Nov 17, 2014

Economic Feeding Time for Bunnies

For the past 8 months, I have been erring on the side of caution as I feel that there is quite a number of risks out there that will potentially derail the stock market. Some of the risks are still around but one of the biggest risk to the global market has been somewhat deflated, which makes it safe for this scared bunny rabbit to poke his head out to scavenge for some food.

The Biggest Risk: US Interest Rates

The biggest risk that could potentially send the global stock market plunging again is the rise of interest rates. I have been discussing the potential fallout of rising interest rates in the past few installment of my newsletter and I am sure you should be familiar with all my "Doomsday" story by now. For those who are uninitiated, just know that the biggest stock market crashes in history are preceded by interest rates hikes.

The pressure for the US Central Bank to rise interest rates has somewhat abated.. thanks to falling oil and commodity prices, strengthening USD and low inflation numbers. Central Bank usually raise interest rates when there is a potential rise in inflation. China's slowing economy, deflation in Europe and Japan, resulted in America importing deflation and will continue to be importing deflation in months to come. With low inflation, a stable and low interest rate environment, and improving economic climate in US, all the recipe for a US stock market rally is there... at least until April when the world expect the US Central Bank to give a clear indicator when they will start rising interest rates.

Other Risks Still Around

The biggest other risk is the potential collapse of the Chinese property market and the economy. The recent numbers from China are all screaming towards a slow-down and the Chinese government has increased support for the faltering property sector. It will still remains to be seen if the Chinese government is able to stabilize the situation. In any case, the Chinese capital markets will be distracted by the Hong Kong - China stock market link, which will result in a quick rush of hot money into the Chinese market. The deteriorating economic condition in China will probably be covered up by the rush of easy money for the next few months. However, as a precaution, I will still stay away from Asia as a whole.
Portfolio Before
Portfolio After
 Why US Mid-Small Caps

At this moment in time, the US stock market is in a sweet spot, but I feel that the Blue Chips stock is still expensive at the moment. However, US Mid and Small capitalization stock has been under performing the Big Boys for the entire year and their returns are 10% lower than SnP500 index. I could have allocate more funds into Europe, but a falling Euro dollar, which will persist in the next few months, will erode the potential returns from any potential stimulant by the Euro Central Bank, so US Mid and Small cap stock is the way to go!    

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