Sep 11, 2014

The Bull Strikes Back! Implications of recent Currency Movements, Global Trade and Household Allocation

The recent "correction" lasted a mere 2 weeks, before the Bulls rushed back into the market to fill the gap almost immediately. Although I managed to take advantage of the correction and allocated a small portion into Europe, the opportunity is lost before I can fully exploit it. However, 2 recent indicators are pointing towards a more sustained correction in the near future.

Sharp Rise in USD

The immediate, most significant indicator is the USD/SGD trend. The USD is often seen as a safe haven in times of global turmoil and there is often a strong accumulation of USD right before any major correction occur. The USD has risen strongly against SGD for the past 1 month from the lows in Aug when the global stock market hit its most exuberant state. The recent sharp spike in USD indicates a strong accumulation of USD by the Big Boys. Something is certainly brewing. Our significant portfolio position in USD money market funds benefit greatly from the recent spike.
Sharp Rise in Pop & Mum's Exposure to Equity
It has been a common understanding that the average man on the streets are often the last people to get into the stock market. By the time they have devoted a large chunk of their wealth into the stock market, it is often a good indicator for the smart investors to get out. The chart below shows the proportion of the asset allocation of a typical retail investor and it is interesting to note, that they always get their asset allocation wrong. They allocate too much bond when equities were about to run and allocate too much into equities when the equities market get too expensive. The recent trend indicates that the allocation into equity has pushed it close to the historical dangerous level above 60%. I have no doubt that the US Bull market has a few more years left, but I will become more and more cautious as the years pass. 

Decoupling of US from Asia's Manufacturing Industry
The last chart is an interesting one. It shows a rise in US manufacturing index, and strengthening US economy, without a corresponding rise in the manufacturing in Asia. Traditionally, US was the biggest importer of Asia's goods and services but the chart below indicates that US is no longer exporting as much from Asia as compared to the pre-financial crisis years. Even China's exports, which used to be reliant on US, have lagged behind greatly. This indicates a movement of manufacturing jobs back to the US itself and Asia's manufacturing cost has risen so much that it now makes more sense for the Americans to manufacture their own goods. This also indicates that the prosperity of the smaller Asian nations now rest strongly on the Chinese domestic economy. The economic health of the smaller Asian nations now have their faith tied more closely to the fate of China and this time round, there will be little help from the Americans to allow Asian countries to export their way out of any recession.

Portfolio Strategy

The recent correction is simply too fast for us to really take advantage of and the market valuations remains on the "heaty" side. I will want to observe the outcome of the sharp rise in USD and the highly probable correction that will follow. Let's hope that the cursed period of September and October, will really scare the Bulls into retreating back into their pens and allow us to pick up some more reasonably priced stocks.

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