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Much Ado About Nothing?

01 Jul 2013 
SOURCE: Wong Sui Jau
I added further to my portfolio last Friday. The investments were as follows:

Aberdeen Asia Smaller Caps - $3000
Henderson Horizon China fund - $2000

The US Federal Reserve has now hastily come out to reassure the public that it is not reducing its bond buying yet, and neither has it raised interest rates. Jerome Powell, one of its members reiterated that the gradual withdrawal of its economic stimulus will only take place under the right circumstances. Thus, while they indicated previously it might take place in 2014, this was based on their estimation that by then, the US economy would have strengthened enough such that it would be able to stand on its feet even without the Fed’s stimulus.

I think both the equity as well as the bond markets overreacted. The economic data coming out of US was good. So, the Federal Reserve indicated that if the trend continued, they can pull back their stimulus. This is a responsible thing to do, because overly loose monetary conditions over an extended period of time can cause asset bubbles and inflation. Yet, clearly the health of the US economy is of paramount importance to the US Federal Reserve, as all their efforts to stimulate it over the past few years have shown. So, they are unlikely to ease up if the recovery is still weak.

Thus, instead of focusing on the present good news, which is that the US economy is showing positive signs of recovery, investors choose to focus on the imagined bad news, which is the scenario that the Federal Reserve pulls back too early in future, causing the US economy to dip back into recession again.

I believe that when people are selling even though data coming out is good, just because the market is in a correction, it’s a good time to buy. Hence, I added to my holdings two weeks back, and I added more on Friday. China in particular looks really cheap. While people continue to be fearful about possible bad loans, they need to realise that the Chinese central bank is much more powerful than the US Federal Reserve. The Chinese financial system is not a fully open one. Hence, there is much more the Chinese Central Bank can do to ensure stability as opposed to the US Federal Reserve. In the meantime, the valuations for the Chinese equity are now literally the lowest in the region, which is quite amazing considering they used to be the highest at one point years ago. And we are talking about one of the most important economies in the world today. China is a behemoth that won’t disappear or become irrelevant. It is too important to the global economy now.

On the whole, there isn’t any fundamental reason to panic over the situation the world is in today. Europe is slowly, painfully recovering, US is well on track in its recovery. Even Japan has seen a breath of fresh air this year as well. Asia and the rest of the emerging market economies can only stand to benefit from all this. All the potential dark clouds investors were worried about last year has not resurfaced. There is no US fiscal cliff (nobody seems to be mentioning this anymore). No further debt crisis in the Europe. In fact, economic data has generally been positive, especially for US.

So, when people are selling just because the market took a correction, I am taking the opportunity to buy more instead. I believe it is important not to let your emotions control your investment decisions. It is discouraging to see your portfolio fall over the last one month. However, that is precisely when you should be looking for bargains. Some of my best investments were made when markets were deep in a slump and my portfolio was showing all red. While we are not in that situation today, markets have nevertheless taken a hit over the last one month, and portfolio values have fallen. Given the circumstances, I see it as an opportunity to buy rather than to sell at this point in time. The markets will recover, and I believe they will resume their uptrend again. And when they do, the past month’s drop will be a fleeting memory and people will be wondering what all the fuss was about.

Message from Admin: The information contained in the above article represents the blogger’s personal views. The information is for general reading and should not be taken as financial advice.

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