We
had a good run for the months of January and February. The portfolio on average
gained 9.2% on average during that two months. The air seems to have cleared a
bit with economic indicators showing recovery in US. The Greece debt crisis
also has been put on the shelf as the second tranche of bailout fund is finalized
after much haggling from all vested
parties. However, new clouds of worries are looming over the horizons again
with Iran threatening to cut off oil supplies to major western economies. Here
are the updates of the past month:
1)
Housing Markets and Employment data continues to
improve in US. The Dow punched above 13,000 points for the first time since the
Financial Crisis. The US recovery is seen to be gathering steam at a steady but
slow pace.
2)
the Euro
members finalized the second bailout package which is increased to €130 billion.
Private holders of Greece governmental bonds are asked to take a slightly
bigger write down of 53.5%. The deal is expected to be finalized before 20
March, when Greece needs to repay bonds worth €14.4bn or default on its debts.
Until the end of March, anything can happen that may derail the bailout payout.
Stay tune to this Greek Drama.
3)
Crude oil prices had a sudden spike above $100
due to western-imposed sanctions on Iran and Iran threatened to close the
Strait of Hormuz, a crucial route that allows the delivery of around one fifth
of the world’s oil.
4)
Gold prices corrected sharply to $1700 after
rising to hit $1800. The reason was due to a lack of indication if there is a
QE3 by federal reserve chairman Ben Bernanke. Without the inflation inducing
QE3, speculators sold down on gold.
The NEW Greatest
Threat – Energy Prices
The Euro crisis has been pretty much fire walled and the
majority of the damage is contained within Europe. The new threat comes in the
form of elevated oil prices. Thanks to the recent chaos brought about by the
Arab Spring in the Middle East, energy supplies are periodically disrupted.
With the new uncertainty brought about by the posturing by Iran, energy prices
jumped 10% overnight. If oil prices continue to rise sharply, it will threaten
the recovery of the major western economies and this might lead to a new
stagflation crisis. Stagflation is a situation when goods are scarce and
inflation is rampant, and at the same time, very low economic growth and high
unemployment. The principle medication for this condition is either to replace
the energy supply through other means, or to raise interest rates sharply,
bringing down the cost of price of goods. Global economies will lapsed into
recession should the higher interest rates medication is prescribed and Asian
countries, which escaped relatively unscathed during the Great recession, will
bear the full brunt of the impact this time round.
On the bright side, the world has gotten used to crisis
erupting in the middle east now and than. Major wars in the middle east for the
past 20 years have not led to the doomsday scenario yet. Iran currently exports
most of its oil to China at the moment of time and should not affect the
western economies significantly at this moment of time. However, should Israel
decides to launch a preemptive strike against Iran, we will see the whole of
middle east explode into chaos and this will definitely significantly affect
global oil supplies.
The Strategy for
Now
Global economy seems to be recovery gradually from the
effects of the US/Euro financial crisis. However, the entire episode is full of
twists and turns, worthy that of a Shakespeare’s
drama. The portfolio must be positioned to expect the unexpected, and at
the same time, take advantage of the recovery should the unexpected does not
turn up. The year end rally has more or less lost its steam and I believed that
profit taking from the year end rally is due. There is now an allocation of 20%
into Singapore fixed income instrument. This “opportunity” fund will ensure
that the portfolio has room to take advantage of any sudden unexpected dips in
the market. The allocation of US has increased from 15% - 30% allocation to
take advantage of the recovery in the US economy, redirected from the Asia
allocation. Should there be any crisis, I believe that the US stock market will
be the best insulated as compared to all other nations. It has been a great
start to 2012 so far! Let’s hope for the best that such performance can be
maintained into the end of the year.
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