stocks will usually has a higher
leverage and do better than gold prices should gold prices advance. It is true
for the reverse.
One
possible reason to explain this phenomenon is due to the uncertainty in the
equities markets during the Euro financial crisis that lead created a mass
selling panic of equities, regardless of the fundamentals of the sector. This
is despite gold prices hitting new high and gold mining companies’ accounts
look better than ever. This divergence presents an opportunity to continue
holding gold shares strategically.
 |
| Damage Wrecked by the Tohoku Earthquake and the tsunami |
The
great Tohoku earthquake and the subsequent tsunami and nuclear meltdown
devastated the Japanese economy. The fragile recovery from the global financial
crisis has been derailed. The sudden reversal of the fate of the world’s third
largest economy led to a significant slow-down in global trade.
China continued that monetary tightening to
slow down the rampaging property market and a potential overhearing of the
economy. The policies started to gain traction in the second half of the year.
The slowing down of the world’s second largest economy has many investors
worried that the main growth engine of the world will splutter and die. With
Europe looking dire at the point of time and US unable to pull out of their
economic stagnation, some economists predicted that a depression worse than
that of the great recession, is more probable than before.
The North and South Asian equities market performed miserably for year
2011. India stock market, once the powerhouse in the 2003-2007 bull run, has
became the worst performing stock market in Asia. It didn’t help that the rupee
also fell more than 10% against the USD. The reasons are due to the stubborn
high inflation, high interest rates and the inability of the Indian politicians
to put in effective policies to combat the rising rich poor inequality.
Despite
all the monetary tightening in Asia, growth is still reasonable as compared to
the West. However, banks and investment houses are cautious about the outlook
in Europe and US. Banks in Europe and US are required to raise more cash,
partly as a result of the new regulations that arises from the global financial
crisis, partly also to have enough cash to buffer again any potential default
in European sovereign debt. Asian stock markets, with a small equity investor
based as compared to the west, suffered as a result of liquidity flow back to
the West. This is in contrast to the booming property markets, which Asian
investors are much more familiar with. As a result, we are seeing a divergence
of the trends of the property markets and stock markets. The abysmal
performance of the equities markets, has convinced investors to abandon the
equities markets in doves and redirected their efforts into the property
markets. This has lead to a severe undervaluation of the Asian equities markets
as compared to the property markets in terms of yield.
South East Asia continues to shine
With
major emerging equities markets around the world suffering from bear markets,
the equities markets of South East Asia continues to shine. Indonesia, Malaysia
and Thailand held up splendidly in the face of another global recession while
Singapore, the worst performing market in ASEAN, still out performed the BRIC
economies. FDI investments in this part of the world rose rapidly compared to a
slowdown in the BRIC nations. Indonesia is one of the few countries in the
world that is upgraded by the rating companies, in the face of a slew of rating
downgrades around the world.
 |
| Euro Countries on Life Support |
The
Great Recession did not end in 2009 for the Europeans. 2007 was just the
starting point of the a drama worthy of that of the Lehman brother crisis. It
also exposed the weakness of the much celebrated Euro, which is suppose to
bring peace and prosperity on the continent which started 2 World Wars.
Unsurprisingly, the crisis was brought about, in part, due to the inability of
the political leaders to see eye to eye with each other and trying to protect
the interest of their own countries. Surprisingly, the major European equity
markets did not perform badly despite being in the eye of the storm. From the
SGD point of view, the depreciation of the Euro dollars did more damage to the
European funds than the fall in the respective equity markets. The storm lessen
coming into December as the feared, panic flight to safety from European bonds
did not occur. The bond auctions of the affected countries, like Spain and
Italy, are able to garner better than expected results, leading to a
relief that these major European countries will buy enough time to
restructure their finance. With the countries fate tied closely together by the
Euro, European debt crisis, as stated by the German chancellor, Angela
Merkal, “Marathon runners often say that a marathon gets
especially tough and strenuous after about 35 kilometers . But they also say
you can last the whole course if you’re aware of the magnitude of the task from
the start.”
US
– Seeing the light of recovery at last?
Long has the persistently high
unemployment rates in US been a major problem not only within the country, but
also acts like a cloud of gloom across the world. The main engine of growth, US
consumers, can’t spend if they have no jobs. Coupled that with partisan and
brinksmanship politics, it is hard to imagine anybody in US can help the
economy along. SnP threw a wrench into the mess by downgrading the AAA ratings
of US treasuries, once an unthinkable act. Modern economists and investors
simply are unsure how to react given that a global trade and reserve currency
does not have absolute safety. Later in the year, the US economy is proved
their resilience and dominance of the global economy. Unemployment fell and the
US treasuries are still seen as the safest form of investment in the world with
a record low yield. Can the US economy pick up the engine of growth from China,
which has been slowing down in the past few months?
