Year 2012 Holds a Lot of Promise for the Stock Markets

There are only a few more days left before we wave goodbye to a tumultuous year 2011 and cross over to year 2012, with much awaited hope and optimism. Indeed, there is much to hope for in the new year.

If history is anything to gauge from, I believe we are around six months away from a bull market. A typical bear market will last an average of about 9 - 18 months with an average 30% decline from its peak. From the highest point of 3313.61 on 9 Nov 2011 and currently standing at 2674.61 on 27 Dec 2011, we are slightly more than one year into the downtrend though the magnitude is only 19%. We believe the lowest STI can go should be at its support level of 2500 and not any lower. As a rule of thumb, the stock market is always forward-looking and usually move six months ahead of the economy. I firmly believe that those investors who are bold enough to buy into the low now will be rewarded handsomely later.

The rationale for optimism is not something airy-fairy. I believe the stock markets have taken into the worst-case scenario of a Eurozone recession and any bad news will be taken with good stride, notwithstanding a slight chance of another global crisis. Looking at some of the positive slew of data from U.S., I believe the economic superpower is in the course of a nice recovery into year 2012, alongside with China and other emerging countries. A Reuters' polls of economists shows that the U.S. will grow at a pace of 2.2% next year compared with zero growth in the Eurozone.

While China has been adversely affected by the plight of its largest trading partners, the European Union, we believe its huge internal consumption demand will still be the main driver of its GDP growth. I do not foresee any extreme measures undertaken by the Chinese government given the current investment climate and the declining property prices. On the other hand, though the depreciating rupee has caused some chaos this year, it is widely believed that India's central bank will ease their monetary policy to counter the slowdown in GDP growth. Lastly, Japan, another economic superpower, is also tipped to pick up in the fiscal year from April and should narrowly avoid a recession, according to a poll.

Moving forward into 2012, much is abounding in the stock market but it is only the fearless and the wise that will benefit. I wish all my readers a prosperous and blessed year of 'dragon'.

Values Are Beginning to Show in the Chinese Market Too..

China's equities have hit their lowest level in nearly 33 months with gold and property companies leading the decline. This reflects both global and domestic concerns. At the global level, sentiment has been undermined by the escalating sovereign debt crisis in the Eurozone. In China, fears about inflation, rising interest rates, an overblown property market and non-performing loans in the banking sector have hit confidence.

The benchmark Shanghai Composite Index, which tracks both A and B shares touches 2206.52 briefly, its lowest level since it closed at 2223.73 on March 18, 2009, before trading at 2223.13 now. Most analysts expect the stock market to keep falling in the short term and to end this year near 2200.

We see that consumption growth is still the main driver in China with higher wages leading to more spending power. Consumer demand will become an increasingly important factor in the Chinese economy as the country moves away from a growth model based on exports. On a technical perspective, the index is poised for a rebound if it can close above 2200 level. Investors who want exposure to China can either buy H-shares, ETFs or unit trusts.

A Tale of Two Markets - Stock and Property

We believe that the introduction of the Additional Buyers' Stamp Duty (ABSD) had exacerbated the decline of the private property market in Singapore. Under this rule, foreigners are required to pay an additional 10 percent stamp duty when acquiring residential property. PRs who purchase second and subsequent homes and Singaporeans who buy third and subsequent homes have to pay an extra three percent stamp duty.

Though some investors thought that money could still be made in properties even with the slowing down of the global stock market, we believe otherwise. It is observed that the fate of these two markets is intertwined and it is just a matter of time before the property market will follow suit the stock market. We estimate that the property market might decline as early as first quarter next year, with a time lag of six months in between each other. This is due to the dissipating 'wealth effect', possible credit crunch and the uncertainty of the economy ahead. Moreover, as an open economy, Singapore is susceptible to the outflow of capital which is always in search of higher yield. We estimate that the property market will only recover at least six months to one year after the stock market has rebounded from its low.

We also believe that the ROEs of the property developers will be adversely affected and continue to underweight property sector, particularly City Development and Ho Bee with its concentrated portfolio. It is not advisable to bottom-fish now unless investors are prepared to wait.

Can Unit Trusts Still Make Money for Investors?

