Bad news

A slowly recovering market is now hit by more bad news with the death of Ms Bhutto. Usually, this kind of bad news affects geographical markets like India and US. However, investor's confidence is at a all time low, thus, any bad news will trigger a sell down. In addition, as stated in my previous post, this period is the festive season which denotes low buying interest among investors which would not help a falling market.

There's too much uncertainty in the markets currently and I expect it would continue this way till Feb 2008. Currently, I would avoid India, US and Thailand like plague. India due to its proximity to Pakistan, US with its close ties to Pakistan and Thailand for uncertain political outlook in the near future with the Thai army not ruling out another coup.

As a note, I like to take this chance to condemn the person behind the assasination. This is not an act of terror, it is pure murder and regardless of race or religion, YOU would not be forgiven. In addition, I suspect that all these killings are political in nature rather than a spread of terrorism.

Festive Season

It's the festive season but markets do not look at all fanastic. All gains reaped during the previous 2 weeks had pared back down. The Fed's quarter point cut has not gone down well with investors although I do feel that a half point cut would be too much as all economic indicators show a slower growth rather than a recession.

Another reason for the fall would be the lack of buying interest during this festive period as most investors are taking a holiday break. In addition, some investors would have locked in profits for some Christmas shopping. Usually during festive seasons, the lack of buying interest would cause indicies to fall as without much demand, the price of individual stocks would fall.

I expect the next 2 weeks to be not that fanastic unless a sudden good news appear. There would probably be some chance to buy in during the last week of the year. However, things might pick up in the 1st quarter of 2008 when economic results are shown during these period.

Lastly, have a great holidays!

Market Recovery In Progress

Hi folks, I'm back from HK!

Tis the Christmas season, and so the retailers are having a great time. If you had managed to heed my advice and bought some UT last week, you should be making some money by now to spend on Christmas presents. As of last week, you would be able to see a positive mood on the stock indices. The momentum of the gains of last week had somewhat slowed down this week, however, it is still a recovery in progress till the end of the month.

However, we would need to take note of the macro-economic conditions and the pull out of investments seen in unit trust. For macro-economic conditions, economic data especially the job data had indicate that the US economy is not too bad. US would probably not go into any recession but might face slower growth. For asian markets, most of asia should be going into 2008 with strong growth but GDP growth might be curbed to prevent inflation from getting out of hand. China had declared a tighter monetary policy to curb inflation and the impact on the stock market would be negative in the short run but in the long run, Chinese stocks are still expected to post strong returns. For Korea, talks had continued on the FTA and things are looking up.

The pull out of investments in mutual funds is somewhat of a concern, as it shows that many investors are cashing out during this period. Using micro-economic terms to explain, this pull-out might drive down demand causing price of stocks to drop which in turn would be reflected on the price of the unit trust. However, it seems that the stock markets are still holding up well even with the cash out.

My advice would be to enter the market now as you had not done so last week as recovery would continue for some time with emphasis on Latin American, China, SEA economies. Even European funds look interesting for those looking at diversification.

HK Trip

This past few weeks had been riddled by correction woes with most funds dropping by as much as 25%. I would be going to HK this Wed for a business trip. Thus, I would take a look and observe the investment climate to gain insights for China investments and provide updates next week.

Market Analysis

Last week, I talked about the duration of the correction. There are basically two factors affecting markets for this week. First is China's move to increase the reserve ratio to lower liquidity and secondly is the effect of the subprime crisis with highlights on Citibank and other European banks.

The first factor might be good in the long run to cool current fast rise of the index in both Shanghai and Hongkong although it might come as a shock to most speculators as the rate of fall is sharp. However, I do feel that somehow, China is going to push to allow their investors into Hongkong soon as previously, prices are much too high due to speculation of China's fund entry. Now, it should be priced at a relatively discounted rate of approximately 15%-20% which should be a good entry price for Chinese investors. Barring any unfortunate news, we might see an uprising trend either next week and in the last week of Nov which might push up global indexes.

For the 2nd factor, it's time to tally up losses so as to clear up the situation of how US and European banks current stand in terms of losses. Huge losses by Citibank is ringing alarm bells and this would prompt US/European banks to further anaylse the impact of the sub prime crisis and take measures to moderate these losses. However, we are also able to see stronger profits for retail stores and consumer electronics and this might be the silver lining. Nevertheless, it is still not worthwhile to put your bet in US markets although I suspect that with the strong growth of the global economy, US most likely would not go into a recession.

My advice for this week would be to start taking positions maybe next week when an uptrend starts forming.

