Investment Decisions to Wait Until After the US Elections

The stock market bull trend is likely to continue at least for the next 4 months, from early July to November, even stretching till December. But beyond that, the global economy appears very hazy. Only the US is firing. Europe, China and India are slowing down. I fear that even though stocks are cheap, earnings will be revised downwards and valuations will then not appear as cheap.

In an environment where stocks are cheap (at least for now!), interest rates are zero, economy is sluggish, what do people chuck their money into? Hard assets that pay higher than fixed deposit yields of course! Dividend paying stocks, residential and commercial properties, high yield bonds are the order of the day! Yields are being pushed to levels that one wouldn't normally accept, because prices have risen faster than the earnings / rental income.

Even though I am cautiously optimistic for the next 4 months, my asset allocation has remained extremely cautious. I have added very little risk positions. Instead, I am mainly into high yield bonds and bond funds. Some bond funds such as the AllianceBernstein American Income Portfolio pays 4.9% per annum, and the AllianceBernstein Global High Yield pays 6.5%. These liquid investments enable me to keep my cash working harder while waiting for opportunities to strike.

The chart above shows that developer sales dominate over resale. Going forward, it is going to intensify for the next 4 years because the supply will be even more drastic. HDB BTO's record supply will bring down resale flat values. This will in turn bring down OCR prices, starting from shoebox units far from the CCR. What may follow is the RCR and finally the CCR. This will however unravel very slowly, over the next 3 years and nobody, including me is expecting a crash, although a 20% drop in HDB resale price, 30% drop in OCR prices, 20% drop in RCR and 10% drop in CCR is possible in the next 3 years. 

If you are intending to buy stocks, do it cautiously and cap your exposure to less than 50% of your investment portfolio. But if you are intending to buy a property, my advice is to wait till after the US elections in Nov 2012. The first year of the US election (2013) is usually the worst year in terms of investments. Remember 1997 (Asian Crisis) and 2001 (911). However, 2009 (the year after GFC) presented great opportunities, 2005 was a continuation of the bull run. It is not a fool-proof way to time your investments, but this time, it looks pretty tough with the austerity measures in Europe and Fiscal Cliff in the US.

I intend to buy a property every year. This is called "Dollar Cost Averaging" into real estate. I can structure it in such a way that in uncertain times like these, I could share it with my family members, thereby reducing my exposure and yet have delta on the real estate. During times of crisis I could buy several. The next 3 years will truly be exciting. As Marc Faber said, "there could be massive wealth transfer". I assume it means people who bought overvalued assets will suffer large losses, while people who bought cheaply will survive and flourish. I always told myself, "If you buy anything cheap enough, you will make money."

Major Economies Are Heading South... But Stocks Are Still Rising

I've written a blog back on 17 June 2012 saying that I believe stock markets worldwide are in the process of stabilising. Below is a hyperlink to the blog entry.

http://musingsonwallstreet.blogspot.sg/2012/06/stock-markets-worldwide-are-stabilising.html

My stand then was that the major economies are likely to deteriorate further, but technically, stocks are showing signs of moving up simply due to the massive liquidity. ECB policy makers reduced the main refinancing rate on July 5 to a record low of 0.75 percent and cut the deposit rate to zero to stimulate credit supply and lending. As a result, all risk assets shot through the roof as cheap money looked for yields. Depositors are forced to buy properties to preserve their wealth, happy with the measly 3% gross rental yields. Some ventured into dividend paying stocks as for the first time since 2008, dividend yields of stocks in Singapore, the US are well above their respective 10 year government bond yields.


Since 17 June 2012, not every stock market has risen though... The MSCI World has reached May 2011's high. Since 17 June, it has risen by 3.7% (see chart 1)

Chart 1: MSCI World

The US real estate sector is doing extremely well. DRN, or Direxion 3x US Real Estate ETF has also regained the high that it reached in March 2012, but not the highs reached in July 2011. Nevertheless, it rose by 12.2% since 17 June 2012. DRN's rise was a reflection of US' recovering real estate market (Chart 2).

Chart 2: Direxion Daily Real Estate Bull 3x Shares ETF

Due to the heat wave, crop yields have fallen. Monsanto has risen by 4.7% since 17 June 2012.

Chart 3: Monsanto

However, if you think this is a start of a prolonged bull run. Think again. The real economy has turned south again. The wobbly rebound of the OECD Composite Leading Indicators of the two fastest and potentially the largest economies in the world; China and India, has alarmingly contracted! The Euro area has also contracted. Only the US is holding up.

The scary thing is that the Eurozone and the US have almost run out of monetary options. Their fiscal ammunition is also limited given their crippling debt levels. Given the poor economic outlook, I believe that even if there is a rally of stocks, even if there is another Quantitative Easing, will be weak. Quantitative Easing does not boost demand. It merely flushes the world with liquidity, which in turn drives up asset prices. Only rich asset owners benefit and salaried workers suffer. At the end of the day, it pushes up inflation as housing costs escalate beyond the reaches of the first time buyers.