Archive for the ‘Investment Advice’ Category
I am not going to discuss the basics of Dollar Cost Averaging, I believe readers can find out about the concept quite easily on the Internet. Just going to display some interesting facts and graphs.
These 3 months of the year, markets have contended with the ouster of Egyptian President Hosni Mubarak, battles between forces loyal to Libyan leader Muammar Qaddafi and rebels, protests in Saudi Arabia, Bahrain and Yemen, oil above $100 a barrel, record-high food costs and a magnitude 9.0 earthquake in Japan that killed more than 8,000 people and crippled a nuclear power plant.
Let’s touch on the events, country and situation one by one.
China’s inflation accelerated to a 4.9 percent annual pace in January, exceeding the government’s aims to limit consumer-price gains to 4 percent for 2011 for a fourth month. Banks extended 1.04 trillion yuan ($158 billion) of new loans, more than double December’s level.
China government targets inflation as top priority to cut risk of social unrest while encouraging private investment and allowing for stronger Chinese currency.
The front loading of interest rate increase by the Chinese government means in the first half of the year we will see substantial interest rate increase and increase in capital requirements of banks.
Reserve ratios stood at 19 percent for the biggest banks before today’s move, already the highest in more than two decades. 8th February, the People’s Bank of China (PBoC) announced that the one-year deposit rate and the one-year lending rate will rise by 25 basis points (bps) to 3% and 6.06% respectively.
Chinese banks, set to post record profits, are trading at their cheapest level in two years and may stay depressed in 2011 as investors bet faster inflation and capital requirements will erode earnings. Shares lost allure over the last three months. The nation’s five biggest lenders, with a combined $771 billion market value, trade at an average of 8.5 times forecast profits, compared with 10.4 times at the world’s 20 largest banks, according to Bloomberg. India’s five largest banks trade at an average of 19 times.
Last year I had some clients in Indian equity, always a consideration and comparison to China. India had a pretty good 2010 and China equity faltered. India’s main stock index, the Sensex, gained 17% last year, and the country’s market cap as a percentage of world market cap increased more than any other country except Canada.
This year seems different. After a small gain of 0.25% on the first day of the year, the Sensex has gone down for all except one day since for a year-to-date decline of 7.90%. The chart below from Bespoke Invest shows the index made a lower high on its most recent rally, and tested its late November intraday low.
I have been noticing this since I read the article on 11th Janurary. The November lows didn’t hold, the technicals will turn decidedly bearish.
Adapted from “India Struggles Out of the Gate” published on Tuesday, January 11, 2011 in bespokeinvest.com
China’s stocks may slump for a second year as the central bank raises interest rates to tame inflation, according to Zhang Kun, the strategist at Guotai Junan Securities Co. who correctly predicted last year’s drop.
According to Zhang, whose Shanghai- based firm Guotai Junan is the nation’s second-largest brokerage by revenue, said. “Inflation is the biggest risk. The government will keep tightening.”
Guotai Junan is alone among China’s major brokerages in predicting declines for 2011. China International Capital Corp., the only other major Chinese brokerage to correctly forecast the index’s drop in 2010, also expects an advance this year.
The Shanghai Composite fell 14 percent in 2010 to 2808.08, making it the worst performer among benchmark indexes in the world’s 10 biggest markets. Premier Wen Jiabao’s government ordered banks to set aside more reserves six times and boosted rates twice since October to tame inflation and curb asset bubbles after record gains in lending and property prices.
The central bank will keep increasing borrowing costs to cap inflation at around 4 percent this year after it reached a 28-month high of 5.1 percent in November, Zhang said. Last March, he said the Shanghai gauge, which had already dropped 9.2 percent, would fall a further 17 percent to 2,500 in the first half as the government boosted measures to cool economic growth. The index slid 27 percent in the first six months of 2010.
“The benchmark gauge for American equities will rise 11 percent to 1,379 in 2011, bringing the increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.’s David Kostin, the most accurate U.S. strategist this year, said sales growth will spur a 17 percent rally in the S&P 500 through the end of 2011. ”
I was quite suprised by this Bloomberg in a report. I had mentioned about the term “New Normal” coined by Pacific Investment Management Co. (PIMCO) where the world economy grows at a slower rate than the decades that preceded this crisis years.
A rise of 11 percent in Standard & Poor’s 500 Index will bring the increase since 2008 to 53 percent, though not as impressive as Emerging Markets growth of approximate 80 percent till date. However, an 11 percent rise is a very attractive draw to finally enter the US market at a time Emerging Markets is showing signs that explosive growth has gone to a sustainable pace.
