Archive for the ‘Investment Advice’ Category
Market Updates October 2010
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.
For fixed income I favour Asian emerging market bonds and high yield bond market. Lower risk fixed income will go to SGD, AUD money markets, countries more developed but stable.
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.
What Makes Brazil An Attractive Investment.
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.
GDP
Brazil’s GDP now stands at $2.0 trillion, the 8th-largest economy in the world, compared with China’s $5.7 trillion, $1.5 trillion for Russia, $1.4 trillion for India, $2.1 trillion for Italy.
Currency
Brazilian Real has appreciated against the USD about 6% year to date. 1.70 BRL = 1 USD
Foreign Reserves
US$285.7 billion in November 2009
Equity Market
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
Outlook
What concerns investors is usually outlook of the equity market, unless the investor is investing in Real denominated bonds, which is unlikely.
More about interest rates, inflation and investment instruments.
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.
Low interest rates hurts retirees, savers.
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.
How does low interest rates in the many economies affect the world and life in Singapore? Here are a few effects.
Where will S&P 500 go from 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?
Read More…
Greed and Fear. Market Update Aug-Sep 2010
There has been not clear indication what is next for the global economy and also about decoupling of economies that affects where and what to invest in. These few months, markets has been reacting to data announcements, with each market having its general trend.
Over the past few weeks, risks of another recession and of deflation have increased then decreased again. The outlook for the global economy remains uncertain, particularly in developed countries where there has been divergent performance in recent weeks.
Data from U.S. includes non-farm payroll, ISM manufacturing index, unemployment claims, unemployment rate, trade deficit, US retail sales, etc. Shall not bore you with the numbers.
In Asia, China and India continued to show momentum despite variations such as India’s interest rate increase and China’s tightening measures. China’s PMI rose to 51.7 in August, marking an end to months of deceleration and also the 18th straight month the index is above the boom-bust level of 50. India reported GDP growth of 8.8% in 2Q10 vs. 2Q09. Expansion in the manufacturing and services drove India’s growth rate to its fastest pace since 2008.
The major indices fell in August as doubts about the economic recovery caused fear and uncertainty in the market. US equity indices fell between 6 and 8% while the Asian and Emerging Markets equities fared slightly better with some positive growth for August.
Case for High-Yield Bonds (Advance)
What Are High-Yield Bonds?
High-yield bonds, otherwise known as “junk bonds”, are issued by organizations that do not qualify for “investment- grade” ratings by one of the leading credit rating agencies – Moody’s, Standard & Poor and Fitch Ratings.
Credit rating agencies evaluate issuers and assign ratings based on their opinions of the issuer’s ability to pay interest and principal as scheduled. From the table of credit rating definitions, bonds rated Baa or BBB and above are considered investment-grade securities. Bonds rated Ba or BB and below are high-yield bonds, and generally have default rates in a range of 2-8% per year.
These issuers are usually
1) Newer, emerging companies raising money for expansion
2) Older companies which have weak balance sheets and/or weak profits
3) Companies taking on large debts for acquisitions or leveraged buyouts
What Currency Movements Mean For Your Investments
The world now, more than before, is facing some structural changes with will propel currencies movement. Previously, currencies of the world have been affected by economy, interest rate and investor usage. Now the movements of currencies will be broader in a clearer direction. With Singapore Dollar going to be strong, whole reason why knowing what to do is important.
So what do these currency movements mean for investors’ investments? A lot of investors (sadly a lot of financial advisers, even bankers too) make mistakes when determining where the currency matters and where it does not. For example, you can hear an investor, or financial adviser, saying, “I’m not advising this fund because it is in USD. USD is going to depreciate.” This reasoning is WRONG.
BRIC Performance
April 23rd was a peak for equity markets. The market has fallen quite substantially from there, which I’m inclined to believe is a correction and a price-in of slower growth in the world economy with the problems in Europe, tensions in Korea, Chinese property assets inflation fears, slower than estimated increases in jobs in US.
Chart below shows the performance of the BRIC (Brazil, Russia, India, China) countries since the 4/23 peak. India (Sensex Index) has held up the best by quite a bit with a decline of just over 5%. Brazil’s Bovespa Index is down at -11.2%. China’s Shanghai Composite is down 15.8%, while Russia’s RTS is down the most at 16.4%. US’ S&P 500 is right in middle with a decline of 12.8%.
While the US and China have just moved to new correction lows, Russia, Brazil, and India are all above the lows they made in late May.
Adapted from Bespokeinvestment Group at www.bespokeinvest.com
May – A Volatile Month With 2 Tales To Tell
May has been a volatile month. Europe’s sovereign debt risks and tensions in Korean Peninsular weighs down heavily on the financial markets while economic data has shown that the recovery is underway.
Speculation and intense debate on 2 issues, whether Greece will be forced to default and whether Euro will lose some of its weaker member countries has died down a little. However, things are still not certain a month after attacks lead to a trillion dollar bailout package. Euro skeptics say the forced spending cuts and tax increases will scuttle a recovery before it takes hold. The fiscal austerity measures will be a big drag on growth. Spain lost its AAA credit grade at Fitch Ratings, dropping one step to AA+ to a “stable” outlook.