Country
|
%
|
US
|
1.0%
|
UK
|
-7.7%
|
France
|
-22.5%
|
Germany
|
-2.3%
|
Spain
|
-17.8%
|
Italy
|
-31.2%
|
Greece
|
-71.2%
|
Japan
|
-11.8%
|
Hong Kong
|
-19.1%
|
China
|
-20.8%
|
India
|
-35.9%
|
Russia
|
-21.5%
|
Brazil
|
-26.4%
|
South Korea
|
-12.3%
|
Indonesia
|
1.9%
|
Singapore
|
-17.0%
|
Thailand
|
-4.7%
|
Malaysia
|
-1.5%
|
Global
Market Performance
All the figures in the table have been
converted to SGD for a better reflection of the market returns.
The best performing equities market is
from Indonesia. If you recall, Indonesia was the 2nd best performing
country in the world. US market did extraordinary well given the circumstances.
Worst performing market went to Greece. That is no surprise. With the exception
of UK and Germany, most European stock markets were down double digits. The
worst performing markets are actually the BRIC nations. ASEAN did very well
with most major nations with the exceptions of Singapore, given the fact that
most other major economies in North Asia are hit badly. Japan, given the fact
was the most affected by natural disasters, performed well. The majority of the
gains are made from currency appreciation of Yen against all major currencies.
The strong SGD as compared to the European and our Asian neighbours placed a
damper on investment returns out of Singapore.
The end of 2011 heralds much hope for
2012. Hopefully, these numbers will not be visited again in 2012.
Review
of Last Year Strategies
The
year 2011 was an extremely difficult year to manage. Global situations are so
fluid and sudden that there is almost no warning before the crisis hits
investors in the face. The first half of the year started well enough. The
global stock market barely nudged from their original starting point in
January. The global economic drama started off with the Japan Great Earthquake.
Here is a breakdown of the month to month performance of a sample portfolio.
Jan
|
Feb
|
Mar
|
Apr
|
May
|
Jun
|
Jul
|
Aug
|
Sep
|
Oct
|
Nov
|
Dec
|
Total
|
|
2011
|
-0.50%
|
-1.90%
|
0.37%
|
0.63%
|
-2.73%
|
-1.79%
|
-0.44%
|
-8.84%
|
-6.77%
|
6.03%
|
-1.68%
|
-2.07%
|
-15.46%
|
Fund Management Philosophy
During the times of extreme volatility, holding on to certain principles and philosophies will help to guide a money manager in making decisions. Last year was a sterling example how understanding the nature of markets help. Honestly speaking, no textbooks or seminars in the world can capture the experience the thinking process I was made to go through during that period of time. Here are some of my observations which I have mentioned in my monthly investment update:
We are still in recovery stage.
The factors of recoveries are still there despite whatever doomsayers predict. There is no reason to move the entirety of the portfolio of bonds whenever there are scares. If I have done that, we would have missed the biggest market rally in October 2011 and January 2012.
I can’t switch as fast as the market moves
I have mentioned this in last year newsletter. The philosophy that guided me in 2010 served me well in 2011, especially during the volatile months of August, September and October. Be proactive rather than reactive will proof more fruitful. Example is the switch out of commodities and taking opportunity of the major dip in Korea.
Be Contrarian
In the line of our work, we get to talk to many analysts and economists who have more degree under their belt than I have. However, I find that they generally give inaccurate predictions. Let me give you an example by listing some of the investment ideas for 2011 by a major investment and research house, who are regularly being quoted in our mainstream media.
During the times of extreme volatility, holding on to certain principles and philosophies will help to guide a money manager in making decisions. Last year was a sterling example how understanding the nature of markets help. Honestly speaking, no textbooks or seminars in the world can capture the experience the thinking process I was made to go through during that period of time. Here are some of my observations which I have mentioned in my monthly investment update:
We are still in recovery stage.
The factors of recoveries are still there despite whatever doomsayers predict. There is no reason to move the entirety of the portfolio of bonds whenever there are scares. If I have done that, we would have missed the biggest market rally in October 2011 and January 2012.
I can’t switch as fast as the market moves
I have mentioned this in last year newsletter. The philosophy that guided me in 2010 served me well in 2011, especially during the volatile months of August, September and October. Be proactive rather than reactive will proof more fruitful. Example is the switch out of commodities and taking opportunity of the major dip in Korea.
Be Contrarian
In the line of our work, we get to talk to many analysts and economists who have more degree under their belt than I have. However, I find that they generally give inaccurate predictions. Let me give you an example by listing some of the investment ideas for 2011 by a major investment and research house, who are regularly being quoted in our mainstream media.
Recommend 1: North Asian markets are expected to do better than South East Asian markets
Results:
SEA markets performed much better than North Asian Markets.
