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...

Market - Oct 2013

It is time for another market update. Following my August post, I decided not to invest in SingTel and Capitamall and leave my portfolio as it. This did not have to do with the two companies' fundamentals, but rather with general market conditions. Although I have accumulated quite a significant amount of cash reserves, I am of the view that markets have already gone too far. I will therefore stay invested, but will not add any major positions to my portfolio for now. 

In the current environment, there are still no alternatives to stocks, but I feel that I was long too late and already missed the biggest part of the rally. In my view, the risk of a market correction is too high and it outweighs the bit of extra return from another investment.

Let’s have a look on the stock indices of my core markets. What has happened since August?

There were German elections in September with the outcome of a great coalition between Christ Democrats (Merkel) and Socialists. Both parties support the EURO policy and will hold a large voting majority (504 of 631 seats) in the Bundestag. Any objections from opposing parties (the Greens and left-wing communist party with together 127 seats) will have no impact on the country’s politics. 

Markets are relieved that the newly founded German anti-EURO party did not make it into the Bundestag. Just like the Liberals, it remained below the 5% threshold with still remarkable 4.8% of total votes. I would have liked the idea of having one party in the Bundestag questioning the EURO policy – even though this would have caused market consternation. 

Anyway, it is how it is and as long as there are no exceptional bad news from Southern Europe, the DAX will remain dependend on the Dow Jones which in turn is stimulated by the Fed policy. 

This leads us to my next core market, the US. After rumors about a war conflict in Syria, Obama follows a diplomatic approach and now relies on the U.N. to put Assad’s chemical weapons under international control. For the moment it seems as if the risk of a new war conflict is banned.

What about the Fed? Well, as if I already felt it in my last update, the Fed delayed bond tapering as it believes the US economy still needs support. In the end, everything will stay as it is. Nobody expects a slow-down of the USD 85bn monthly stimulus to the US economy still within 2013. For the moment, it seems likely that the Fed stimulus will be maintained for a much longer time. Even if it will be reduced within 2014, I wonder how much longer it will take to completely end it. And more importantly, how will markets react when the Fed announces it will cut or even end the stimulus? 

Another factor that has caused market fears was the US government shutdown in October and the potential of a US sovereign default. I did not even had this on my agenda and I guess most people already forgot the last time when a similar situation occurred back in April 2011. Although almost no one expects an US default to occur, there is still no visible solution to the US sovereign debt problem except for ‘kicking the can further down the road’ to the next deadline and hoping for an economic recovery until then. The next funding deadline is Jan. 15, 2014 and the next debt ceiling deadline is Feb. 7, 2014. In the meantime, a congressional committee will work out a longer-term budget deal. It seems as if global markets can rest until then.

Since start of September there was also a remarkable upward correction in the STI and a good opportunity to re-buy cheap has passed. Like markets in Europe and the US, the STI reacted negatively to rumors about tapering of quantitative easing and a pending attack on Syria. Bad news about flattening growth in emerging markets and asia probably also had some impact on the performance. I guess similar to the DAX and DOW JONES, the STI has recovered in the meantime due to the recent positive news trend.

Having said this, it is quite fascinating to see how interdependent all markets are and how important the US monetary policy has become for the world economy. It is this market property which makes me a bit thoughtful about the overall developments. Do prices currently really reflect the intrinsic value of stocks or has everyone just become really desperate about the lack of alternative investment opportunities?

Let's see where the journey of unprecedented loose monetary policy leads us by the end of the year. It seems as if we have new market records in front of us, but the key question is for how much longer... 

As usual, the media associated the tapering of QE and the pending attack on Syria as the causes for the correction. - See more at: http://www.bigfatpurse.com/2013/09/singapore-permanent-portfolio-update-aug-2013/#sthash.CZVmwtil.dpuf

Market - Aug 2013

Not too much has happend in the stock markets during the summer period since my introductory post in June:

After the Fed stated it is likely to slow down its bond-buying programme later this year, markets fell back to 7,700 (DAX) and 14,700 (Dow Jones), but recovered close to or even exceeded

recent all-time highs (DAX: 8,530 / Dow Jones: 15,650) in July. 

While politicians see the US economy continuing back to growth supported by decreasing unemployment rates, the situation in good old Europe is way more diverse with still unbearable unemployment rates and debt burdens in "the South" and more stable but stagnating economies in "the North". In addition, the situation is exposed to potential political shocks like Germany's elections in September or upcoming debates about a 3rd bail-out package for Greece. 

Overall, it seems as if the US is better off and politicians already see the Fed starting to draw down on the amount of bonds it buys very soon.

I have my doubts about the recent recovery in the US and like few years ago I ask myself today how and when Western economies (including Japan) will ever start to repay debt and de-leverage. Until there is no strategy to reduce debt, there is little reason to believe that the US recovery is sustainable and that the Fed will stop its bond buying programme in the near future. 

At the same time, there are recessionary fears in the Emerging Markets and Asia: Asia’s role as world’s growth engine seems to be waning and economies across the region weaken with investors pulling capital out of the markets. This development is reflected in the recent downward trend of my 3rd core market Singapore and its Straits Times Index (STI).

At a currently favorable EUR/SGD exchange rate, this could be a good opportunity to increase my Singapore exposure by solid positions like SingTel (4.78% yield) and Capitamall (5.42%  yield). With a potential Syria war conflict in mind, I will stay tuned and watch the markets in the next days, keeping in mind that I could also catch the famous falling knife...