I have decided to put forth my thought on portfolio strategy first
For clients with substantial portfolio, will look into entering the US market as a diversification. I believe US market is in a better place now, but returns of US market will likely be lower than growth markets. (note: a market need not be in a good place, lesser risk more upside to rally, as can be seen previously). US equity has been in the overbought region. As shown below, the S&P 500 index has been trading within the red zone (between 1 and 2 standard deviations above the 50-day) for some time now. It seldom goes above 2 standard deviations and everytime over the last 10 years it reach, it pulls back.
I still favour Asia and emerging markets, especially some of the less mentioned regions like Indonesia, Brazil, South Korea and South East Asia. I favour markets with good domestic consumption and commodities driven mix. It does seem like the markets are very correlated nowadays.
Commodities have run up quite a lot and I believe it is a long term story. Pretty hard to reach a convincing conclusion about outperforming equity markets now.
Many investors have heard about investing in BRIC, which is the well-known acronym for Brazil, Russia, India and China. Economists have determined that BRIC countries could rank among the world’s dominant economies by mid century based on gross domestic product. Some important growth factors in these countries are the huge reserves of natural resources and a large and well-qualified work force with relatively low wage levels. A growing consumer demand stimulated by increases in income across broad categories of the large BRIC population is also an important factor.
Due to proximity and racial demographics, we are more knowledgeable about China’s economy; similarly for India. Many investors have invested in Brazil through BRIC funds and emerging market funds, but know very little about the country. Same goes for their Financial Advisers. I’m going to present some basic facts an investor should know about Brazil here.
US$285.7 billion in November 2009
Brazil usually has the highest weighting in Latin American equity funds.
The Bovespa Index is a total return index weighted by traded volume. It’s made up of about 50 of the most-liquid stocks traded on the BM&FBovespa. The portfolio is rebalanced three times in a year. Total market cap is US$1.27 trillion as of August 2010.
As at 13 April 2010, Petrobras (Brazil’s largest oil producer) and Vale (the world’s second largest mining company) are the key players and they account for over one-third of the market capitalisation in the Bovespa. Steel maker Gerdau is also among heavily weighted resource stocks
What concerns investors is usually outlook of the equity market, unless the investor is investing in Real denominated bonds, which is unlikely.
A few days ago I posted on how interest rates and inflation have been affecting investors and savers. One day later, on Friday, DBS announced that it will be slashing what it pays savers. Business Times Article
Effective Oct 15, interest rates for its POSB savings account will be pared to 0.1 per cent from 0.125 per cent for small savers. The next higher rate of 0.25 per cent, all savings accounts – POSB and DBS – will require a minimum of $100,001, double the existing $50,001. For balances above $1 million, DBS will pay 0.275 per cent for all savings accounts.
DBS autosave, which is the current account, will continue to earn the highest interest rates. Balances will have to be above $250,000 to earn 0.325 per cent, current balances above $100,000 earn 0.325 per cent. Remaining balances above $1 million will earn a princely 0.35 per cent.
DBS, the nation’s largest bank, has been struggling with record low interest rates which eats into its profit margins. The benchmark three-month Sibor or wholesale lending rate has been hitting new lows last month. It has slid to 0.50501 per cent from a week ago, and down from 0.51889 per cent on Sept 13 – the lowest in at least 23 years.
Also recently, Lorna Tan wrote an article Straits Times “How to make your money work harder.” In the article, she suggested 4 instruments, Structured deposits, Bonds, Bond Funds and Stocks with dividend yields.
Global Financial Crisis of 2007-08 has brought about changes that affected lives of common people. Interest rates are at 1% or below in most developed countries, and there seems to be little prospect of their rising soon. The futures market believes that American rates will still be below 1% in July 2012 while Fed has pledged to keep “exceptionally low . . . for an extended period.”
In Singapore, interest rates have dropped in tandem with US dollar interest rates. While much less drastic than a 5% to 1% for US dollar, fixed deposit interest rates dropped from 3% to about 1%. However, the problem is that inflation in developing countries like Singapore are higher than developed countries. Singapore’s inflation is expected to be 3-4% this year. The Monetary Authority of Singapore keeps inflation in check through exchange rate policy but does not control interest rates. Advance explanation found here and here.
An investment consultancy group, Bespoke Investment Group did a recent commentary on direction of the S&P 500 recently. As shown in the chart below, after a sharp decline in late April and early May, the S&P 500 has essentially been range bound for the last three months. The question now is, what’s next?