November 2006

GYC Investment Compass: Issue 3

Need for Good Advice

Dear Valued Client,

Markets world-wide have recently been scaling new heights. If you are already invested in the markets, congratulations! You are truly growing your capital!

However, if you are still at the sidelines, allow me to address some issues that may be preventing you from getting into the market, namely :

  1. Why is it important to secure good advice?
  2. Where are the markets heading from here?
  3. Which investment product(s) should I buy?

We have been fortunate of late in calling the market directions correctly since the last major correction in the May/June period. Whilst we hope to maintain this pristine record, making market calls is hazardous business and we cannot guarantee making the correct calls all the time. But with diligent and critical analysis on global issues, we will do our best to hold your hands and get you out if we sense a sea-change in market direction.

Taking Stock ...

The world began the year on an optimistic note - Growth was everywhere and accelerating. Markets rose on the back of a favorable macroeconomic backdrop. Oil prices scaled a series of new highs on robust demand and fear of supply disruption. Commodity prices, likewise rallied.

Then, without any warning, world capital markets slumped in May and June despite the rosy world economic environment. Investors were gripped by fear that the world central banks might have gone too far in their tightening of interest rates. This, coupled with rising oil prices, gave rise to the fear of stagflation.

Now, the contour of growth has taken on a different form. The US economy has clearly slowed with leading indicators in Europe and Japan now pointing downwards. Investors have turned more cautious on the economic front. Oil prices has slumped more than 20% from its peak with commodity prices well off its last peak. Bond prices, especially US Treasuries, have rallied.

The Value of Good Advice

Interestingly, world equity markets have also done well despite the gloomier outlook. What happened? Most strategists were quite bearish in May and June. Their rationale could not be faulted. Oil prices were high, central banks and Japan were tightening their monetary policies, which threatened an unwinding of global carry trades. With growth sputtering, earnings would falter and stock prices were expected to decline with it.

However, the flaw in such an outlook is the failure to understand that capital markets are discounting machines. The unfolding global events were already factored in the price. Market corrections in May and June, on hindsight, were justified and prescient in light of the change in the world economic environment.

If you have listened to the wrong advice, you would have either sold down your investments or still be waiting at the sidelines. If you had sold out, you would have lost the opportunity to recover from the correction. If you had waited at the sidelines, you would have missed an opportunity to grow your capital. The former is more painful. The latter can be corrected simply by ensuring that you secure good advice, the next time.

Through this experience, we hope that you will realise the importance of securing good investment advice for your wealth as the wrong advice can lead to financial ruin and not being able to achieve your investment objectives.

Where are Capital Markets Heading from Here ?

If you have been following our newsletter, you know that we are of the view that the US economy is heading towards a mid-cycle slowdown. The probability of a recession at this point is low. Such an environment is most conducive for capital markets: fixed income and equities. We see no reasons to change this stance as yet.

Global growth is slowing. More importantly, oil prices are down from their peak and looks set to stay that way. Commodity prices have also corrected. These will somewhat relieve the pressure on central bankers to hike rates further. In addition, falling oil prices will help to maintain the US consumers ability to spend, despite falling housing prices and rising interest rates. With the US not heading towards a recession, global outlook should be benign. Corporate earnings can be expected to grow, albeit at a slower pace, with management still focused on cost.

The risk to this benign global outlook is employment, especially in the US. A sharp fall in US employment figures could easily unravel the fragile balance in the US economy given the high individual debt, high interest rates and falling property prices. We would be watching this closely to plot our route ahead.

The world is not any safer today. North Korea has tested a small nuclear bomb. Iraq is still in a mess. The US November election looks likely to change the leadership of the House of Congress and the Senate, possibly resulting in a lame duck scenario of Bushs remaining presidential term. Iran and Venezuela are emboldened in their opposition to the US. The former markedly so, especially after a better than expected outcome in the war between the Israelis and Hamas in Lebanon.

Despite these negative geo-political developments, equity markets have done well. It has been said: a good Bull market is one that climbs a wall of worries. It seems that we have a classic example of this today.

We remain optimistic of world capital markets today. Between fixed income and equities, We prefer equities. As before, we counsel against greed, against betting with one leveraged to the hilt. There is no certainty in investment. Risks lurk around the corner. We try our level best to identify these and go for the central scenario; the one we believe is likely to pan out. We could be wrong. If indeed we are wrong, we would like you, our valued client to have the staying power to adjust, to adapt, to take new opportunities in an ever evolving environment. It is indeed very sad, if one is forced into a fire sale position. This is a deep hole that is most difficult to climb out of. As such, we seriously urge you to call our Financial Advisers for a discussion to chart an investment programme, going forward.

Which Investment Product(s) should I Buy Into?

There are currently thousands of investment products available in the market place. Which one is most appropriate for you? How do you choose from all these?

Our Financial Advisors are there to help you. They know the products; understand the characteristics and the risks. They will be able to advise your particular product mix based on your personal circumstances and return/risk profile. More importantly, they have been briefed on the current market environment and thus which investment products are likely to do better than others.

Despite the above, we sincerely believe in a diversified approach, especially for an investor who is just starting out with an asset base of less than S$50,000. Our generic advice is for you to consider two products: global bonds and global equities. Both products are not only well diversified, but also actively managed by the fund managers to capitalise on the better performing region or sector. Such an investment approach negates your need to move your funds around as well as having to personally monitor the world in terms of economic, geo-political development, and market technicals. Whilst some may be able to do this well, most of us who hold a full time job will not have that luxury.

In fact, our internal monitoring of various client accounts has shown that investors with less than $50,000 did best with just global bond and global equity funds as compared to others with a slew of country, sector and other specially structured funds. Please give this some serious thought. Our Financial Advisors will be happy to elaborate on this point as well as be able to recommend the top performing global equity and global bond funds for your portfolio.

Till our next issue, we would like to wish you, our valued client, a merry Christmas and a blessed New Year!

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


From
GYC Research and Investment Desk



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