It has been a very interesting year for the financial markets so far…
The market has tumbled quite a bit since the beginning of the year and financial and energy companies are the main losers.
Warren Buffet’s famous quotation is, “Be fearful when others are greedy and greedy when others are fearful.” Even though the current climate is quite fearful, I would personally continue to be fearful rather than greedy in the coming months.
Financials are getting sold off as the street is expecting loan books to deteriorate and non-performing loans to increase and energy companies are being sold off since the investors do not believe that the juicy profits will be there anymore for an extended period as all the commodities across the board have been sold off sharply since last year.
The market always likes to overreact to any news.
When there is a bull market, we overbuy and when there is a bear market, we stay overcautious. I think we are entering again another oversold era, but it may continue to stay as it is before getting any worse. (Do not forget that markets can stay irrational for an extend period of time.)
It is not a difficult prediction to make that the loan books are likely to deteriorate as the exposure to energy and other challenging sectors will likely bring some defaults in the near future.
It is almost impossible to predict the price of oil as the price has been affected by many factors rather than the simple supply and demand mechanism, but the longer the oil price along with other commodity prices continue to stay low, we will continue to experience more defaults. Due to this simple fact, I would rather try to get away from energy company bonds as much as possible, as well as heavily commodity dependent countries such as Venezuela.
FED hiked the interest rates last December; many analysts started expecting three to four hikes in 2016. I don’t see that this is now happening. I would look for a one rate hike if we are lucky this year. Any aggressive stance from the Fed may shake the markets in a much uglier way.
The 10-year US interest tumbled as low as 165 basis points, which is clearly a sign that the money is again flowing into “safe havens”.
In 2015, many analysts were recommending getting into equities as they were seeing more value in equity markets than in the bond market. Those analysts were again wrong because since the turbulence start happening in June 2015, the bond market has performed relatively well compared with other asset classes.
We are living in such a different era that nowadays many banks are charging their clients to deposit EUR, JPY and CHF with them.
In the debt market, the EM debt crisis is approaching closer and closer as the currencies of these countries depreciated along with the revenues and it will be real challenge to produce USD for the repayment of the interest and the principal. Investing in quality names in the debt market will continue to be the challenge and one should not go simply for a high yield.
USD is very likely to continue to be a main beneficiary as with the last few years.
The spotlight is on “China”, but China is relatively doing better than its peers and I think the spotlight is again focusing on the wrong place.
Beside all these challenges, Syria is likely to teach an important lesson to human history. When there is a war, what happens to financial markets is not a difficult question to answer. Maybe gold is returning to its shiny days because of that?
I would keep a large portion of my assets in cash along with buying some (5–10%) gold at these levels. I would actively seek an entry point for blue chip companies with a target holding period of three to five years. The lowest point the market hit was on 5 March 2009, and I would wait for that kind of a day carefully. In addition, high quality debt papers that can pay continuously 4–5% are still not a bad asset to hold for 20–25% of your portfolio.
This is a period where you should protect your wealth rather than making a risky bet.
I will be travelling in Kuwait and Istanbul this week before coming back to Singapore. Have a wonderful week ahead!
All the best from Singapore.