STOCKS
I check most macro, monetary, earnings and valuation indicators once a week. I mentioned quite early this year that we should sell in May and go away. I believe 2014 will be a year of greater volatility for stocks. We could finally see SOME EMERGING MARKET stock indices outperform the west.
My observations this week are:
1. Earnings growth in a number of markets on aggregate are slowing down. This does not bode well for the global recovery. I always believed that from 2000-2007, emerging markets' growth have been driven by the west's debt laden spending spree. Now that the west is slowly deleveraging, emerging markets' biggest engine of growth has stalled. China's poor export data did not surprise me.
2. PE multiples have been stretched precisely because of low interest rates and QE. Once QE ends, PE multiples could fall back to median levels.
3. Europe's stock recovery seems to have sputtered. I would take some profits off the table for Europe. They seem to have entered a deflationary phase and if ECB does not ease further, this dysfunctional family could face another correction.
4. The US remains the sole global power seeing sustainable growth. Earnings growth has moderated but it is still on the high single digits.
5. The CHINESE HANG SENG index (HSCEI) seems to enter the BUY zone now. It is the only stock market firmly in this zone. The yield curve has normalized again. Inflation is falling. Earnings are recovering slowly. Valuations is one of the cheapest among the major economies, save for Russia. On closer inspection, the cyclical sectors like insurance, and SOME industrial companies seem to be of good value. I don't think the Chinese market will rise strongly because the country is still over reliant on the construction sector and any stimulus is likely be small
6. The banking sector in the US and Europe, mining, and technology sectors are still strong buys. Valuations for banks are still extremely cheap as the real estate sector in the US and Europe recovers.
Overall, I don't see a recession until perhaps 2017. So stocks could rise until 2016. However, I expect a lot more volatility from now on, with VIX rising past 15 more regularly. Once interest rates in the west start to rise in 2015, valuations should rate lower, unless earnings growth picks up strongly. It is a BIG IF.
Bottom line: 6-7% capital gains per year for US stocks from now till 2016. Potentially 7-10% for emerging market stocks per annum but it could drop lower before we see the bottom. Cyclicals to outperform other sectors from here on.
BONDS
the US 10 year yield fell to 2.67% recently. So much for the yield curve steepening theory due to tapering. I'm very surprised to see Cheong Kong 5.125% perpetuals rising to 96-97. It is time to take some profit off all the perps without interest rate resets, as well as long dated bonds.
Move to short dated high yield bonds. I still see opportunities in CNH, USD and SGD space. If you still own bond funds with a straddle strategy or majority in investment grade bonds, it's time to redeem.
NZ is on the interest rate tightening cycle. It's really time to take profit off NZD fixed rate bonds. I've been saying this since Jan 2014. Australia will be the next country to hike rates, probably in six months' time. Take profit from your long dated AUD bonds and move to FRNs. The AUDSGD may appreciate because my premise is the mining sector in selective areas, e.g copper , energy is recovering. Coal is still in the dumps.
Caveat: every portfolio is different so you should consult your adviser before making decisions.
I check most macro, monetary, earnings and valuation indicators once a week. I mentioned quite early this year that we should sell in May and go away. I believe 2014 will be a year of greater volatility for stocks. We could finally see SOME EMERGING MARKET stock indices outperform the west.
My observations this week are:
1. Earnings growth in a number of markets on aggregate are slowing down. This does not bode well for the global recovery. I always believed that from 2000-2007, emerging markets' growth have been driven by the west's debt laden spending spree. Now that the west is slowly deleveraging, emerging markets' biggest engine of growth has stalled. China's poor export data did not surprise me.
2. PE multiples have been stretched precisely because of low interest rates and QE. Once QE ends, PE multiples could fall back to median levels.
3. Europe's stock recovery seems to have sputtered. I would take some profits off the table for Europe. They seem to have entered a deflationary phase and if ECB does not ease further, this dysfunctional family could face another correction.
4. The US remains the sole global power seeing sustainable growth. Earnings growth has moderated but it is still on the high single digits.
5. The CHINESE HANG SENG index (HSCEI) seems to enter the BUY zone now. It is the only stock market firmly in this zone. The yield curve has normalized again. Inflation is falling. Earnings are recovering slowly. Valuations is one of the cheapest among the major economies, save for Russia. On closer inspection, the cyclical sectors like insurance, and SOME industrial companies seem to be of good value. I don't think the Chinese market will rise strongly because the country is still over reliant on the construction sector and any stimulus is likely be small
6. The banking sector in the US and Europe, mining, and technology sectors are still strong buys. Valuations for banks are still extremely cheap as the real estate sector in the US and Europe recovers.
Overall, I don't see a recession until perhaps 2017. So stocks could rise until 2016. However, I expect a lot more volatility from now on, with VIX rising past 15 more regularly. Once interest rates in the west start to rise in 2015, valuations should rate lower, unless earnings growth picks up strongly. It is a BIG IF.
Bottom line: 6-7% capital gains per year for US stocks from now till 2016. Potentially 7-10% for emerging market stocks per annum but it could drop lower before we see the bottom. Cyclicals to outperform other sectors from here on.
BONDS
the US 10 year yield fell to 2.67% recently. So much for the yield curve steepening theory due to tapering. I'm very surprised to see Cheong Kong 5.125% perpetuals rising to 96-97. It is time to take some profit off all the perps without interest rate resets, as well as long dated bonds.
Move to short dated high yield bonds. I still see opportunities in CNH, USD and SGD space. If you still own bond funds with a straddle strategy or majority in investment grade bonds, it's time to redeem.
NZ is on the interest rate tightening cycle. It's really time to take profit off NZD fixed rate bonds. I've been saying this since Jan 2014. Australia will be the next country to hike rates, probably in six months' time. Take profit from your long dated AUD bonds and move to FRNs. The AUDSGD may appreciate because my premise is the mining sector in selective areas, e.g copper , energy is recovering. Coal is still in the dumps.
Caveat: every portfolio is different so you should consult your adviser before making decisions.
