I don’t know how you feel about it, but occupied with my daily job the 2 months of the new year went by so fast and 2013 seems already so long ago. I guess, same holds true for my last market update, which dates back to October 2013. Originally, I had
planned to write new articles about market developments every 2 months, but I
think it makes sense to be a bit more flexible with that rule. Sometimes, there
are just too few things to report and sometimes my life just doesn’t allow for
more frequent posting activities.
When looking back to my last article in October, there are quite some news and
developments to report since then, in particular in regard to the US market.
It begins with Bernanke finally announcing to start with tapering the Fed’s
bond buying program by USD 10bn per month, down from USD 85bn to USD 75bn
starting with January 2014. Originally, markets feared a cut-down of the
program, but the Fed’s commitment to leave the interest rate at its all-time
low for a longer period of time led to general market reliefs. In the last days
of 2013, the Dow Jones managed to climb up to a new all-time high of ca.
16,600. Since then, there was a minor correction back to a level of 15,400 in
the first days of February. This was subsequent to disappointing US
manufacturing data and uncertainties in relation to the Fed’s strategy going
forward. In the end, Janet Yellen’s first speech as successor to Bernanke and
new chairman of the Fed was positively perceived by the market.
Yellen is known to be a
strong supporter of the current policy of quantitative easing and I expect her
to stick to this inflationary policy for a while longer. Still, I am curious to
see how this policy will evolve over time and how the US and other western
economies will try to ascend from the depths of the financial crisis. The US is
and will always be a particular case in this regard since it is a benchmark for
the global economy and a raw-model for all western economies, which are still
impacted by ailing public finances. The way the Fed deals with the US debt burden
is exemplary itself as it relies solely on a policy of cheap money to stimulate
the economy and reduce unemployment.
To the contrary, the ECB is required to implement fiscal rules for all EURO
member states and even request structural reforms from the weaker economies in
exchange for financial support. Interestingly enough, but the Fed seems to be
the one which is currently making more progress, having almost reached its
labor market goals (unemployment rate < 6.5%) and having started to taper
further down to USD 65bn as per February 2014. One could therefore argue that
the Fed is already in the process to tighten its monetary supply, although it
is still a bit early to say that.
Whether this monetary strategy alone, without the encouragement of structural
reforms, will be a success story is written in the stars. After all, the US
Senate managed to pass a 2-year budget deal in December to ease automatic spending
cuts and reduce the risk of a government shutdown. Against this background, it
remains to be seen whether the US is on the right way to regain control of its
public finances or whether it follows a simple and unsustainable strategy,
which metaphorically can be well described as ‘kicking the can further down the
road’.
As mentioned above, both
the economic conditions of the ‘EURO-zone’ as well as the achievements of the ECB
lag behind those of the USA and the Fed. However, this has more or less to do
with the very foundations of the EURO-zone, i.e. its complex institutional
structure and cultural diversity. The DAX, as a mirror of a German economy,
which is currently working like clockwork, is therefore not a good benchmark
for the EURO-zone as a whole. From a German perspective, the last reduction of
the base rate down to 0.25%, announced by Draghi in November, sort of came as a
surprise, even though it makes more sense within the wider EURO context.
This step sustainably pushed the DAX further up to new records above a level of
9,000. Due to the current deflationary tendencies within the EURO-zone, it is
not unlikely that we will see another reduction of the base rate in the next
months. This time, however, it would reach the critical level of 0% and could
be interpreted as the very last portion of gunpowder
in Draghi’s gun. This in mind, I currently do not see any alternatives to the
stock market and therefore I stay invested while slowly increasing my exposure
to the market proportionally to my savings rate.
While the upward trend of
the Dow Jones and the DAX remain intact, the STI already left an upward trend
channel during summer 2013 and regularly tests support levels at around 3,000
points. The Fed announcement on 22 May to begin tapering soon rang in a
stronger correction of the STI, which has not recovered since then. In fact,
the STI is currently tumbling up and down, being affected by fears about
foreign funds continuing to flee out of Asia and the emerging markets.
To me, Singapore and the STI remain attractive. I would consider adding more
exposure, but before I am in a position to do that, I need to keep an eye on
my savings. Maybe, there are more opportunities soon when my
2013-bonus flows into my account...
