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Market Review 2011 Q3

Here to summarize the market performance for 3Q 2011.  The table below illustrates the performance from 2011-01-03 to 2011-09-30 of various indices and funds by asset classes namely Bond, Equities (regional and single country), Commodities and Alternative Investment such as managed futures.

PerformanceTable3Q2011

From the above, we may draw the following observations with period from 2011-01-03 to 2011-09-30:

  1. All equities indices, with the exception of US’s S&P 500 and MSCI All Word, are in bear territory.
  2. The top performing funds are:
    a. Superfund Green A Class Gold (managed futures denoted in Gold) with 25.35% gain! (For accredited investor only)
    b. Alliquot Gold Bullion Inc A (Fund investing into physical gold) with 20.38% gain! (For accredited investor only)
    c. Legg Mason WA Singapore Bond with 6.64% gain!
    d. Schroder AS Gold & Prec Metals A (Futures and Equities fund) with 3.9% gain!
  3. Bond funds such FTIF-Templeton Global Total Return has taken a hit.  The primary reason for the loss is due to the sudden ‘rush’ to ‘safe haven’ dollar as we can see from the chart below, it took only days for the US$ vs S$ from the low of 1.20 to 1.31, approximately 10% loss!

US dollarvsSngDollar 2011

Indeed, Asian currencies experienced their biggest monthly loss since December 1997, the year of Asian Financial Crisis.  In fact all 25 of the largest emerging market currencies dipped against the dollar in September and many by double digits.

However, we believe the ‘rebound’ of US dollar will not last.  US$ is ‘seen’ to be 'safe haven' because the traditional 'safe havens' like Japanese Yen and Swiss Franc intervened to halt their appreciation; other nations with safe haven characteristics do not have sufficient liquidity to absorb 'safe-haven' flows.  Further, with huge amount of debt, it would not be in the interest for US to have a strong dollar position.

On equities front, despite the recent sell-off, in particular the emerging markets such as Asia and Latin America, their fundamentals remain firm.  To be precise on the sell-off in emerging markets, according to EPFR Global, almost $6bn was pulled out of emerging market in 5 days from 2011-09-22 to 2011-09-28.  It is the largest withdrawal since 2004.  Regardless, emerging markets, in particular Asia governments and companies have re-emerged themselves after the Asian Financial Crisis in 1997 with solid balance sheet. 

As such, we are seeing opportunities in selected markets such as China.  MSCI China index now stands at 7.8X after the recent sell off in Chinese stocks due to fear that Variable Interest Entities (VIE) might be ‘scrapped’.  VIE is vehicle enabling the private Chinese companies such as Baidu, Sina to list in overseas stock market such as US stock exchange.  The historical PE is 12X.  Likewise, the recent sell off has also pushed valuations in the S&P 500 index 25% below the average level from the last nine recessions, even as profit estimates fall.

The chart below illustrates the performance among various asset classes on selected indices and funds:

SelectedFundsPerfomranceQ3 2011

On the positive note, it is worth noting that:

  1. Japan's public pension fund, the Government Pension Investment Fund, which oversees US$1.5 Trillion, the world's largest, will start investing in emerging market stocks by end of the year as it diversifies assets to maintain stable returns.
  2. Investors who shunned emerging market stocks a year ago is buying after valuations fell to the lowest levels since March 2009.