Sunday, January 2, 2011

As before, don't put all your eggs in one basket

HERE'S an account of how the market psychology has evolved in the last two years.

Just months after the collapse of Lehman Brothers which triggered the seizure of the global financial world, 2009 started off on a bad note. Not helping matters was the stomach-churning plunge in the market in the first three weeks of the year to depths unseen for a long time.

With few clues as to how the crisis would be resolved, and still under a siege mentality, most primed themselves up to brave yet another difficult year. But lo and behold, 2009 turned out to be one of the best years for equities globally. The Straits Times Index (STI) ended the year more than 60 per cent higher.

With apocalypse averted and the low hanging fruits in asset prices picked, the market entered 2010 divided in opinion. Many analysts had even refused to make any high conviction forecasts. Many expected a volatile year.

In one camp, the big fear was inflation. In the opposing camp, the enemy was deflation. Ultimately, the forces fuelling inflation proved stronger, particularly in the second half after the US announced its second round of quantitative easing. The liquidity flow flooded the emerging markets - given the poor growth outlook for the developed world. And 2010 again turned out to be a good year for investors. Almost all asset classes chalked up positive returns - equities, commodities, real estate. Well, almost everything - except cash.

Now into 2011. Bolstered by two positive years, the mood has turned decided sweeter. The near consensus view out there now is that this year will yet be another good year for investors, helped by the continued rising tide of liquidity.

BT polled a few wealth managers, and here's a sample of their views. Based on the forecasts of firms which gave us their numbers, the Singapore equity market is seen rising by 7.6 per cent to 15 per cent this year.

China, after being one of the laggard markets last year as the central banks raised rates to fend off inflation, is expected to return in excess of 15 per cent.

The views for US equities, however, are mixed. Citi sees the S&P 500 ending at 1,300 by December 2011. That's just about 3 per cent above its current level. And if we take away the expected depreciation in US dollar versus Singdollar, then US equities may be a losing proposition for Singapore investors based on Citi's forecast.

The US dollar is expected to decline by 4.6 per cent to 6.2 per cent based on the forecasts of Citi, DBS and UBS. UBS Wealth Management Research's chief investment strategist in Singapore, Kelvin Tay, however is expecting US equities to post returns of 10 to 15 per cent, or 4.6 per cent to 9.6 per cent in Singapore dollar terms, based on his outlook for the US dollar.

Schroders's regional head of multi-asset Al Clark, meanwhile, is a bit of a contrarian in that he expects US equities to outperform equities in the Asian emerging markets. Many also expect gold to continue its run. Again, the forecasts range from 0.9 per cent to 12.5 per cent, after accounting for the depreciation of the US dollar against Singdollar.

Finally, bricks and mortar too are expected to remain in demand. RBS Coutts, in its 2011 Investment Outlook, noted that in a low-yield environment, prime property will be prized for its secure income stream, rather than the expectation of capital gains. 'Those seeking capital gains from property should look to China, Hong Kong, India, Singapore and Australia.'

Schroders's Mr Clark said Singapore property, along with Asian property, will be subject to the same reflationary policies of Western governments. 'If liquidity is made available unabated, then we expect markets to remain strong. If political appetites for ballooning deficits change (as we are seeing in the UK and Europe), then the subsequent removal of liquidity support may see markets struggle,' he said.

DBS's regional equity strategist Joanne Goh is of the view that real rates will continue to be negative in Singapore, thus driving asset reflation. 'We believe physical property prices will remain supported as the economy is expected to grow at 7 per cent in 2011 resulting in low unemployment rate and higher income.' At this stage, she added, DBS does not see a property market bubble to warrant any government control measures.

So it seems the consensus is that keeping one's money in almost anything is better than leaving it in the bank. A head of research quipped: 'You are dropping money as you walk by keeping your money in the bank.'

Putting it more elegantly is Nick Cringle, Global Co-Chief Investment Officer of RBS Coutts. 'With interest rates expected to remain low in the West in 2011 and 2012, inflation - even at low levels - remains powerfully corrosive of spending power.'

Behind the benign official inflation data sits service-price inflation which remains less subdued. For example, education inflation is 4 per cent in the US and 6.4 per cent in the UK; hospital services inflation is 7.3 per cent in the US, 6.2 per cent in the UK and 3.5 per cent in Singapore; and transport inflation is 4.1 per cent in Europe.

'Deciding to hold cash, for anything other than the short term, should not be confused with a strategy of taking no risk,' said Mr Cringle. 'Indeed, the real return (ie, after inflation) on sterling cash has been minus 2.2 per cent over the past 12 months, and minus 0.7 per cent for both the dollar and euro.'

But the truth of the matter is the outlook is far from being the perfect sunshine and blue sky that all would have preferred. There remains a number of risks out there. However, the bias is still on a continued recovery and growth in the global economy supported by the emerging middle class from China and India.

The best bet then perhaps is still to cover as many bases as one possibly can: have some cash, some debts, some equities, some in property, and some in commodities.

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