The Market Tanks... and Shoots Back Up Too Much!

source: BBC.com

The fear of a possible Bear market gave way to euphoria when the US Federal Reserve signaled that they will go slow on the interest rates rise, while the delay of the US-China 1st March implementation of further tariffs  gave further boost to the market, giving the Chinese market an extra boost that there is a good chance that the trade war can be resolved soon.

However, the market shot up too fast too much within a short time frame of 2 months, with the market returning recovering most of the losses that occurred during the 2018 Christmas correction. If you recall back to a few months prior to the crash, I was mentioning that the valuation of the US market is too high to be sustainable and a correction is inevitable to correct the excesses of the market? The correction occurred with most market having a healthy correction... and started shooting back to the expensive zone again.

As the euphoria of the possible resolution of the US-China trade war starts to fade, the reality of a slowing economy in US and China, further damaged by the trade war, will come back to hunt the markets.

Source: Yahoo Finance

With the impeding dateline of a chaotic Brexit coming into play on 29th of March, it is highly possible that the markets will take a breather and fall back to a more reasonable level.

Meanwhile, over at Emerging Markets, the recovery did not take hold as strong as the US markets as the recovery is more muted, making the valuation of Emerging Markets much more compelling at this point of time. Having said that, the Emerging Markets will be facing increasing headwinds due to the effects of trade wars becoming more obvious as time goes by. China's economic data will show increased weakness as their export oriented economy will show more signs of cracks.

Source: Yahoo Finance

On the bright side, this trade war can be used as an excuse to push difficult government policies across, and lay the blame on US and Trump. Unpopular reforms such as closing down inefficient state owned companies, lifting protection to the local companies exposing them to more increased competition and improving intellectual property rights protection are needed for China to shift from a manufacturing base to a more knowledge base economy. This will benefit China in the long run to achieve their goal as a superpower able to rival that of United States.

Portfolio Review 

The current portfolio with the majority of the allocation into US and Emerging Markets have benefited greatly from the easing of trade war tension. The US small cap fund which was switched from bonds last November did well with the US stock rally. However, as the US market swings back into the expensive zone, I also become more cautious on the prospect that the small cap fund, which I will be looking to scale back and take profit on. Meanwhile, the Emerging Market equity still offer reasonable value and I am looking to hold on to it.

The next major event will be the possible chaos as a result of the Brexit, which may have an adverse effect on European equities and will probably result in a ripple effect on the rest of the world. We will watch cautiously on the development on that front.