Aug 20, 2014

A Small 10% Move into Europe

German Chancellor Angela Merkel arrives at the EU headquarters in Brussels, to discuss whether to tighten some sanctions in response to the intensifying conflict in Ukraine Photo: Getty

I ended my monthly review post for July with this statement,

"The global stock market has fallen 4-10% since the last week of July, with the European markets bearing the brunt of the damage. It is still too early to call for a market correction yet, as the Bulls haven't really given up the strong rally which they have enjoyed for the last 3 years. However, a stray missile from the Russian backed Ukrainian rebels had started the wheels of a possible 10% correction into motion."

The global stock market has rebounded since a week ago and the bulls are looking to regain their trend after being knock down by the Ukraine crisis. This will be the most critical stage of the Bull run as any failure to turn the investors' psychology around to a more positive one, will probably lead to a lost of control by the Bulls.

From the point of the global stock market, the European markets have fallen behind in performance and is lagging the US and Emerging Markets by more than 5% in difference. The slowing growth from the more developed European nations and the threat of increasing economic wars with Russia, raised the fear that the European recovery story will be derailed. This sense of fear is actually very good news for investors as the various European governments and central banks will have to do more to ensure that the recovery is not derailed. Stock markets love it when governments and central banks pump massive amount of liquidity into the system.

Given the current situation whereby you are damned if you do not take advantage of this correction and you will also be damned if you take advantage and only to realize that this small correction is just the beginning of a market crash. A true dilemma...

My strategy is simple, to allocate a small percentage to the region which has the most attractive valuation and possible money printing which is Europe.

In short, I am moving 10% of the short term bond allocation to Europe and I will have a 55% allocation into bonds and 45% into equities. This allocation allows us to react flexibly as we go into the months of September and October. These two months are afterall famous for stock market crashes and I am still pretty paranoid about the over valued US stock market and the property bubble over at China. 

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