Asset Class Returns As At end-July 2010

Its getting interesting as we step into the second half of 2010, which I believe will be quite bullish for equities in general. July was a great month for the major asset classes—prices rose across the board. It was the best calendar month overall for the markets since last November, the last time that all the broad measures of stocks, bonds, REITs and commodities posted gains in a single month. Indeed, the Global Market Index (a passive measure of all the major asset classes) rose 5.7% in July, its best month since May 2009. Looks like I am not the only one starting to take on new positions.

REITs were the big winner, posting a 9.7% return in July. Equities weren’t far behind, particularly in foreign markets, in part because of the falling greenback. The 5.2% retreat in the U.S. Dollar Index (the biggest monthly decline in over a year) helped boost the dollar-based returns in stock markets in developed- and emerging-market nations overall. July’s rebound in stocks generally helped claw back a fair amount of the losses incurred after the previous two months of selling.

In just one month the foreign equity from developed markets have more than overtaken the up-down first 6 months and notched ahead on a year to date basis. Emerging markets equity in the month of July alone has doubled the entire gains for the first 6 months. These are very bullish signs.

The fact that REIT is still the top gainer after gaining more than 50% this year indicates that bottom fishing among the most distressed asset class has gathered momentum.

Meantime, there's the argument that relative valuations have moved in favor of stocks. The bulls say that equities are attractively valued next to bonds, which have posted a strong run so far this year. The Barclays U.S. Aggregate Bond Index is higher by 6.5% through July 31. U.S. equities, meanwhile, are more or less flat. And with the 10-year Treasury yield dipping below 3% last week while US corporate earnings have recently soared to record highs, some strategists think it's time to raise equity allocations and cut back on bonds.

Equity Strategy 2H 2010 & Asset Class Returns As At end-June 2010

Just passed the halfway mark. REITs finally took a hit, is this the beginning of the double dip. Do I believe in the double dip, yes of course. Only that the dip will be more restrained, not a significant or prolonged dip. Things move in cycles and like pendulums. Share prices are the same, they will sing to one side, over swing a bit and the correct. This is because the data are but collection of human behaviour, and masses will never react perfectly. They will chase a share price that is running until it overshoots, and attract sellers to come in. When the balance shifts to the other side, you will see it overshooting on the downside again.

June was another rough month for risky assets, although the losses were considerably deeper with U.S. stocks from a dollar-based return perspective. REITs also took a hit: for the first time since the opening months of 2009, real estate securities dropped by more than 5% for the second month running.

Bonds held up well in June. This is probably due to the threat of deflation taking a toll on investor sentiment, the safety of fixed-income (even at unusually low yields) attracted capital flows last month like moths to a flame.

US equity took the hardest hit in June. Was this an adjustment to the European crisis and the Euro crisis? Probably. Was it trying to discount a flattening of recovery, probably. Was it due to funds closing their books and squaring off positions and waiting for the right levels to reloan in 2H, absolutely.

But what we all should be focusing at is the YTD figures. Commodities are down by nearly 10% and foreign developed stocks have retreated by more than 13% in dollar terms—the steepest decline for the major asset classes on a year-to-date basis through June’s close. There has been some flight to reserve currency assets, but US equity did follow suit, much of its YTD losses came in the month of June alone.

So we are giving back all gains this year and more. Is this a risk aversion period? I think the sell in May rang true and it coincided with the Greek, Hungarian and Portuguese malaise, followed by the weakening Euro, which threatened demand for exports from the rest of the world.

China had to do a lot of braking in its domestic economy and the Shanghai index reflected that for the past 3 months. Now they have to contend with pressures to have a stronger yuan as well.

Some may cite the fact that many governments have piled on too much debt and that will come back to haunt us. Well yes, but not so soon. No one is going to put a gun to the US and ask them to lower their debts within the next couple of years. While the same seems to be happening in Europe, it is mainly a sovereign issue not a corporate issue.

We are actually still in the midst of a newly created liquidity bubble. Thanks to Bernanke and many of the other governments, we have printed and poured too much liquidity into the global financial system. We are also locked in with globally benign interest rates. Tell me what do the above ingredients make?

But why the recent pullback. Well, even when you are driving a Porsche, you are limited to how far and fast you can go if there is a traffic jam. Be sure, we have a highly powered underlying liquidity revving its engines. We just need the traffic to clear up a bit: Euro steadying a bit; unemployment growth flattening out but not down trending aggressively; corporates continuing to put out good quarterlies; etc.

I have changed my views on the Euro, I think it will stablise here 1.25-1.30 and not go any closer to 1.00 to the USD. Herein lies the key. The Euro crisis may have blighted our views too much. Look closer, most of Europe's top companies are benefiting strongly overall. We missed the picture that this is more a sovereign thing. Many of the companies are already getting an 18%-20% boost in receipts (added competitiveness) thanks to the weaker Euro - we all know that that is more than double the net margins of most companies.



