February 2007

GYC Investment Compass: Issue 4

What Lies Ahead for Year 2007?

Dear Valued Client,

2006 has been a great year for equity investors. So will it be more of the same in 2007? In our last few newsletters, we have laid out the unfolding economic landscape:

  • a mid-cycle slowdown for the US
  • a benign environment for the world financial assets to thrive and
  • a goldilocks scenario similar to what we have experienced in the late 1990s just prior to the formation of the internet bubble (with its subsequent bursting hurting all financial asset investors)

Are we going into another bubble? If yes, what is this due to? Should we be getting more cautious, or should we stay the course, enjoy the ride and get off just before the bubble bursts (assuming of course, that there is a bubble to burst)? What lies ahead in 2007? Are we getting too pessimistic? Is history making us too cautious? Are we unnecessarily being bogged down by history, especially by our recent experience? How should we be positioned? What should be our asset allocation for 2007? What should we be doing for our equity position? What about our bond position? These must be some of the questions in your mind.

In this first issue of our Investment Compass for 2007, we hope to add some insight of what we think lies ahead and how you should be positioned to profit from it as well as protecting your capital by side-stepping any unnecessary risks.

Some Facts ...

The US is in a mid-cycle slowdown. This is both an economic fact and already discounted by investors as shown by the recent good performance of financial assets. Easy money has been made. The growing economies in Asia have done very well. The economies of India and China have enjoyed a breakneck GDP growth of 8.3% and 10.7% for 2006 respectively. This pace of dizzying growth is expected to continue for 2007 as well. This is yet another view that is well discounted by investors. The Fed is unlikely to hike its rates in the first half of 2007 and that the Fed might even contemplate a cut in interest rates in the latter half of 2007 has also been somewhat discounted by the market.

So it seems a lot of good news has been taken and accepted by investors. The risks therein lie in the ensuing macro economic development that is not in line with this prevailing view.

What Could Go Wrong ?

Plenty! A number of questions can be asked which will hopefully provide a glimpse of what we are worried about for 2007. Chief among these questions is Is the Middle East situation stabilizing? How is the US going to extract itself out of Iraq, and at the same time, manage the nuclear issue in Iran? This has serious implications on oil prices and its consequent effect on global growth. Can China cool the over-heated economy and make the much needed economic adjustments without any accident, or policy mis-step? Can India maintain its current pace of economic liberalization? Will we be seeing some roll-back of economic policies in the interests of protectionism? What does the stalemate in US politics mean to the world - both politically and economically? A weak and indecisive US typically encourages and emboldens extremists and militant countries. What about the Avian flu? Would 2007 be the year of the flu pandemic?

Any of these emerging risks can inject uncertainties into the minds of investors and trigger the expected reaction i.e. sell first and think later.

We believe that there are more risks lurking, in addition to those mentioned above. Some of these may already be brewing outside the watchful eyes of the markets and can potentially develop into a crisis, taking all by surprise (e.g. the recent Asian Currency Crisis).

What Then Should I Do ?

We hope the above potential risks will not shock you into inaction. Or worse still, drive you to sell all your present investments and switch into cash. These are probable and possible risks and are by no means certain to develop and crash financial markets. The objective in highlighting these risks is to caution against being over bullish especially after a pleasant experience.

Investing is not about taking extreme positions i.e. selling down your assets and switching into cash for fear that one of the above risks may come true. Rather, investing is about managing risks, managing expectations, managing emotions and managing greed.

For 2007, if you are already overweight on equities, or the recent run up in equities has distorted your long term asset allocation, we advise that you call up our financial advisers to conduct a financial health check and discuss proper actions for your capital.

Greed does not pay. 2007 is a time to rein in greed. Take profit on your equity positions. Do not swing to the other extreme of putting everything into cash. What if the world markets remain benign? Financial assets will continue to do well. You will miss the ride if you are into 100% cash. Moderation is key. Managing risks is key. A well thought-out & balanced portfolio is one where you are not hurt should the environment turn adverse but at the same time enables you to enjoy the upside if the environment remains favorable for financial assets.

Again, we seriously urge you to call up our Financial Advisers for a discussion. They will provide you further insights, especially the countries we remain positive on and those that we have growing concerns due to either deteriorating economic developments or valuations.

Greeting

We are glad to report that your portfolio has done well in 2006. (please click here to see the average returns on our clients' portfolios). It is our desire to continue to add value to your capital in 2007. In our subsequent Investment Compass, we will address some interesting themes that warrant your serious consideration for your portfolio.

In the meantime, we wish you a very blessed and prosperous 2007. Thank you.

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