Cold War Fears Reignited. China Slow-down Sparks Stimulus Hopes

The month of March was a wildly volatile month with major market moving events affecting America, Europe and Asia. Investors took these events in stride and the financial markets handled these shocks well. The Emerging Market outperformed the western markets for the first time in months as international investors looked for value in the battered Emerging Markets. The investment portfolio was able to handle these shocks well due to a large allocation into short term international bond funds and was able to outperform the global index.

The US Federal Reserve: Paradox

With the tapering process in high gear, investors around the world are scouring for an indication when the US Federal Reserves are going to raise interest rates next. They got a mixed signal instead. The market fell sharply when Janet Yellen, the new chairwoman of the Federal Reserve, hinted that they may start rising interest rates as due to the improving US economic environment. However, she later came out to say that the Fed is committed in the loose monetary policy until the US economy improves further. The global stock markets rallied.

Russian soldiers stand near a tank outside a former Ukrainian military base near the Crimean capital Simferpol
Source: AFP

Ukraine and Crimea: Ignored

Russia surprised the international community when they sent troops to annex Crimea, a territory belonging to Ukraine, resulting in a sharp fall in the European stock markets. Russia is one of the biggest trading partners for many of the Euro zone economies and a punishing economic sanction on Russia will lead to a negative implication for the still fragile Euro zone. US and her European allies moved quickly to kick Russia out of G8 and imposed a few token sanctions on Russia. The financial markets were relieved to later realize that the sanctions were very mild and they recovered quickly. Ukraine essentially was left to deal with the crisis on their own with little help from the international community.

The Chinese Economy: Hopes and Fears

China led the headlines again as leading indicators were pointing to a big slow down in the Chinese economy. The Asian Financial Markets fell initially on the news, but rallied later when the Chinese Government announced a "mini-stimulus" to shore up the economy. The Asian Markets are hoping that this recent measure will lead to more significant stimulus in the near futures.  The previous troubled nations: Turkey, Thailand, Indonesia and India led the Asian rally as concerns about their economies started to fade.

Portfolio Strategy   

The tapering fears that have been plaguing Emerging Markets the whole of 2013 seem to have disappeared in the last few weeks. The Emerging Markets' stock and currency markets have been holding up well, despite market turbulence in US and Europe. However, the unknown from the Chinese market and increasing US interest rates, make any large allocation into the Emerging Markets a highly risky bet. Therefore, staying put and further observations are needed before we can declare that the coast is clear. The global markets seem to be in a holding pattern waiting for the next big news to occur. As we move into the dangerous months of May to October, the period when market shocks often occur, the ability of the global stock markets ability to rally will be questioned in days to come. The portfolio has held up well in the face of the uncertainty during the March period and it should hold up well as well if a deeper correction takes place. For now, I believe that the market is too frothy  and a more meaningful correction should materialize, in weeks to come.