Rally in Stock Market Losing Steam. The Dilemma of Commodities

The portfolio had a fantastic run in January, mirroring the trend of last year, with optimism towards the stock market propelling the stock markets of major economies to the pre Euro crisis high. The rally fizzled off in February as the old European crisis concerns and political woes erupted anew again. Spain's Prime Minister Mariano Rajoy and his party is rocked by a political scandal, poor economic showings, dampened investors' demand for Spainish bonds, sending the yields up. A potential political gridlock in the upcoming Italy election is also affecting investors sentiment, leading to an increased concern that the Euro debt crisis may erupt anew due to political paralysis.

Former Italian Prime Minister Silvio Berlusconi

Economic data from US and China are mixed in February and this lead to investors taking some profits. The failure to stem the implementation of the US Sequester is also a setback to the investor's confidence, as the $85 billion automatic spending cuts come into play, starving the economy of the much needed cash infusion. On the China end, the manufacturing index turn out worse than expected, suggesting that the Chinese manufacturing sector is still not in recovery mode, leading to a sell off in Asian shares.

History Repeating Itself?

As the chain of events unfolds, it seems to be leading to a similar stock market scenario like what we have seen last year. However, the good news is that there is much less potential human political drama this year as compared to last year. Even with the news of stock markets hitting new highs and investors optimism getting better by the day, people seem to forget that the markets hit them when they least expect it. Our strategy for last year, was to take profit when the markets are extremely optimistic going into March. We will be duplicating this strategy for this year. I will be moving 20-30% of the profits we made over the last few months to US or SG bonds, just in case the market gives the investors a sucker punch again, which seems to be highly possible. 




The Debate About Commodities

The worse performing position for the portfolio are the resource and gold fund. The problem withresource funds are the paradox that lies behind the factors driving their prices up. Commodities prices rises when major global economies start to do well as the demand for commodities increase. However, there is always this fear that along with growth, comes inflation, which causes central banks around the world to tighten money supply, which is a negative for commodity prices.

The recent development in the commodity prices is a reflection of the struggle between these 2 factors. On one hand, global economies seem to be on the mend, and yet investors are anticipating that the US Federal bank will turn off the money tap once the US economy gains traction. The fear of the monetary tightening outweighed the potential need for commodities and this is driving the prices of commodities shares down. The debate I am having is whether to cut losses on our commodity position, given the fact that the situation may swing to the other end at any point of the time. The fact that commodity prices are currently highly volatile and unpredictable, makes it a difficult decision for me to cut or to hold on to the current allocation. I tried to delay this decision, in order to observe the market for another month, but it seems like the commodity markets are still not yielding any clues which direction it is going.

Given such consideration, I would rather allocate the funds to sectors which I am confident will generate a decent returns rather than sit it out praying that hope will win over fear at some point of time and the commodity funds stage a major rebound. I have decided to cut down the allocation of commodity funds and move it to other more potentially fruitful areas.


The Report Card

We had a decent return of 5.6% year to date, as we are able to leveraged on the jump in US equities and USD. The US allocation helped to buffer the relatively quiet and horizontal moving Asian equities and offset the disappointing performance of the resource funds. I will be making major adjustments to the portfolio in the coming days. If you have lost your IFAST password or is unsure, do take some time to apply for a new one. You will need it soon!