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2Q 2013 Market Review

“Don’t jump ship now. We may have reached an inflection point of low Treasury, mortgage and corporate yields in late April, but this is overdone. Will there be smooth sailing tomorrow? “Red sky at night, sailors delight?” Hardly. Will you be able to replicate annualized returns in bonds and stocks for the past 20–30 years? Hardly. Expect 3–5% for both. But sailors, don’t panic.”  Bill Gross – Bond King.

In the last Market Outlook 2013, we anticipated volatilities in the bond market and according to Financial Times, the sell-off of bonds in May and June was probably the worst since 1994 – a record of $1.21 trillion poured into bond funds from 2009 through 2012, however, the recent bond funds outflows shatter the previous record of $41.8 billion in October 2008 with a net outflow of $52.8 billion from traditional bond funds and another $8.9 billion from exchange traded bond funds.  Foreign bond fund ETF outflows hit $1.4 billion in May – 14.4% of the asset.  The sell-off was so bad that at the height of week of June 21 turbulence, Citigroup suspended redemption orders on ETFs.  According to Lipper, four-fifths of 5,528 US bond funds tracked lost money.

Since May 2, the yield on the benchmark 10-year Treasury hit 1.63% and closed at 2.59% on Jun 25.  As for the junk bond, the high yield reached 4.95% in early May and jumped above 7% on Jun 26.  Due to the surge in yield, quant hedge fund such as MAN AHL Trend was badly hit as well.  Here are the performance of various bond mutual funds, quant hedge fund vs bond ETFs since May 2 to Jun 26:














Source: iFast Corporation Pte Ltd & TrimTabs Investment Research

On a longer time horizon, here is the performance of selected bond funds and hedge fund vs selected equity indices:

Source:  iFast Corporation Pte Ltd

What conclusion may we draw from the above?

  1. On developed market vs developing market – decoupling effect is seen.  In fact, we observed that MSCI Europe and S&P 500 year-to-date is still positive; whereas MSCI Asia Ex Japan, MSCI Emerging Market generated negative return of 9.15% and 13.01% respectively.
  2. On Emerging Market – Sell-off is selective.  On currency front, countries with big current account deficits such as South Africa, Turkey, Brazil, India etc are badly affected; on the other hand, Asian countries such as South Korea, China with their huge foreign exchange reserves have generally fared well.  As for emerging equities, commodity-producing emerging markets such as Brazil is down more than 20% due to weaker demand from China.  Brazilian stocks have fallen 53% in 2 years!
  3. On bond mutual fund vs ETF, despite ETF being more cost effective, mutual funds had outperformed ETFs for instance – Barclays High Yield ETF fell by 5.6% return, but Allianz US High Yield S$ Hedged fell by 2.93% and Aviva Global High Yield lost 4.86%; iShares JPMorgan USD Emerging Market Bonds lost 12.6%, however, PIMCO Emerging Market Bond S$ hedged lost only 11.58%, its unhedged class have incurred even lesser lost (8.61%) as the US dollar had strengthened against the S$ during the said period…
  4. On Singapore Bond – also suffered a loss of 6.01% from May 2 to Jun 24 because “Singapore Bonds slavishly track (US) Treasury yield movements, if the 10-year yield in the US is going up by about 30 basis points, then it’ll be 20 basis points on the Singapore 10-year.”

Regardless, we see this could be a buying opportunity.  Why?  Here are the reasons:

  1. Japan’s largest pension fund, also the world’s largest public pension fund – Government Pension Investment Fund (GPIF) with total assets of $1.17tn or 56% of Japanese’s pension assets will reshuffle its allocation as follows: Japanese Bonds to reduce from 67% to 60%; Japanese stocks to increase from 11% to 12%; Foreign stocks to increase from 9% to 12%; Foreign bonds to increase from 8% to 11%.
  2. The withdrawal of quantitative easing (QE) will be progressively: first probably in Q4 2013, the monthly volume of QE will be reduced from US$ 85 Billion to US$50 Billion; next, QE programme would probably end in Q2 2014; finally, the Fed would have to decide to reduce its balance sheet by  withdrawing liquidity possibly in 2015/16.  In short, the exit for QE will be “managed” in such a way that it would not create a big ‘chaos’ in the market.
  3. The process of deleveraging is largely over in the US and Japan and should progress slowly in Europe.  Central banks will only unwind QE measures slowly and, assuming that “market shock” risk is reduced, market setbacks should be regarded as buying opportunities.

Broadly speaking, we see value in selected bond funds because “This sell-off has been about liquidity [QE] and not fundamentals. The Fed is still accommodative and inflation is low, a good backdrop for credit and high yield.” and the Bond Guru, Gundlach, Chief Investment Officer of Los Angeles-based DoubleLine put it “I do believe July will not be the same type of month.  There’s profits to be made in the bond market between now and the end of the year.”

As for the equities, accordingly, by the end of 2013-06-21, emerging market equities looked oversold.  Using the ubiquitous MSCI indices and judging by price-to-book ratios, emerging markets are selling at their deepest discount to developed world stocks since September 2005 – when Katrina was in the headlines – developed equities trade for almost twice (1.89 times book value); the emerging world trades at 1.39 times book.  Further, the iShares MSCI EM ETF is trading at its biggest discount to net asset value since November 2011 and a 21% of the outstanding shares traded in the last 3 days of the week is “a classic panic”.   But this time is different – since September 2005, one of the key factors attributed to EM outperformance is the remarkable China growth story has changed: China is almost certain not to grow as fast as it was before.  As Warren Buffett says, “Only when the tide goes out do you discover who’s been swimming naked” – this could be the time to be more cautious on the choice of equities market to be in, as we don’t want to be in countries that would be found “naked as the tide goes out”.


  1. Financial Times, Sam Jones, 2013-06-05, “Quant Hedge Funds Hit by US Bonds Sell-Off”
  2. Financial Times, Ben McLanahan, 2013-06-07, “Japan’s Vast Pension Fund to Buy More Stocks”
  3., Kenneth Foo, 2013-06-10, “Singapore Bonds Decline as 10-year Yields climb to 22-month High”
  4. Financial Times, Robin Wigglesworth & Vivianne Rodrigues, 2013-06-11, “Emerging Market Assets Suffer in Fierce Sell-Off”
  5. Financial Times, Robert Parker, 2013-06-11, “Investors Should Buy on Market Setbacks”
  6. Financial Times, Stefan Wagstyl, 2013-06-12, “Investors Pick Good Bets from Bad in EM Sell-off”
  7. Financial Times, John Authers, 2013-06-23, “Brave Bargain Hunters Should Look to Emerging Markets”
  8. USA Today, John Waggoner, 2013-06-26, “Investor Yank Record $61.7B bond funds in June”
  9. Financial Times, Michael Mackenzie & Vivianne Rodrigues, 2013-06-26, “US Rate Volatility Sparks Surge in Junk-Rated Debt Yields”
  10. Financial Times, Tracy Alloway & Arash Massoudi, 2013-06-27, “ETFs under Scrutiny in Market Turbulence”