Tuesday, August 20, 2013

Market Analysis -- 20th Aug 13

Global markets have been in volatile sessions and nervous since the May after US Fed mentioned of possible tapering.  The question bugging investors these few months were when will US Fed start to taper.  The fear of tapering and interest rate hike next unsettled most and caused bond markets to fell so as equity markets.  Other than that there is no other reason for global markets to pull back as much as 10% from May.

Rationally, tapering is something that should not be feared of as stimulus in the first place is not supposed to be there, taking away something that was not supposed to be there is of nothing wrong.  As for fear of interest rate hike, the low interest rate environment is abnormal and interest rate should move back to the norm level or equilibrium.  If stimulus tapering and interest rate hike are a normal process then why should there be fear ? The answer is pretty much simple, the cheap money has attracted leverage of borrowing to flow into equity, property and bond markets in search of return against the low interest rate.  It is the over leverage that is unwinding now and nothing to do with fundamental.  In fact tapering and interest rate hike should be seen as fundamental improving which is a good sign.

There is no doubt funds are cashing out in equity markets as they probably suffered losses in bond markets and with end of the year just 4 months away, if fund managers still don't sell off equity to record portfolio gain, at the end of the year they will have nothing to show case for their portfolio, which eventually affecting their performance bonus.  That is fund managers' woes but not so from long term investors perspective as the fundamental of the global economy is improving from days to days (Euro zone area finally get out of recession last month, US labor markets is improving, China's growth is slow but not in deep trouble.  Long-term investors should be thankful funds are panicking in selling, pressing down the prices to attractive level to bargain hunt.

STI not exception is facing selling pressure as funds outflow and notably, S-Reits and high-yield stocks were the first victim of the selling.  There was reason given to justify the selling of S-Reits as fear of interest rate hike will make REITs have problem in borrowing to acquire more assets to grow.  However, take a deeper thought, that reason is wrongly justify.  REITs with already sizable assets in their portfolio need not acquire more assets as the existing portfolio can sustain the revenue.  Furthermore, some of the REITs can pass the cost to tenants to offset possible higher interest rate environment.  A recent report from SGX note that with the recent average S-Reits yield is 6.4%.  CPF ordinary account is having interest rate of 2.5%, while the special account is 4%.  Average bank saving rate is 0.2% and Singapore inflation is around the 3% level.  Putting money in bank to earn interest can hedge against inflation ? Even if interest rate hike, can the new interest rate be able to hedge against inflation ?  The so-called risk-free CPF is only having 2.5%, still a tad below the inflation while average S-Reits yield is at least 2x more than the inflation.  This need not take a genius to tell you that one still need to invest S-Reits for the long term to hedge against inflation.  Hence, the more the selling goes, the better for investors to bargain hunt and all these have to thank the funds for doing so.

Majority will be looking at September US Fed FOMC to figure out whether when will the tapering start.  For one true fact, tapering is inevitable and investors should look beyond tapering and not feel the fear of tapering.  Upon tapering, there should be a knee-jerk reaction to the economy as might have some slow figure coming out next, the importance is during those periods investors should monitor for resilient factor in companies earning and not run away and wait for the whole stock markets to turn up higher, prices at more expensive level then talk about coming back to buy.  Fundamentally incorrect.

For the next 4 months, stock markets will see a bottom from now till mid-September and a rebound following that regardless of tapering factor. 

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