European industrial production actually rose 0.8% in April much better than the average forecast of 0.5%. One of the better leading indicators of economic activity is cargo carriers, Fedex's recently reported that Europe is seeing solid activity, very much different from the picture the media would have us believe.

China may be the weak link in 2H. In addition to the yuan, the high interest rates, the yet to subside property bubble, we now have a snowballing labour issue. The Honda-Foxconn developments should ensure a cascading and rippling effect on all labour wage demands across China, watch it balloon in the coming weeks.

I think US equity and emerging markets equity will be quite positive for most of 2H2010. I see the Dow testing 11,500 and the FBMKLCI testing 1,450 before the year is over.

Fiscal Deficits, Current Account Surplus & Asset Class Returns As At May 31, 2010

Wow, May was THE month alright. Look at the returns for May. Everything were red except for US bonds. May was the worst month for the major asset classes since the dark days of February 2009. Virtually everything suffered with more than trivial losses. Treasuries were the exception, thanks to the revived rush to safety.

Stocks around the world led the decline, with foreign developed markets posting the biggest loss among the major asset classes. What changed the sentiment so sharply in May? A renewed fear of deflation was one catalyst. Investors are increasingly focusing on the growing burden of debt that weighs on the global economy, particularly in the mature countries of Europe, Japan and the U.S.

It was inevitable that the surge in asset prices across the board would come to an end. That doesn’t mean that expected risk premiums are nil or negative. But the investment landscape ahead is set to become more complicated. In the spring of 2009, as it became clear that the global economy wasn't going to implode after all, the markets repriced assets accordingly. Markets are no longer trading in anticipation of another Great Depression.



We may have avoided another Great Depression but we now have the The Winter of Euro-Discontent. To a large extent, we can say that this is more localised than the subprime mess. In another angle, the Eurozone crisis is a different version of the US/UK subprime mess as well.

The US and UK governments acted swiftly to contain the mess, by rescuing dubious companies that cannot be allowed to fail. The US government can print money liberally and even with an enlarged debt, the US is still the US. Not so for many of the governments in the Eurozone. If Greece was the US, Greece would not have been under such a spotlight. It would have been able to print its way out of its troubles.

What is real is we are going to see a long period of deflation within Eurozone, with equally weighty weights on the Euro currency, and other independent European currencies. Public debt or sovereign debt inhibits movements in or grandiose monetary policies. While they have to placate foreign buyers of the attractiveness of their bonds, they are hamstrung by not being able to do deficit-stimulus. Unemployment and social unrest will only climb.



All this will mean that other countries may be wanting to delay tightening, such as the US, China and a host of more vibrant emerging markets. When investors compare the EU with the rest of the world, its obvious. Then you STILL have a low interest rate regime everywhere, in fact a prolonged low interest rate environment - that will cause funds (now on the sidelines) to pour into the US and other emerging markets. The more EU plays out the cards they were dealt with, the more optimistic I am of a strong equity market for the US and emerging markets in 3Q and 4Q.

Technically, Japan is in a more difficult position with a huge fiscal deficit but they still have a current account surplus, and that should be the key in estimating the probable recovery by EU countries in crisis. Watch their current account movements and signs of improvement will mean they are on the mend. Well, we all know that that is not going to happen till 4Q2010 if not later.

As a side note, Malaysia looks impressive with its strong current account surplus, and owing to our deficit-stimulus funding, our fiscal deficit is a bit high but not exceedingly so. Being an emerging market economy, it would be wise to bring the fiscal deficit down gradually over the next 3 years.

Asset Class Returns As At end-February 2010

REITs continued to be bought up aggressively as the deep discounts saw many funds taking the plunge to buy for value and recovery. Commercial properties are still a long way off to normalisation but its gratifying to see activity there, and the returns for the past 12 months was nearly 100%.

The trend in February was again one of posting a wide range of results and a shifting pattern of winners and losers on a monthly basis. This isn’t a shock, but more of it is probably coming, meaning that a new set of challenges await for managing asset allocation relative to the trend for much of the past 12 months.

February saw some weakness triggered by the Greece situation. Commodities and US stocks were the only ones posting positive monthly gains. Sovereign debt issues were hit as investors priced in the higher default risk.

I suspect the better performance of REITs and commodities were probably linked to rising yen and dollar carry trades. We can expect more of the same. Other than that, I do not see any strong asset class trends appearing, expect muddling performances from the rest over the next few months.

