Oct 8, 2014

Troubled Times for Asia and Europe. Commodity Prices take a Beating

The month of September saw the economy of the different regions diverge even more significantly. The US economy strengthen and with the prospect of the US central bank ending their QE bond purchase program and a possible earlier than expected rise in the interest rates, the US stock market becomes more volatile than usual. The development from Europe and Asia made investors flock towards USD, causing the USD appreciate dramatically, not seen since the 2007 financial crisis. 

Trouble Brewing in Asia and Europe
The economy in China continues to indicate a slow down and decreased the possibility of hitting the 7.5% growth target. The China government has loosen some of the money supply but this doesn't seem to encourage global investors from moving into the China equity market. The "Occupy Central" movement further discouraged the investors from investing into the Hong Kong stock  market, of which almost 50% of the capitalization are made up of Chinese companies.
A protester (C) raises his umbrellas in front of tear gas which was fired by riot police to disperse protesters blocking the main street to the financial Central district outside the government headquarters in Hong Kong, September 28, 2014.
(Reuters / Tyrone Siu)
The Japanese Yen continues to slide towards a record low as the Japanese central bank made no indication to stop their own monetary loosening  program. The slide in the Japanese Yen creates an additional risk that emerging market currencies might cause an extended sell-off that will lead to further inflation and potential foreign debt crisis.

The economic recovery of the Euro zone hit the brakes again as the German industrial production numbers came out much lower than expected. The European inflation figures came our only a fraction of what the European Central Bank (ECB) considered to be healthy. The Ukraine crisis and the sanctions implemented on Russia created a further drag on the Euro zone. The ECB decided to start their own bond purchase program, leading to a sharp decline in the Euro dollars.

Sharp Fall in Commodities Prices
Gold and Oil prices fell sharply as a result of the rising USD and slowing Chinese growth. Despite troubles in Middle East with the ISIS incursion into Syria and Iraq, the huge surge in oil supply due to new discoveries in oil exploration techniques have helped to diversify geopolitical risk in Middle East. The advancement in Green technology and slowing economies around the world also lead to a slow down in the demand for Oil. 

Portfolio Strategy
The sharp rise in USD has benefited my portfolio significantly due to the big exposure in USD. The portfolio gained despite the sharp fall in global equities thanks to the strong appreciation in USD. That stock market is currently at a junction deciding to go down or up with the bears and bulls battling out. Meanwhile, I will take the opportunity to increase the equity proportion, towards US and Europe equities once I see any opportunity. The US bull market has rallied for almost 6 years and it's time for a major correction to occur. I am still very comfortable with the current allocation even though the potential for returns have been skimped. Even having said that, capital preservation is the most important investment philosophy that every good portfolio manager should focus on.

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