SGD - The New Safe Haven for Global Investors

Bernanke flashes the big 'bazooka' in his bag to hint that the Fed
is prepared to go ahead with QE3

August had been a quiet month, with the as usual "Growth is slowing and we are going to do something about it" proclamations made by leaders around the world. Major markets hit a ceiling after a good month run before correcting at the end of the month of August. All eyes are now centered on the US presidential elections and the China political change which will take place a few months later. Meanwhile central banks stepped up and take charge as governments continued to be embroiled in paralyzing political maneuvering.

The US central bank took a more aggressive stance as signs of further deterioration in the job markets continue to weigh on the economy. Gold prices rallied from the bottom as the chances for a new monetary easing become more likely. Based on some of these events, I can make a pretty good guess on what some of the trends that may materialize until the end of this quarter:

1) USD will depreciate against SGD and may hit a year low

This development will be bad for our US holdings as any gain in the US equity markets will be eroded by currency losses. In fact, the USD is already trending down in the past few days. So should we bail out of the US equities market right now? I believe that the US equities market will still be one of the better performer, as the recovery slowly and painfully pick up steam again. The economic cycle of US is also currently in a sweet spot, so I think any losses in the USD will be more than compensated by the gain in the equities return.

2) Gold will see better times ahead, after a major 2 years correction

We may get to see some action in the gold market and perhaps, the broader commodities market in the near future. As I have written in the past newsletters, commodity counters are having a miserable time, with their performance falling to the bottom of the pack in the past 2 years. The uninspiring performance are mainly attributed to the falling demand from the slowing China and Indian economy, and coupled with a strong USD and promises of further monetary easing from US central bank, which never materialized, investors abandoned commodities counters in doves. Everybody is talking about REITS these days and commodities counters are more or less being forgotten. A smart investors will probably take note of these development and do whatever the media is NOT telling them to do.

3) China equities market will see some light at last

The China equities market, once the favorite of many fund managers and analysts just went through 4 miserable years. So miserable that they have clinched the honor of being the persistent 3 worst stock markets in the world, for the past few years. After years of export led growth, the Chinese government is trying to reposition the economy from a export oriented one to a more consumption one, as major global economies are slowing down and are unable to continue to import China made goods. On top of that, Western governments are talking about creating incentives for companies to bring manufacturing jobs back to their respective countries, to drive down the unpopular and perpetual high unemployment rates. With these developments in mind, the Chinese government has no choice but to try to restructure the economy, without driving the property prices up too much, maintain a reasonable inflation number, and to reallocate the wealth from the property market to the stock market and consumption. This will help China in the long run to attain a more balance and diversified economy. These changes will take a few years at least, but short term measures, like the recent measures announced by the government, made a pretty good impact on the Chinese stock market. The government will have more teeth, after the once in a decade change of leadership, and can get down to tackle these reforms more seriously, without needing to worry about intra party politics.

 4) Singaporeans: It will be a good year to travel.

Corporate bonds of companies backed by Temasek
in demand by global investors

The SGD will continue to strengthen into end of the year as foreign investors continued to pour funds into Singapore, via corporate bonds. The demand for corporate bond market in Singapore has reached a record high, as global fund managers are looking for a safe place to park their money, with a decent yield, amidst all the chaos and uncertainty around the world. Singapore corporate bonds seem to be heaven sent for these global fund managers. Singapore's sovereign debt is one of the 14 coveted triple A-rated in the world and in Asia, only Singapore and Hong Kong have the privilege to be in the triple-A club.  On top of that, many of the corporate bonds issuance are companies backed by Temasek or the Singapore Sovereign wealth fund. The yields are also very attractive at around 3-4%, given the extremely low interest rates around the world. With all the hot money flowing into Singapore, SGD will be expected to be strong till the end of the year. However, the party will stop, when the global economy gets better and the stock markets get back to their feet again. So Singaporeans, grab the currencies of those countries that you are intending to travel to, as the rates might not be as attractive in the future, as the hot money flows out.

The Portfolio 

The portfolio essentially reflects most of the themes I have highlighted above. Invested into US, North Asia, commodities and Singapore corporate bonds. I have moved out of Singaporean corporate bonds in the month of August, in anticipation that the equity markets will deliver better returns than the safe havens of Singapore corporate bonds. Baring any unexpected black swans events, example: Israel attacking Iran, the market should have a good run, thanks to the stimulants governments and central bankers around the world will implement, to reignite their respective spluttering economies. 

The portfolio has returned 0.97% in August, with the performance of the portfolio muted by the lackluster the heavily weighted Aberdeen Pacific and Emerging Market fund. The Aberdeen Emerging Market fund was recently highlighted by a Bloomberg article for its outstanding performance, and is currently ranked at the top in terms of risk adjusted returns, in the emerging market fund universe. It didn't do too well last month, as compared to its peers, who are more aggressive in their investment approach, but it is reassuring to know that our fund managers are doing their job well for the fees investors paid.