Recommend
2: Avoid gold funds.
Results:
Gold future funds are some of the best performing in 2011. Gold shares however
did badly. They are predicting a fall in the price of gold which is incorrect.
If gold shares did not diverged from gold prices, they would have done well
instead.
Recommend
3: Outperformance of the small caps.
Results:
Small cap lost much more than that of large caps during the year.
Recommend
4: Favourite single-country equity market: Taiwan
Results:
Taiwan stock market lost -21.18% in 2011.
Recommend
5: Least favourite single-country equity market: Indonesia.
Results: Indonesia
is the best performing market in the world.
I was approached by an account manager
highlighting my overweight of Indonesia in my investors’ portfolio and
encourage me to heed their recommendations. Good thing I had my reservations.
 |
| Indonesia - The Rising Star of the next economic power |
Some of you may notice that you may
not have Indonesia in your portfolio. The main reason could be that your
portfolio size is too small and I am unable to allocate into Indonesia without
affecting the core portfolio.
I mentioned in my annual report that I will take a sizeable allocation into US at the start of the year. I was too late and only allocated at the end of the year. The spectral of the US treasury downgrade pose too much risk to switch into the market. On hindsight, I should have just switched in regardless, as the politicians will do the right thing at the end of the day.
There were 4 fund switches made last year, with the majority done in the last quarter of the year.
March 2011 – Switch out Commodities. Switch in Asia Pacific
I mentioned in my annual report that I will take a sizeable allocation into US at the start of the year. I was too late and only allocated at the end of the year. The spectral of the US treasury downgrade pose too much risk to switch into the market. On hindsight, I should have just switched in regardless, as the politicians will do the right thing at the end of the day.
There were 4 fund switches made last year, with the majority done in the last quarter of the year.
March 2011 – Switch out Commodities. Switch in Asia Pacific
The
portfolios are very heavy in
commodities funds, with portfolios having up to 30% weightage. We had a good
run up to the first quarter of 2011 and I decided to take some risk off the
table as I felt that commodities funds are ripe for a correction. I moved 10%
of the weightage to a less risky Aberdeen Pacific equity which is managed much
more conservative and has less risk. The global economy still seems to be
moving along nicely, which is why I did not move them to bonds. That was a good
decision as the commodities funds lost more than 20% during the correction
while Aberdeen Pacific equity only lost 12%.
September 2011 – Switch out BRIC/Emerging Markets/Asia
to Korea
After
the sudden drop in August due to the duo US Euro crisis, I decided that Korea
was a very attractive market after dropping 20% as compared to 10-15% for most
markets. As the fund is limited for SRS
and Cash, I couldn’t perform the switch for CPF investors. Korea started to
soar back in the later part of the year and is one of the better performing
markets other than Indonesia.
October 2011 – Switch out Asia/ Emerging Markets to SG
Bonds
October
marks the month when there is a swift recovery in the global stock markets from
September low. There were reasons to believe that there will be more downside
despite the seemingly more optimistic position that the world in. Sure enough,
the Greek prime minister announced a referendum to have a national vote on the
issue of the EU bailout. Later, Italy was engulfed into the crisis and the
stock market plunged again.
November 2011 – Switch out bonds to US equities
The
developments in EU moved faster than expected as the politicians held one
summit after another. A slew of half hearted measures were put in place to
backstop the Euro financial crisis. However, that seems to be enough for some
investors and the market recovered slightly. At that point of time, US
unemployment rates fell significantly since the end of the global financial
crisis. There are every evidence to support my theory that US equities will
perform well given that the world’s largest economy is firmly in recovering
mode. The move to US equities is very profitable in the month of December where
it appreciated 6%.
All in all, I believed that the decisions made last year were sound and timely despite the excessive volatility and uncertainty. There are some better decisions that I could have made, like moving from gold and resource shares to ETF and futures. Like moving into US market earlier and have faith that the politicians will do the right thing at the end of the day. Seasoned stock brokers and fund managers claim that they have never seen such volatility and unpredictability in the last 20-30 years of their career. Past economic theories and investment strategies need to be relooked at and see if they can still be adopted in this new investment environment.
All in all, I believed that the decisions made last year were sound and timely despite the excessive volatility and uncertainty. There are some better decisions that I could have made, like moving from gold and resource shares to ETF and futures. Like moving into US market earlier and have faith that the politicians will do the right thing at the end of the day. Seasoned stock brokers and fund managers claim that they have never seen such volatility and unpredictability in the last 20-30 years of their career. Past economic theories and investment strategies need to be relooked at and see if they can still be adopted in this new investment environment.