Market Correction

Seems like today, the market correction is upon us. For high risk unit trusts especially China fund, today's price might cause your capital to drop by as much as 7%. Based on current trend, tomorrow might show a rebound but the ride might be tough ahead.

As an investor, this correction might be long overdue as hang seng had been hitting new heights almost every other day and it's time for a breather. In addition, big brother USA is not doing that well as seen by Citibank's problems. However, barring some very bad news, recovery might take place after 1-2 weeks.

If major asian indexes does not recoup its losses and in fact drop further on wednesday, you might want to wait a while before buying in more as the downtrend might continue. I do not advise buying in at the moment though even if you take a long term approach to investing and do not want to time the market. I do note that it's quite impossible to predict the lowest point of the market but it is still possible to buy when the market shows sign of recovery to ride on the tide up.

Fed Meeting on 31 Oct

This week can be considered the gambling week with the Fed meeting on the 31 Oct 2007. Many people might invest on Wednesday should they think that the Fed might lower interest rate again on 31 Oct, conversely, many people might also sell their investments should they feel that the Fed would not take any actions.

However, this is what I feel might happen. The Fed would most likely not lower their interest rates and this would enable US$ to rise. Although this might be contrary to expectations that US interest rate would be lowered, the Fed chairman would reassure the public that they would monitor the situation and take immediate action to lower interest rate if neccessary like previously. Thus, stock index might not neccessarily drop with such encouraging comments and even if it drops, the magnitude of the drop might not be that great as Fed has indicated that they are going to cut rate in future rather than now.

I would still remain with my stance of adopting a wait and see attitude as I'm advocating the viewpoint of an investor rather than being a speculator to time market movements. Note that after the Fed meeting, sentiments and market trend would be clearer for the investors to analyse where to put their money in.

Recently, the Chinese funds are currently stagnating with regards to their performance 3 months ago. For these past few weeks, the best performer should be the korean funds. The korean market (Usually the KOSPI) is tracking the Japanese market (NIKKEI) and recently with major Japanese firms releasing good financial results, this would have positive impact on the Korean market as they basically follow the trend of the Japanese market. The Latin America economies are tracking the US market which is currently mired in uncertainty, so their performance are also not that great for these past few weeks.

Markets Update

Seems like global markets are weak for this week and last week. It would probably be weak till the situation becomes clearer after the Fed meeting on 31 Oct. There's a high possibility that Fed would not cut rate so fast prompting a further drop in market indices in the world. Currently, I expect most investors to cut their holdings or adopt a wait and see approach.

For those planning to buy in funds or increase their holdings, I would suggest to hold your horses and wait for the uncertainty to clear up first as fund prices are different from stocks in that they appreciate or depreciate gradually compared to stock prices, thus, even if you would not get the price at rock bottom price, you will still manage to ride the upward wave up.

Funds Market Analysis (Oct 15 - Oct 19)

Some market updates here.

On the horizon, I expect a short term correction during these 2 weeks for the Chinese markets or at least in the near future. HSI had been breaking records every so often and I guess some profit taking is bound to take place. In addition, there is pressure from rising oil prices that would cause profits to suffer. Thirdly, although the Chinese government is optimistic about economic growth in general, they had to implement some highly unpopular policies to cool down their overheated economy to prevent prices from spiralling out of control.

Technology funds are worth looking at as growth and earnings are strong. In addition, as most people are still traumatised by the tech bubble burst, this sector is often neglected. Currently, one of the drivers of the US economy is the technology stocks after being hit by the sub-prime crisis. Overall, the US economy still looks ok but their stock market is still badly shaken. As discussed previously, many analysts are still predicting further Fed cuts before the end of the year if they didn't already done so on 31 Oct 2007. I however look unfavourably on further rate cuts as a sign of weakness of the US market which requires intervention to bail out speculators that place their bet on the wrong horse. Thus, I still view US as a region where I would not go into.

With weakness of the US market, other regions like Brazil and Mexico that are of close proximity to the US market are also hit. The performance of Dow and Nasdaq seems to impact how the Brazillian and Mexican stock market perform, but growth for Latin American markets are still favourable in the long term. For short term investors that has an investment horizon of less than 3 months, probably you should take a look at Asian economies that are offering better returns.

I would look more closely at Korea for this quarter as first of all, the growth of the economy is going to be better than expected. Secondly, I'm optimistic that Korea would most likely conclude the FTA with Europe by end of the year even though talks are still ongoing and the representatives are saying that it might not be concluded by end 2007. For funds dealing in Korea, market volatility is not as great compared to China, India and Latin America but still returns a modest growth of 20% a year. Korean funds are expected to do generally well till first quarter of 2008.

