Market - Feb 2014

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...