When things start to turn better is the time when we should start worrying.
The Final Verdict
The final portfolio will look like this:
US Equities - 40%
Asia Pacific/ Emerging Markets Equities -30%
Singapore Bonds - 30%
This portfolio should allow us to benefit greatly should the market corrects and yet, not lose out on the potential profits should the correction does not come through. The best case scenario, is of course, pray for the market to have a nice correction, before moving back up again. Let's see if we can maintain that double digit returns for this year as well!
The stock market has been performing well since the start of the year and many analysts seem to be pretty positive about our immediate future at this point of time. The US stock market seems to be unstoppable as S&P500 zoomed past the 1500 mark and analyst on a popular local radio station proclaimed that we will hit STI 3800 soon.
The key to master the art of predicting the movement of financial markets is to watch out for the small and subtle hints, which major news carriers will not shout, from the top of a building. I was talking about an impending potential outbreak of the Euro crisis for the majority of you, who set through the annual investment review with me. It seems to be coming to pass again with the recent Cyrus incident. In fact, if you are astute enough, you will realize that the major players around the globe have started to pare down their Euro exposure since 2 weeks ago.
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| Euros losing strength in recent weeks. |
Euros have been gaining strength since last year July, as the biggest concern of that time, Greece, faded into the background. So, in theory, if investors believe that the Euro debt crisis is on the mend, there shouldn't be any reason to sell Euros, yet there is a sharp selloff starting from Feb this year. Could it be possible that the major players are already positioning themselves for a potential resurgent of the Euro crisis again?
This is one of the many hints I actively look out for in the financial markets to help me make the decision to take profits.
So, assuming there will be a potential market correction in the near future as a result of some negative news from Europe, what should the new portfolio look like in order to weather this correction? Here are some of my rationales:
1) Reduce equity exposure from 100% to 70%, with 30% allocation into Singapore Fixed-Income.
This is a profit taking exercise, but why 30% into bonds? This figure is based on the 20% allocation I switch into bond last year. The 20% timely switch allowed us to outperform the rest of the market by a wide margin but I could have done better if a higher allocation has been made to switch into bonds. However, I was not confident of an impending correction during last year February and I made the switch "just in case things happens". This time round, the signs of corrections seem to be clearer now that we have advanced into March and I am willing to take a bigger bet that a correction is poised to occur... soon.
2) Increase US exposure from 20-30% to 40%
Last year, I increased US exposure from 10% to 20-30% of the portfolio and that position performed flawlessly as predicted: That the US stock market will be the least affected in the case of a Euro crisis. The hypothesis is similar this year. On top of that, the potential of the US stock market, along with the perspective that the recovery in US is getting into 2nd gear will make this a strong position regardless if the market tanks or continue to move up.
3) Elimination of resource/gold position
This is a difficult decision as clients have to take between 30-40% loss on this position. Resource and gold fund dropped suddenly going into March as the news of a potential monetary tightening from the US Fed will lead to a collapse in demand on commodities.On the other end, if growth materialize around the globe, commodities will do well. It is essentially a 50/50 bet which I have no idea which direction it will go in the short term. As I mentioned in my last month news letter, I would rather bet on something which I think will have a better chance to appreciate, than to be at the mercy of chance.
4) Elimination of South East Asian position
I have also decided to liquidate all the positions in SEA. Our exposure to SEA in the last few years have served us very well, when the equities markets around the globe sank and spluttered. SEA was the only bright spot around the globe and have been topping the best performing charts in the last 3 years. Taking a page from all the expensive lessons that I have learn in my last decade of money management: Whatever that has performed well for the past 3 years and there are personal bankers recommending this funds to retail investors = AVOID! This seems to be the case for our SEA stock market for now. Major players will also want to lock in profits and may redirect to other potential markets, that are totally unpopular right now (BRIC & Europe). So, we move where the money goes.
The Final Verdict
The final portfolio will look like this:
US Equities - 40%
Asia Pacific/ Emerging Markets Equities -30%
Singapore Bonds - 30%
This portfolio should allow us to benefit greatly should the market corrects and yet, not lose out on the potential profits should the correction does not come through. The best case scenario, is of course, pray for the market to have a nice correction, before moving back up again. Let's see if we can maintain that double digit returns for this year as well!
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