However in general, the global economy still looks good from now till 1st quarter of 2008 with minor dips along the way.

Funds performance

Funds performance is basically one of the criteria of why an investor would pick that particular fund and usually this performance is compared with an index or a basket of indices. However, not all funds would outperform the index as not even the legendary Warren Buffet could beat the index everytime even though he did manage to do that for the longest time possible.

Normally, a long term investor would look at the fund performance measured over a longer time period like 3-5 years. Over this period of time, there might be recession or a boom period but the funds would show you returns during that period without consideration of any variables. However, this is a good indicator for long term investor as all returns are averaged out among the downs and ups of the market cycle.

For short term investors, this indicator of looking at funds over a period of time might not be that great unless you consider the macro environmental conditions. Not all funds perform great in periods of boom and recession equally, some funds generally grow more than their yardstick index during a period of growth but decline more compared to the index during a correction or period of recession. However, other funds might not grow as much during a period of growth but they are resilient in the face of a correction or recession. Thus, as a aggressive investor, it would be preferable to put your funds in those that can grow more in periods of growth and switch out to a high resilience fund once a correction sets in.

However, some might question why not sell the fund rather than putting in a high resilence fund during a period of correction? This is because no one can accurately predict the time of a correction and if economic indicators show that a correction is coming, you basically switch out to hedge against it, and if you predict incorrectly, you basically still earn some returns compared to selling and you would not have to incur the high sales charge as compared to the switching fee.

For conservative investors that mostly deal with bond funds or conservative portfolio funds, do note that the returns usually show bid-to-bid returns (And this is always the indicator highlighted to you by bankers and insurance agents), thus, you would really need to check the sales charge of the fund you are buying. That is because if you are shown a fund that's providing a return of 4.5% annually which you might think it's better than your fixed deposit interest rate but when you factor in the sales charge of 5%, you are really making a loss of 0.5% annually (And you can probably dismiss that banker from your sight forever!).

Note that fund performance is not the only indicator on whether a fund is great but it is an important indicator nevertheless.

Funds Market Analysis

Currently, we are in a period of growth globally and the main focus of this growth is mainly in Asia. Emerging markets like China and India are getting a lot of attention as their domestic market base is big, they are also resource-rich and have plenty of room to expand. The following are my views on some sectors that I would pay attention to.

Bonds (Risk rating:3-4)

Bonds are normally a safe haven in market corrections or in a recession as they often guaranteed returns over a long period of time. Recently, bond funds had performed admirably against a backdrop of sub-prime issues as investors suddenly cut on equities and flocked to bonds which pushed up the price. However, this relatively safe haven might still edge upwards in future.

Reason : Expectations that US will further lower their interest rates will push this baby upwards.

Actions to take: For cautious investors who wish to hedge against uncertainties in the market or even for those who wish to include bonds in their portfolio, you might wish to consider putting more weightage on bonds. However, traditionally, bonds are not really a great money earner.

Asia Ex Japan (Risk rating:7-8)

Asia accounts for much of the growth in the global economy excluding Japan. It is expected that this region would continue to drive growth for the global economy.

Reason : Strong GDP growth for many countries in Asia. Growing domestic markets especially in China and India that fuels growing demand for consumer goods and raw materials. Implementation of the QDII initiative in China would inject excess liquidity from China into Asian markets that have chinese-linked shares.

Actions to take: I personally would increase my portfolio in this region as overall, growth in Asia would outpace other regions of the world if I require a region based fund.

China or Greater China(Risk rating:8-9)

Most of the funds dealing with China have little or negligble weights in the 'A' shares. These funds are mostly dealing with shares linked to mainland corporations listed in Hang Seng also known as 'H' shares. It is predicted that China would continue to grow for many years ahead.

Reason : Strong double digit GDP growth in China. Large domestic market. Host of the 2008 Olympics.

Actions to take: For aggressive investors, you would like to put part of your portfolio in a China equity fund. It has consistently generated returns of >40% annually. I expect some corrections along the way from now till end of the year but overall, sentiments on the ground is quite upbeat about China and there is this underlying faith in the Chinese government to ensure that everything would proceed smoothly till the Olympics is over.

Latin America(Risk rating:9)

For Latin America funds, most of the growth comes from Brazil so you can expect funds to allocate about 50% of their resources to the Brazillian market while a greater part of the rest goes to Mexico. Latin America is generally not in the media limelight compared to other emerging markets like China and India, however, they are still attractive having offered high returns for the past 3 years. This sector is driven most by the US consumer markets, being geographically close. However, it must be noted that the US sub-prime issues had affected it quite badly but it is starting to recover from the worst of it.

