We will be moving a portion of our cash into equities in preparation for
the year end rally after a big correction in August to October. If you
recall, we moved from 20/80 Equities/Bonds to 50/50 Equities/Bonds in
late August. So we are moving from the current allocation to 80/20
Equities/Bonds this week. Despite the number of headwinds still out
there that can tip the world into a global recession, here are some of
the events that made me decide to take a more slightly aggressive
stance:
1) There are indications that the US Central Bank will have a high probability of not raising interest rates this year
2) EU central bank indicated that they will increase the quantitative easing by the end of the year
3) Greece financial system normalizing
4) China government unleashing infrastructure investments and expanding loan limits, which only solves the short term issues.
I have a hard time deciding which region to allocate the funds. Here are some of the reasons the whys and why-nots of each major region.
America - Stronger USD is crimping on the profitability of many major S&P500 listed companies and with a slow-down in emerging market economies, these factors are creating anxieties that profits will slow especially for big MNCs which currencies and emerging market economies are important to the bottom line. The US Central Bank indicates concerns that the slowing emerging market economies may derail the US recovery, which drives analysts to believe that the US Central Bank will not raise interest rate this year. However, there is no absolute certainty that the interest rate will not be raised given how resolute the US Central Bank was in raising interest rates earlier in the year. An interest rate raise at the end of the year will wreck havoc in the global equity markets when most of the investors have expected it to be delayed until next year.
Asia - The equity market has recovered to a certain degree thanks to the stop-gap measures implemented by the Chinese government, but all these measures will not solve the long term structural problems and it will come back to haunt us come next year again. Even though the valuation of Asian equity is very compelling after the recent fall, I am hesitant to even take a short term position on Asia as I believe that the financial excesses of the Asian markets have not been purged yet, given that property prices and debt levels are still at an elevated level.
Europe - Still stuck in the slow recovery mode with Greece throwing stones at the European equity markets now and than, the European markets are still way behind the economic cycle curve. Recent positive development includes a potential increase in the QE stimulant by European Central Bank and the normalization of the Greek financial market, which will potentially boost and stablize the European stock markets. The European equity markets are also threatened by both interest rates and emerging market issues but given the net positive effects on the additional QE boost by ECB, it tips the European region into favor.
Given that we are at the tail end of the global equity market cycle, I am reluctant to move 100% into equity unless there is a more substantial fall in equity prices. The recent correction, although is a welcome drop to the already expensive stock market, is still not enough, in my opinion, to garner a risky all out position into equities unlike the previous years which I have done so.
Here is the allocation after the switch:
Asset Allocation:
Europe Equity: 50%
US Equity: 20%
Asia Equity: 10%
Cash: 20%
1) There are indications that the US Central Bank will have a high probability of not raising interest rates this year
2) EU central bank indicated that they will increase the quantitative easing by the end of the year
3) Greece financial system normalizing
4) China government unleashing infrastructure investments and expanding loan limits, which only solves the short term issues.
I have a hard time deciding which region to allocate the funds. Here are some of the reasons the whys and why-nots of each major region.
America - Stronger USD is crimping on the profitability of many major S&P500 listed companies and with a slow-down in emerging market economies, these factors are creating anxieties that profits will slow especially for big MNCs which currencies and emerging market economies are important to the bottom line. The US Central Bank indicates concerns that the slowing emerging market economies may derail the US recovery, which drives analysts to believe that the US Central Bank will not raise interest rate this year. However, there is no absolute certainty that the interest rate will not be raised given how resolute the US Central Bank was in raising interest rates earlier in the year. An interest rate raise at the end of the year will wreck havoc in the global equity markets when most of the investors have expected it to be delayed until next year.
Asia - The equity market has recovered to a certain degree thanks to the stop-gap measures implemented by the Chinese government, but all these measures will not solve the long term structural problems and it will come back to haunt us come next year again. Even though the valuation of Asian equity is very compelling after the recent fall, I am hesitant to even take a short term position on Asia as I believe that the financial excesses of the Asian markets have not been purged yet, given that property prices and debt levels are still at an elevated level.
Europe - Still stuck in the slow recovery mode with Greece throwing stones at the European equity markets now and than, the European markets are still way behind the economic cycle curve. Recent positive development includes a potential increase in the QE stimulant by European Central Bank and the normalization of the Greek financial market, which will potentially boost and stablize the European stock markets. The European equity markets are also threatened by both interest rates and emerging market issues but given the net positive effects on the additional QE boost by ECB, it tips the European region into favor.
Given that we are at the tail end of the global equity market cycle, I am reluctant to move 100% into equity unless there is a more substantial fall in equity prices. The recent correction, although is a welcome drop to the already expensive stock market, is still not enough, in my opinion, to garner a risky all out position into equities unlike the previous years which I have done so.
Here is the allocation after the switch:
Asset Allocation:
Europe Equity: 50%
US Equity: 20%
Asia Equity: 10%
Cash: 20%
No comments:
Post a Comment