July 2006

GYC Investment Compass: Issue 1

About GYC Investment Compass

Dear Reader,

Welcome to the first issue of GYC Market Compass! We hope to share with you investment opportunities and strategies to help you Grow Your Capital.
In this inaugural issue, we will be addressing concerns on the recent turbulent markets and in particular, the following questions :

  1. Where are Global Markets heading?
  2. What should I be doing?

As Singapore is now plugged into the global financial markets, any external shocks would be felt on our shores. As your Financial Advisor, we are here to help you understand and make sense of what is happening in the markets and how to steer through turbulent waters.

Let's start making smart decisions about your money!

Global Markets: Where are We Heading?

Overview:

  1. The second quarter has been a turbulent one. World equity markets did well till the middle of May with some markets hitting new highs since the bursting of the Internet bubble. Investors then experienced stomach churning corrections over the 2nd half of the quarter. Most badly hit were the emerging markets with some down as much as 25% at one stage. World equity markets then staged a modest recovery towards the end of the quarter.
  2. For the quarter, the US S&P index was down 1.9%. The higher beta, tech-laden Nasdaq plunged 7.2%. In Asia, Japan and India both gave up about 9.0%. Amidst these poor results, China stocks did very well. Shenzhen A index registered a gain of 35.5% on the back of a growing Chinese economy and increased investors confidence following a slew of market reforms in the Chinese capital markets.
  3. Despite this volatile swing in world equity markets, the global economy continued to grow at a good pace. Inflation was largely contained although signs of building inflationary pressures within the economic system were emerging on the back of surging commodities prices, including oil. Coupled with concerns of tightening capacity in the world economy, this then led most Central Bankers to hike interest rates so as to moderate growth.
  4. After 17 consecutive interest rate hikes by the US Federal Reserve (Fed), investors began to wonder if the Fed had overdone the tightening job. Three fears began to crop up on investors mind: Fear of Shrinking Liquidity, Fear of Recession triggered by overly aggressive tightening by the Fed and the Fear of Shrinking Corporate Profits as the world economy slides into a recession.
  5. Looking ahead, we think that the world economic environment could be more benign than was discounted by the market participants. The US economy looks like it is entering a mid-cycle slowdown. Signs of slowing growth have begun to emerge. Inflation, while rising, is not surging. With companies still focusing on cutting costs, wages are unlikely to surge and thus unlikely to add to the inflationary pressures present today. On the macro front, we have localised asset bubbles, for example, the US real estate market. Even this has been deflated somewhat by the Fed via a series of hikes in lending rates. Central banks have chosen to be pre-emptive. They are concerned, but not reacting in alarm to the building inflationary pressures. Surveys shows that companies still do not have the necessary pricing power to pass on rising manufacturing costs to the consumer.

Our Outlook ...

On the micro level, the health of the company balance sheet has never been better since 2001. Cash levels are high, valuations are reasonable to cheap. Recent sell-offs means that investors are vigilant and not carried away a necessary ingredient for a serious turn in both the economy and the markets.

The risks to our more benign outlook are the following :

  1. Surging Inflation
  2. Sharp and Swift Recession
  3. Collapse of the US Dollar
  4. Exogenous Shocks to the System

Any one of these events will be enough to bring in a bear market for equities. A combination of (a) and (b) will cause stagflation, an event that is bad for both equities and bonds. However, we know that while these events may drag capital markets down in the short term, they will not permanently affect the attractiveness of these assets for medium to long-term investors. History, in fact, has shown that these are great buying opportunities for those who dare!

What Should I be Doing ?

There are basically two things you can do in reaction to what you have just read :

  1. Do Nothing : Because you are not only fully invested, but rightly positioned for the future. Do not do nothing because you have been paralysed by fear arising from recent market moves (speak to your Financial Advisor to review your current holdings).
  2. Act : Market declines are excellent opportunities to buy good investments on the cheap. If you are already in a dollar cost averaging investment programme, now is not the time to pull the plug. In fact, you should stick with the programme which has been shown to be the most profitable investment strategy ever known. If you are wrongly positioned, it is still not too late to reposition yourself that is switching from a poor investment to a good quality one that will benefit from the mid-cycle slowdown.

Our Financial Advisors have been briefed on what are the attractive investments to profit from the coming mid-cycle slowdown. They are at your disposal. Speak to them.

Finally, we advise all investors to overcome the emotional swings of greed and fear. When the markets are up, we are swamped by greed, focusing solely on returns and forgetting about risks and fundamentals. In turn, when the market corrects, we are gripped by fear, losing track of returns and the fact that good investments can now be gotten at a discount! To do this, we need professional help in the form of a knowledgeable Financial Advisor. Their role is to guide you along and provide you with valued counsel in terms of financial advice. The next key ingredient in the fight against greed and fear is to stick with a clearly laid out investment program that has been thought through and agreed in normal times. Just as good times will surely be followed by bad times, difficult times will in turn give way to a better tomorrow and richer returns to those who can manage their emotional swings with good advice and sticking with a well conceived investment program.

Look out for our next issue, where we continue to bring you more updates on the markets.


From
GYC Research and Investment Desk



IMPORTANT NOTES: This report is provided for the information of the intended recipient only and should not be reproduced, published, circulated or disclosed to any other person without the prior written consent of GYC. The information and opinions expressed herein reflect a judgment of the markets at its original date of publication and are subject to change without notice. GYC does not warrant the accuracy, adequacy or completeness of the information herein and expressly disclaims liability for any errors or omissions. The information is given on a general basis without obligation and on the understanding that any person acting upon or in reliance on it, does so entirely at his or her own risk. Any projections or other forward-looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. Neither is past performance necessarily indicative of future performance. You should make your own assessment of the relevance, accuracy and adequacy of the information contained in the information provided and make such independent investigations as you may consider necessary or appropriate. Accordingly, neither GYC nor any of our directors, employees or Representatives can accept any liability whatsoever for any loss, whether direct or indirect, or consequential loss, that may arise from the use of information or opinions provided.

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