A friend asked me recently whether it is still good to buy unit trusts given that the markets are in doldrums now. In turn, I asked him what he wants from his investment in unit trusts. As quoted in the novel 'Alice's Adventures in Wonderland' by Lewis Carroll, “If you don't know where you are going, any road will get you there.” To understand the features, risks and benefits of investing in unit trusts,refer: http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf.

Unit trusts are the best tools for diversification or even asset allocation when put together as a portfolio. It is one of the the most effective ways to gain exposure to the markets when they were to recover from this crisis. Remember March 2009 when the markets rebounded more than 50% from its low after the Great Financial Crisis (GFC)? I sure do. Investing in unit trust make sure you stay invested throughout and not miss the rally.

Again, my friend asked whether does it make sense to invest all his money at one go or in stages. With this current sentiment, if you have a sum of $100,000, you might want to do it in stages, say $20,000 a time. This would ensure that you have the ‘bullets’ to take opportunity of the market if it goes lower. Moreover, unit trusts allow us to participate in dollar cost averaging through the monthly regular saving plan. This allows investors to buy more units when the market is low and thus average out our buy-in prices.

Essentially, you pay a front-end load of 2%-5%, depending on the types of unit trusts, and the annual management fees. Just as you won't go to a plumber for diagnosis when you are sick, investing is best left to the professional fund managers. So if you insist an answer to the above question, it is an absolute 'yes' provided you use it appropriately.

How to Make Money In a Bear Market - Part II

I read with interest the article by Straits Times' Senior Correspondent, Mr. Goh Eng Yeow, on how to make the most out of the bear market now. Specifically, he urged readers to suspend the usual 'buy-and-hold' strategy, and instead adopt a more opportunistic approach to benefit from the wild price swing. On a practical note, investors should buy into blue-chip stocks when they are badly bruised and sell them off when the rebound comes.

I agree with his view, knowing that 'market timing' is one of the elements that will earn you 'alpha', which is the excess return over benchmark. The other elements being asset allocation and stock-picking skill. While you can earn excess returns through asset allocation by investing in ETF or unit trust as a portfolio, and read lot of research reports to minimise the error of picking the wrong stocks, it does require skills, experience and lots of courage to buy when the market is selling.

The way I see to mitigate risk and even make money now is through the use of options/derivatives (futures, CFDs), whether it’s a covered call to generate income or a protective put insuring a holding or pair trade. Investors should be aware that it’s no longer sufficient to hold just a balanced portfolio of 60% equities/40% bonds in this dynamic marketplace.

The reality is that clients should be empowered to do their own investing and not depend solely on their wealth managers. They should determine their risk tolerance and then choose the vehicles that fit that tolerance. Most of us have in the past been resigned to pay a manager to do just this but with the rise of these products -- derivatives, ETFs, powerful platforms and education etc. – everyone is empowered to manage and execute the plan that they have developed.

Signs of Recession? Not in China...

The Hong Kong Stock Exchange is buzzing with activities while its European and U.S. counterparts see lacklustre performance due to a significant reduction in trading and listing activities. Haitong Securities, China's second-largest brokerage by total assets after Citic Securities, is selling 1.229 billion shares (worth US$1.67 billion IPO), with European private equity firm Warburg Pincus planning to take a cornerstone role.

Meanwhile, Chow Tai Fook Jewellery Group Ltd.'s up to US$2.8 billion Hong Kong IPO was also fully covered by Tuesday, a day after it started taking orders. The gold and diamond jewellery retailer, which has more than 1,500 shops mainly in China, counts George Soros, the retired infamous hedge fund manager, as its main buyer. He was said to have snapped up US$40 million worth of shares while Lee Shau Kee, chairman of Hong Kong property giant Henderson Land Development Co., had also bought HK$500 million (US$64 million) worth of shares.

Also taking orders is the up to US$2.28 billion Hong Kong-Shanghai IPO of New China Life Insurance Co. New China Life has already secured four cornerstone investors who have pledged to buy a total of US$780 million in the Hong Kong tranche: Singapore-listed insurer Great Eastern Holdings Ltd., Malaysia's sovereign wealth fund, Khazanah Nasional Bhd., hedge fund D.E. Shaw & Co., and Asian private-equity firm MBK Partners.

Apparently, the smart money is pointing to us the region to where we should put our money in the midst of this turbulence. While they see value and opportunities in the future, the retail investors are fixated on the current dire situation. It is no wonder that the rich can only get richer.