Asset Class Returns As At 31 December 2009

REITs have continued to climb, a sure sign of sustained bottom fishing, which may explain the still subdued recovery in real estate in the US. This kind of sustained bottom fishing is important as it will enable funds to tap new investors or old ones to put in fresh capital to take advantage of a recovering sector. As in any recovery, you need to see fresh capital re-emerging. Uptrend boosts confidence, and a bit of confidence is a lot more powerful than a spreadsheet or power point presentation.

Emerging markets equity closed off the year very well. Developed markets equity continue to suffer from a perception of delayed recovery, and subsequently a lack of fresh funds flowing into those markets. What was surprising, or not really, was the sell off in US bonds and emerging market bonds. This is a strong indicator - it shows that risk aversion has continued to ease, and more importantly investors are preparing funds to obtain higher returns in the first quarter of 2010 (i.e. equity).

p/s photos: Mona Chopra

Asset Class Returns As At 30 November 2009

Time for the monthly review of the performance of various asset classes. Emerging market stocks have had a fantastic YTD, chalking nearly 70% return, some of that attributable to the USD carry trade, but also due to the immediate stimulus programs enacted by many emerging markets' governments. When you realise that most of these countries did not have as massive a wealth destruction effect as say in the US and much of Europe, one can understand the liquidity awashed in emerging market.

The other important sector which I have highlighted last month was that the commodities have started to move, which is also why the CPO saw some good upwards action last month. I suspect that its not pertaining to the fundamentals of commodities per se but rather some of the switching by USD carry trade into commodities.

If you look at the US equity markets, though many seemed fearful as it climbs towards 11,000 on the Dow, they are just up broadly by 25% on a YTD basis.

Surprisingly, junk bonds are also posting unusually large returns, or what we call high yield bonds. That can be explained by the deluge of funds moving out of cash markets and TIPs seeking higher returns one the risk aversion mentality subsided, causing a sudden ramp up in demand for junk bonds. However, the return last month for junk bonds has been muted as many are more circumspect now that the Dow has breached the 10,000 level.

p/s photos: Jessica C. (Wacoal's top model)

No, Not Lost In Space ...

Readers of this blog may have been speculating that I might have been abducted by aliens or taken away to Sg Buloh for some "gentle questioning sessions" - ... actually hopped onto a plane and have been in Sydney, still am... do not have access to the internet, so the postings will be infrequent.

Thankfully, there is the monthly asset class returns from The Capital Spectator - gives me something to talk about without too much work.

After a long period of flattish performance, commodities have started a move last month. Though it may sound silly, I think it is VERY EASY for this kind of asset class moves to turn into a wave, go long on CPO. I do think the rumour of Sime Darby selling 10% to China-interest has a high degree of credibility - and of course it is very good for Sime Darby. Though I did not like many of Sime Darby's M&A and subsequent integration plans, it is still the number one plantation company in the world. Many also may not be aware that it has been building very important port facilities and have a few very exciting long term ventures in China already. Let's just say that Sime Darby may be reinventing themselves to latch onto China as the platform for their next growth phase for the next 10 years. Yes, Sime Darby is a BUY now, no time to do a "Why I Like..." but close enough.

Curiously though, there have been more interest in bonds and relates papers last month according to the table. More significantly, the REITs have showed signs of weakness after a spectacular run for the past 3 months. This may indicate that we may have recovered from the lows, now the euphoria is over, some of these REITs are still showing tremendous leverage and debt difficulty.

p/s photos: Jocelyn Lukos

Asset Class Returns As At 30 September 2009

Emerging market stocks continued its strong run in September bringing its YTD gains to 61.5%. REITs which I touted as being safe to get back in 2 months back, registered another good month. Developed markets equities ambled along. Nothing new here, with the G20 committed to an easy money policy, the equity markets broadly should be supported still. Watch for upticks in commodities as that has languished for most of the year. Commodities have more to pick up when real capital spending and global trade recovers. The fact that it has not moved much tells you that globally the recovery, especially in developed markets is slow, and that the producers still have some inventory levels to work down. Emerging markets vibrancy alone cannot tilt the scale. To me, we are in the 6th inning in a 9 innings baseball metaphor rally. The following legs will kicked in when developed markets equities start to really gain steam.

Asset Class Returns As At 31 August 2009

August was the month which saw Emerging Markets equity skidding after a strong showing for the past few months. The group lost 0.5% but was still up a long way on a year to date basis (+48.3%). At that kind of rate, August was a much needed breather. As mentioned during last month's tally, REITs was the one to be in, and rightly chalked up the best showing in August, so much so that REITs are on positive territory on a year to date basis thanks to the month of August alone.