Reason : Being an emerging market relatively close to the US, its' market is tied closely to the US. The demands of the US consumption market will continue to fuel the growth of the Latin American markets especially when US is recovering from sub prime issues.

Actions to take: For aggressive investors, you would like to put part of your portfolio in a Latin America fund as part of your diverified portfolio. Note that more and more people are turning their focus to other emerging markets as they regard China and India to be getting more and more expensive, and one of the attractive markets to look at would be Latin America.

Other markets like Europe and US are still bogged down by sub-prime issues even though they had weathered the worst of it but somehow, the uncertainty of the magnitude of the subprime issue is still present. News that UBS, europe largest bank, is having losses of millions of francs in the 3rd quarter is certainly not reassuring to investors. In US, it is still unsure if the subprime "death" toll will increase further and with the US market pressuring Fed for more rate cuts to bail out the market does not really raise the confidence of the investors.Thus, I would avoid this 2 markets for now unless you wish to diversify your portfolio and currently do not have any funds in the these sectors.

CPF Investment Changes

Just an update here. There would be some changes to the investment scheme for CPF. Most notable is the fact that the first $20k in your ordinary account can't be used for investment anymore with effect from April 2008. However, any current standing instructions would not be affected.

For more information, you can refer to Ministerial Statement on CPF reforms

If you currently have any regular savings plan for your CPF-OA even though your CPF-OA does not have the minimum amount of $20k, you will not be affected by the rule. This means that, for example, if you currently have $10k in your CPF-OA and you manage to sign up for a regular savings plan to invest in a unit trust for $10k initial sum and $5k annually (Assuming your yearly contribution to your OA is $5k), this means that even though you do not have $20k minimum in your OA, there will still be deduction of $5k from your OA for the regular savings plan.

Of course, the first $20k in your CPF-OA will earn an additional 1% interest based on the prevailing interest rate that is tagged to some bond or T-bills returns.

Glossary of terms:
CPF-OA -> CPF Ordinary Account
T-bills -> Treasury Bills

How to start investing

The first question a person asks is usually when to start investing and how to go about investing. Usually it is impossible to create a diversified portfolio when you do not have adequate savings but it is still good to start investing with small amounts. However, the basic concept of which group of investor you are in still applies.

You should start investing as long as you have at least $1000 after setting aside part of your savings for rainy days. Next, you should choose a unit trust distributor like the following:

1. FundSupermart
2. Philips Capital Poems platform

Disclaimer : I do not make any commissions from recommending them and should you have more platforms, kindly send me comments to add to these list.

The above is for DIY funds management where you buy and sell funds using the platform provided. However, if you are not IT savvy or are busy, you could engage with a personal banker or an insurance agent. Do note that when you are dealing with an insurance agent, you need to make sure that you are buying funds without any insurance options tagged to it, as premiums no matter how minimal are still considered costs (This is one of the mistakes I made when I started) that offsets against your profits. Forget anything the insurance agent tells you about claiming tax relief because under IRAS, insurance relief is bundled with your CPF relief (If you had capped your max CPF relief, it doesn't help and moreover, it's always better to separate insurance from investments). Do also note that for DIY, the sales charge is usually much lower than the sales charge quoted by the banker or insurance agent which is about 1.5-2.5% vs 5-5.5%.

For a conservative investor, you should start with bond funds, for "fence" investor, you should pick a global equity fund while for aggressive investor, you should pick a higher risk fund like single country fund (For more information regarding which group of investor you are in, kindly read my previous posting). Alternatively, there are also portfolio funds that are available like balanced funds or progressive funds according to their allocation to bonds and equities.

You can also have a regular savings plan arrangement with your banker or your distributor to buy funds either monthly or quarterly. For this, you would need to come up with an initial sum before commiting a fixed sum of a minimum of $100 every month regularly (If you are interested in monthly payments) to buy into that particular fund. In this case, you are using what investor called the "dollar-cost averaging" approach to grow your money. This approach allows you to average out the costs of the fund and tends to provide you appreciable returns with lesser risks over a long period of time.

For my future posts which would sadly be weekly unless I have more to add, I would provide some analysis of the markets and perhaps recommend some funds available although my focus tends towards a more aggressive approach.

Investor Categorization

In this post, I will provide a general way of categorizating the investor and recommend basically what type of funds you should invest in.

