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| Janet Yellen, the upcoming Federal Reserve Chairman will determine the fate of the financial markets. Source: Reuters |
In my very very recent article, I talked about why I am so worried about the emerging market economy, so I shall talk about the strategy for the portfolio going forward.
On the state of the portfolio, the decision to switched out of Turkey and Thailand was a good decision. Thailand went on to fall 2% and Turkey fell 8% after we switched out. Meanwhile, Europe has been holding on strong and for once in many months, the portfolio managed to outperform the world index again, thanks to this switch and the relative resilience of the Fidelity American Fund. As I mentioned, this year will be tricky, but I believe that there will still be a pretty good chance for a big rally in the US and European markets coming to October this year.
The main factor to consider if the US/European markets will rally or not will depend on the time gap between the tapering, and effective rising of the real interest rates by the US Federal Reserves. Stock market function the best when there is predictability and a stable interest rates environment. The Federal Reserves indicated that they will hold interest low, even after when they have unwind the Quantitative Easing Program until there is a significant improvement in the US economy. The tricky part here this: If the US economy do pick up steam and inflation starts to kick in, the Federal Reserves may have little choice but to start rising interest straight after the tapering of the QE, in order to stave off any future potential asset bubble. That will cause a whammy on the US stock market and a double whammy on the Emerging Markets if that is the case. If not and the Fed decides to leave interest rates unchanged for a year or two, we will probably have a very buoyant Western stock market which will enable the portfolio to return good profits. So, the key to watch out in the next few months will be the health of the US economy. If it is recovering too fast, that's bad. The best is a mediocre slow recovery that requires no action on the Fed part. In any case, the key is to remain flexible and be ready to move in or out of the market as the flow of events unfolds.
Meanwhile, I will watch out for opportunities once the market starts to correct in earnest and I foresee that by May, we will have a clearer picture on which counter and sector will be a good bet.
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