In Decision Not Indecision

Every mother knows when to ignore a child throwing a tantrum and when to heed an actual cry for help. This is the same for certain attention-seeking noises that have been wailing out of the market recently. We will address just two of these concerns.



First, the Dow Jones has been rising steadily while the Chinese market has moved sluggishly at best. All in all, a total of $6.5 billion has been redeemed from emerging markets like China this year. On the flip side, developed market equity funds like the US have booked inflows consistently for weeks, attracting more than $52 million in the same period. Yet, there has been no call from your adviser to make any adjustments to your portfolio. You may be interested to know why we remained seemingly indifferent in reacting to these fund flows. Take a closer look, and you will see that our inaction, is not indifference.

 Short Term Pain, Long Term Gain


Let us explain it this way. China is working out some teething problems with inflation. The pressure of escalating inflation in emerging markets has spurred policymakers to take drastic cooling measures starting from late 2010. These measures have caused short term fund flows to flow out from the emerging economies to the developed markets, as investors are concerned that the cooling measures would cause slow growth, thereby affecting corporate profits. These teething pains while uncomfortable, are an unavoidable part of China's growth story.


However, we understand that investors such as yourself may have entertained the thought of avoiding these short-term discomforts. Should you have reduced your holdings in emerging markets, and direct the funds towards large caps in the US? Let us pause a moment to reassess the situation. In the art of warfare, the ancient Chinese war adviser, Sun Tze always does a detailed assessment of his enemies. He goes to war only when he has done his risk to reward calculations.



Why Less is More


Our call to buy into Malaysian equities two years back is an example of how we took advantage of capricious market trends. At the time, speculative funds, known as 'hot money' flowed into Malaysia due to positive changes in their foreign policy. Hot money typically flows from one market to another unpredictably. In that case, we rode on this trend in order to make short-term profits for our clients.


So why do we not see the need to attend to these market noises now? Isn't the media focusing most of its attention on the speculative net redemption from markets such as China? Shouldn't we do something about the situation? Well, we continue to believe that cooling measures taken by the Chinese government will come to a halt eventually. Funds will then flow back to the Chinese market. If we take action to pull out of China now, we may risk missing out when hot money comes flowing back into China. That would mean a huge opportunity cost for your portfolios. Since the JNP Investing Commitee has never taken interest nor liberty to time the market, we choose to stay status-quo. And we will continue to faithfully invest in China on a regular basis in anticipation for the Chinese market to rebound. We believe the rather annoying market noises will soon stop when your portfolio starts behaving as desired. For the moment, it is our belief that inaction is a better way of achieving long-term rewards in your portfolio.




The American Tale


We were not surprised by the upside of US equities either. Global news reports have long flooded investors with gloom and doom warnings of investing in the US. Yet, the committee decided to sweep up many strong large caps at a cheap value. While funds flowed out of the US, we continued to secure our foothold. We retained a minimum exposure of 15% in US equities throughout the crisis. The reason is simple. We did not want to see our clients missing out on the surge of US equities when the recovery took place. Often, the rally begins subtly and by the time the media captures the rally, it is already too late. 'Sexy' prices remain elusive to those who are reactive rather than preemptive.




Russia on Santa's List


Should good little kids always be rewarded with candy? It depends, doesn't it?


While money has been flying out of Brazil, India and China, Russia has been an exception. Global fund managers believe Russia to be the only country now to attract new money among the major emerging markets. We believe that Russia will benefit greatly from rising oil prices and is likely to grow in economic earnings this year. Globally, many even see Russian shares as proxies for investments into commodities.


For these reasons, fund managers are keen to build up their Russian exposure. In fact, the number of global fund managers now recommending Russian securities and assets as a good investment rose from 50 percent in January to 88 percent in February. If Russia were a kid, I'd say he would easily make it to Santa's 'Good' list.




Good Kid Bad Teeth


Our investing committee was naturally interested to explore this market, and capture any opportunities if present. We are well aware that the Russian Trading System (RTS) is still trading at a good value.


Nevertheless, a number of reasons persuaded the committee against investing into Russia. We have not given candy to this good little kid. Because on closer inspection, we found that he has tooth decay! What do we mean?


The political structure of Russia remains heavily influenced by their ex president, the current prime minister, Mr Vladimir Putin. On one hand, this can mean political stability and should induce us to see Russia as an attractive investment. However, the political dominance of this one man raises some concerns. What will happen to the RTS should this prominent figure be removed from the political scene?




Plagued with Plaque


With the dominance of state in major Russian corporations, the market is rather unfriendly to investors. Such an environment may not be able to retain foreign funds for the long term.


Most importantly, the recent fund flows into the Russian market is most likely induced by surging oil prices. Admittedly, there is a huge correlation between Russian mutual funds and energy funds. However, our research shows that the former has not outperformed the latter. As such, we concluded that sticking to energy would make more sense than taking a chance on Russia. We may increase our exposure to energy, or energy related investments due to the potential we see in this sector. However, we are unwilling to take a chance on Russia due to the inherent political risks on the economy. At the moment, we remain comfortable with the allocation in this sector. We believe that it is the optimum percentage to balance the risk-reward ratio.


From history, too many investors attempt to leverage on the news in hopes of riding waves of hot money. Too often, they find themselves entering the trend too late and unable to exit on time. To ensure your portfolio behaves up to expectations, it is critical to carry the right investing attitude.


In JNP, while others time the market, we tame our framework. We will continue to help you position your monies ahead of the business cycles, being opportunistic to profit from situational anomalies, while preventing permanent loss of your capital.