I will broadly classify investors into 3 groups and allocate the ratio between bonds and equities accordingly. The first group is the conservative group where you basically have low risk capacity, longer time period (usually 3 years or more) to invest and requests that your returns to be around 5-8% . For this group, normally I would recommend that you put 80% in bond funds which usually gives you a return of about 6% annually and the remainder in a broadly diversified fund like a global equities fund that returns you about 10% annually. The bond funds do not fluctuate that much, accounting for one of the lowest risk financial tools available. The global equities fund is usually medium risk in nature but allows exposure to a growing economy where over a long run, this fund usually offers good returns for a reasonable amount of risk. However, to partake in a growing economy, this group can adjust their portfolio to having 60% bond funds and 40% equities fund.

The second group is the "fence" group as they want ok returns which is about 9-15% returns, is willing to accept some risks of losing approximately 10-20% of their money but only wish to tie up their money for no longer than 3 years . This group should allocate 30% to bond funds, 50% to global equities fund and another 20% to higher risk single sector/country fund. The higher risk funds allows the investor maximise returns in a growing economy while for bond funds and global equities fund, the explanation are already as discussed under the conservative investor category. The investor can swing their portfolio to 10% in bonds, 60% in global equities and 30% in single sector / country funds to maximise returns in a growing economy.

The third group can be termed as the aggressive investor where they only accept high returns of above 15%, is willing to take high risk of losing approximately up to 30-50% of their money and is only willing to tie up their money for a short period like 1-2 years max. This group should delve purely in equities, 50% in global equities and 50% in high risk single sector/country funds. To maximise returns in a growing economy, they can put 30% in global equities and 70% in high risk funds.

Of course, investors can opt for a more diversified portfolio even though they are aggressive like putting 10% in bond funds but it is not advisable for the reverse like putting 10% in high risk funds if you are conservative. This is just a rough guide as each investor might although fall in these broad categories but their risk appetite might be bigger and thus allocating heavier weightage to equities. Note that there is no such thing as low risk, low period of investing and yet high returns. Investing can be summed up by this formula where Returns = Time period of investment + Risks taken.

Personally, I'm started out by buying a progressive fund where 80% are in equities and 20% in bonds, this nets me an average of 10% returns for the past 2 years annualised. Recently, I had shifted a major portion about 60% of my savings to single country funds where I'm enjoying about 30-40% returns (Top half of 2007, I cashed in a returns of approximately 10% after investing for 3 months and currently I'm enjoying approximately 15% returns which I had not cashed in) if you annualised the returns.

Note that my guide is not exactly comprehensive and serves as a rough guide to novices. I can't say I'm exactly the best as I know people that enjoys 100% returns. I don't speculate exactly when is the fund's lowest point of that year but just buy in to keep unless some bad news are brewing. My next post will look at how a novice investor can start to invest and where to invest

Knowing yourself

Investment is basically to put your money in financial instruments to make them work for you, be it putting your savings into stocks, into fixed deposits, funds etc. Note that just leaving your money in a savings account would not do much for your money.

Most people that have no clue about the various financial instruments are always worried about one thing which is basically the risk involved or in layman's term -> "Losing your money". Thus, we would need to reduce our risks to maximise returns.

First of all, the investor needs to ask himself/herself if he/she has the time required to do research as after all, if you are planning to go into stocks, you would need to study the fundamentals of the company. I do not advocate contra as that is more like short term punts rather than long term investment. If you do not have the time, then it would be better if you invest in funds instead as the fund manager would make decisions on what equities to buy, and in addition, it also reduces the amount of risks you are exposed to.

Secondly, what kind of an investor are you? We have to look at the kind of returns you need like 20% of the sum of money put in and the duration of time you can put your money in. Normally, I would set the duration as a minimum of a year although in actual fact, most mid term duration is regarded as 2-3 years. Most funds will return positive returns if you leave it alone long enough for like 10 years so that it is almost like guaranteed capital protection.

An investor would need to understand that it is impossible to earn more than 10% returns in a year without any risks involved. However, the longer the time period, the less risk of losing your money there is. Obviously you still need to have a general knowledge of what's driving the global economy or what's hot. If you would like a high return, then when the fund is volatile and manages to wipe out 20% of your capital, would you be worried and sell off the fund immediately? Risk aversion also plays a huge factor of whether you would maximise any returns.

Thus for a novice investor, the returns, the time and the risk aversion determines what sort of investor you are. If any bankers or agents approach you and just recommend you any funds without determining what sort of investor you are, you can be sure that the agent is just thinking of his/her commission rather than your best interests. Obviously some of you might not be sure of where and what to invest in but as a safe gauge, the more conservative you are, the more your money is in bonds and money market. The more aggressive you are, the more your money is in equities. Your risk profile is always frequently changing, thus, any banker who did not do any updates on you is just not doing their job.

In my next post, I would discuss on how to determine what type of investor you are based on just 3 factors, namely risk, time and returns and recommend the types of portfolios that might be good for you.