Strategies
and Outlook for year 2012
Year 2012 is an enigma. Economists and government around the world are warning about slowing growth and technical recessions. Yet at the start of January, there are much optimism that it will not be as bad. The US economy continues to show strength. Asian governments are contemplating loosening monetary policies to stimulate growth. The Euro front seems to be all quiet with the little bad news faded into the background. Considering the current situation, it will be extremely difficult to guess the market direction.
My best guess is that markets will undergo a major correction in the 2nd and 3rd quarter and we will see some recovery near the end of the year. There are some leading indicators that are turning south rapidly and I believe that the current optimistic market situation cannot last. However, any correction will be swift as most of the current crisis are partly solved or deferred to the next government. There will be 42 government elections this year with major economies in the west having a change of guard. No one will want to shake the boat at least until their elections.
Here are some of my thoughts for 2012:
1) Take profit frequently and ensure that there is always at least a 20% opportunity buffer to take advantage of any sudden dip. The Korea allocation will be on the first on my Radar to go.
2) Increased allocation for US. The current allocation in the portfolios is at 20%. Given the strength of the US recovery, an increased allocation to 30% will help to ride on the recovery. Furthermore, being the only economy in the world that can withstand market shocks, any European crisis correction will affect US lesser as compared to Asia.
3) Maintain allocation in South East Asia but selectively. The portfolio utilizes a general SEA fund. However, the problems with most SEA funds are that the allocation to Singapore market is quite substantial and the Singapore stock market has the problem of following the crowd. When US or Europe or China or Japan has a huge correction, Singapore stock market will always be hit regardless. Thailand comes to mind for year 2012 given that the country is recovering from the devastating flood and the stock market is currently under-performing to its potential.
4) Take profit on Gold shares once the convergence of spot prices and gold mining shares occurs. If there is any more allocation in commodities after that, there will be considerations if investing in a commodity shares fund or commodity futures fund makes more sense.
Year 2012 is an enigma. Economists and government around the world are warning about slowing growth and technical recessions. Yet at the start of January, there are much optimism that it will not be as bad. The US economy continues to show strength. Asian governments are contemplating loosening monetary policies to stimulate growth. The Euro front seems to be all quiet with the little bad news faded into the background. Considering the current situation, it will be extremely difficult to guess the market direction.
My best guess is that markets will undergo a major correction in the 2nd and 3rd quarter and we will see some recovery near the end of the year. There are some leading indicators that are turning south rapidly and I believe that the current optimistic market situation cannot last. However, any correction will be swift as most of the current crisis are partly solved or deferred to the next government. There will be 42 government elections this year with major economies in the west having a change of guard. No one will want to shake the boat at least until their elections.
Here are some of my thoughts for 2012:
1) Take profit frequently and ensure that there is always at least a 20% opportunity buffer to take advantage of any sudden dip. The Korea allocation will be on the first on my Radar to go.
2) Increased allocation for US. The current allocation in the portfolios is at 20%. Given the strength of the US recovery, an increased allocation to 30% will help to ride on the recovery. Furthermore, being the only economy in the world that can withstand market shocks, any European crisis correction will affect US lesser as compared to Asia.
3) Maintain allocation in South East Asia but selectively. The portfolio utilizes a general SEA fund. However, the problems with most SEA funds are that the allocation to Singapore market is quite substantial and the Singapore stock market has the problem of following the crowd. When US or Europe or China or Japan has a huge correction, Singapore stock market will always be hit regardless. Thailand comes to mind for year 2012 given that the country is recovering from the devastating flood and the stock market is currently under-performing to its potential.
4) Take profit on Gold shares once the convergence of spot prices and gold mining shares occurs. If there is any more allocation in commodities after that, there will be considerations if investing in a commodity shares fund or commodity futures fund makes more sense.
Conclusion
I will not predict that all is doom and gloom, nor can I predict that there are good times ahead. The situation is fluid and I will endeavor my best to move ahead of the market. Lastly, with a slew of new regulations by MAS being implemented in year 2012, doing fund switching may get more difficult as there may be additional requirements of hard copy signed forms to be attached with the online switch. It will be almost impossible to execute everyone switches on time if that should happen in the near future as I will have to wait for hard copies of the paperwork to come in before I can execute the trade. As of now, there is no clear indication from the regulators on where they stand. Sometimes, regulations are blindly implemented to protect consumers, end up harming them more.
I will not predict that all is doom and gloom, nor can I predict that there are good times ahead. The situation is fluid and I will endeavor my best to move ahead of the market. Lastly, with a slew of new regulations by MAS being implemented in year 2012, doing fund switching may get more difficult as there may be additional requirements of hard copy signed forms to be attached with the online switch. It will be almost impossible to execute everyone switches on time if that should happen in the near future as I will have to wait for hard copies of the paperwork to come in before I can execute the trade. As of now, there is no clear indication from the regulators on where they stand. Sometimes, regulations are blindly implemented to protect consumers, end up harming them more.
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