Commodity boom and inflation

Funds for commodity and energy should be booming now with rising raw material prices and oil prices. However, as rice prices reaches a high, this might cause concerns for the economy. For the past month, we had witnessed rises in commodities, energy funds and also in the Brazil sector.

I had decided to lower my holdings in Brazil as it nears the high mark of 70,000 to cash in on my profits. I noticed that perhaps the high raw material prices are not justified according to demand and supply factors especially for oil. OPEC had stated many times that supply of oil is adequate and with oil traders and energy funds buying into oil, this artifically inflates the price of oil. In addition, this also applies to commodities. However, it is unsure how this stagflation plays out as people will soon realise that the demand for goods and services would fall with a gloomy economy looming.

Hence, I suggest a cut on all energy and commodities holdings as it seems to be a tad too high for now. Although there's no doubt that oil prices would keep going up in future, this surging rise in prices might be too much to take. For Brazil funds, there might be cut back at the 69000-70000 level and it is thought that the index at this level might not hold for too long with US economy weakening. For other sectors, I suggest DCA for averaging down or start buying as it seems that markets are recovering slowly.

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.

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.

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.