We are Moving into US Small/Mid Caps

Lion capital Singapore Fix-Inc Fund has lost around 4.5% since we switched in as a result of the US tapering announcement. The damage to the fund, is quite unexpected as most of the holdings are invested into Singapore Government Bonds and Singapore government linked corporation bonds. According to the fund manager, the SGS bond did not lose too much value as compared to the US treasuries. The main culprit of the losses are the Singapore linked corporate bonds. The 3 local banks also got downgraded by Moody's as the rating firm warns of a high debt ratio within the Singapore household which may impact the financial soundness of the local banks and the downgrade of these 3 bank bonds also created an impact on the fund. The fund is expected to recover by the end of the year as the bonds mature, but it is too slow for my liking as the potential of the equities fund of more than 10% will outweigh the recovery of the losses by this bond fund. Thus, the rationale to get out of the bond fund totally despite taking the hefty losses.

The decision to move to US small companies fund is not a hard one. The USD will continue to strengthen in the near future as long as other major economies continues their loose monetary policies while US starts to tighten theirs. USD is expected to rise against SGD also and investing most of the portfolio in a US will ensure that we can outperform the local and emerging market as a result of currency appreciation and has a better chance to outperform the MSCI World Index, which composition is mainly dominated by US companies. There is a pull and push factor for investing into US small and mid cap stocks.

The pull factor on investing into US small/mid cap is that the Fed has more or less highlighted the factors for rising interest rates:  Lower unemployment and rising inflation. Both of these factors will spur consumer spending which will first and foremost, benefit the US Small and Medium enterprises which makes up of the back bone of the US domestic economy. Major MNC which started investing heavily into emerging market as a result of a weak USD in the past decade will see their profit erodes as major profit centers in emerging countries start to slow down along with an appreciating USD. Local US companies will be less affected by a global rising interest rates environment as compared to their Asian counterparts for reasons which I will highlight below.

The push factor to focus more on US equities away from emerging markets lies mainly on the on the risk factor or emerging markets. Many emerging economies, especially in Asia, has emerged relatively unscathed from the Global Financial Crisis and has soared ahead in terms of market cycle. Some of the companies in these economies have lapsed to their borrowing habits in Pre-97, when they borrowed heavily in USD as a result of tightening monetary policies in their home countries and relatively lower borrowing cost of US debt. The reversal of the direction of USD and US interest rates will increase the debt burden of these companies and there is a possibility that some of them may get into trouble if interest rates and USD rises too fast, too furious. Global investment funds will also increase their fund flow out of these countries back to US as the stronger US dollar and the recovering US economy created opportunities for profits. The S&P500, which has hit historical high while many of the major emerging market economies still see their stock indices wallowing at a level way below the pre financial crisis high, tells of the increasing confidence international money managers have of the US equities market.

I understand that some of the concepts and rationale above may be too advance for some of my investors. Do drop me a call and a review session so that I will be able to spend some time to explain to you the intricacies of the global equities and debt market.