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.