August was the month where Foreign Developed Markets (ex-US) had a bit of a decent run, maybe on a portfolio reallocation where some institutional funds were taking off some bets in Emerging Markets in preference for developed markets. Commodities continued its dismal run, and this may indicate that the global economy is still some way off from a proper recovery, what we are seeing is a stock market recovery, which basically tries to discount a more solid economic recovery 12-18 months down the road.

p/s photos: Shinobu Ikehata

Asset Class Returns As At 31 July 2009

The month of July was a very exciting month. Things really moved! Emerging markets continued to defy most expert predictions by surging headlong, led by China. It wasn't just emerging markets but developed markets surged as well. The funny thing is that when emerging markets moved, we always get the nasty and critical pieces on how and why emerging markets are too risky and have no reason to outperform the developed markets - hello... how the fuck do you think we got into this current mess, thanks to the fucked up brilliant greedy financial experts in developed markets!!!

REITs is a very interesting vehicle as they will only attract buyers when investors can see a genuine bottoming in the real estate space. Although the REITs are mainly representative of the US sector, it does indicate some vibrancy - despite its 10.4% gain last month, REITs as a whole is still down 41.3% year to date, an indication that there is still a long road to recovery. Another way to look at them is that it is time to really buy aggressively those REITs that currently yields very well (low teens) in Grade A or even Grade B offices. Wait another two months, and it won't be so attractive anymore.

Despite the concerns over commodity price gains in recent weeks, its pretty clear that the gains have not been excessive. As a group it is only up 3.2% and on a year to date basis, it is still down by 38%.

p/s photos: Chrissie Chau

Asset Class Returns As At 30 April 2009

For the month of April 2009, REITs finally recovered and outperformed other asset classes, but on a year to date basis, it is still the worst performer, having lost more than 50%. There is indications that things might be bottoming in US real estate. Despite a large number of foreclosures still, there were more bidders for those auctions. Home builders in the US have staged a similar rebound last month. Emerging market stock have outperformed other equity markets, still on a year to date basis, the losses were still bigger than developed markets and the US equities. What is more interesting is the very flat performance of commodities. The bottoming of markets may tie in with a working down of inventories in commodities. I expect commodities to outperform the other asset classes in the coming months.







p/s photo: Pace Wu Pei Ci

Asset Class Returns As At 28 Feb 2009

It is very useful to look at how differing asset classes have performed on a month by month basis as markets are so volatile and it pays to get a pulse on the dying patient, being rolled in and out of ICU. The best asset to be in for February, ta-dah... is cash or better still 3 month T-bills.

What is gratifying is that emerging market bonds have stopped falling. Its good in the sense that the wholesale selling wave have dried up, or rather the de-leveraging process have almost dried up.

TIPs is headed for a big burst as the amount of money running into TIPs has been ridiculous. Selling has continued for bonds of foreign developed markets, primarily in European countries.

Emerging market equities have fallen only half as much as US stocks and foreign developed market equities, a significant sign that investors are finally differentiating the global impact. yes, it has and will hit emerging markets but they should be better equipped to reflate compared to the US and Europe.

Like I said in January, REITs will still be the worst asset to be in, the carnage continues in REITs, dropping by a whopping 21% in February alone.

p/s photo: Anna Tsuchiya

Asset Class Returns As At 30 Jan 2009

It pays to keep a monitor on month to month performance of differing asset classes, especially in the current volatile times, as that will give us a leg up to get the pulse of risk aversion and shifts in investors investing strategy. For the first month of 2009, the best performing asset class was High Yield Bonds (+6.3%). That is extremely interesting. If we looked at the 12 month performance of High Yield Bonds, it is still down 17.5% (which means if we were to take out January's superior performance, High Yield Bonds would have recorded a yearly loss of some -23.8%. HYB got whacked royally in particular over the last 6 months as investors sold down HYB in preference for the safe Treasuries. Investors feared that many HYB corporates are either going to collapse or will have grave difficulty in finding fresh funding, and maybe that business conditions will be so bad that these HYB corporates will find it tough to service even the interest. The fact that buying has re-emerged in HYB in January indicates that there is some investors willing to re-look HYB, and that the bulk of the bad news may have been discounted or may have been more than priced into these HYB. Anyhow you look at it, its a good sign on less risk aversion.

REITs, in particular US REITs continued to be the worst performing asset class as invetsors totally ignore the yields and anticipate that many of the properties should be written down a lot more than what they are in the books. Commercial properties owned by REITs do not get much media attention as not many of them get sold down in the current market place. Even stretched owners with commercial properties will be able to get their banks to extend their grace period in these troubled times. Still, the continued selling in REITs indicate the overwhelming gloom surrounding the real estate arena in the US. Look for some gung-ho investor to start making a public offer for some of these REITs (ala YTL) as an indication of liquidity and confidence flowing back into the industry.

The fact that the only positive performers were all bonds indicate that risk aversion is still high. Stay tuned to developments.