Wednesday, September 19, 2012

Follow the Smart Money - My Investment Thesis Today

I have been asked way too often these days on what's my investment thesis and where the smart money is heading to. 

To answer that, the simplest question to do is to Ask ourselves what sectors are hot today? What sectors have been shaped by news that have constantly grabbed the headlines. Take a look at a YTD chart of the different key sectors on the Singapore exchange (not limited to these sectors though), and it will be clear that Real Estate, Oil & Gas and Financial sectors are outperforming the other sectors. Yes, with a 8 month view of the market, this is what the market has been reacting to. Fundamentally, we ask ourselves also if such trend is validated. In fact, these 3 industries are key to Singapore's economy. The economic restructuring has seen us, over the last 2 decades, move away from over reliance on manufacturing and pure export oriented country. We have learnt our lessons well as a country to avoid the 1997 crisis but have you as an investor made the right call with our simplest state of economy?

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We can take a look at another chart detailing the last 2 months before the turn of the year and 2-3 months after the turn of the year, which happened to be the start of a mega New Year rally. In fact, on closer inspection, Basic Materials (metal, coal) and the Maritime sectors seemed to have been badly battered and then vividly revived. Which draws me to another point: Volatility. Ride it out, what do you get? (See the chart above). After 1 full year, eliminating temporal volatility, in fact, these 2 sectors are the most volatile of late and price swings are huge, as with their 'possible profits'. It is your take if you decide to hang on to this risk returns balance. 

Now, consider the recent rally (chart below), that I am treating to have started since June albeit secretly until the release of plenty of quantitative and monetary stimulus measures from major economies (China, Europe, US and latest today, Japan with its central bank). It is the same old sectors in Basic Materials and Maritime absorbing the volatility but this time in divergence. Basic Materials have been doing tremendously well, helped on by the correlation between China's stimulus package and demand for steel and coal mainly. Maritime has however, gone way too oversold (unnecessarily in my opinion) this time round. But that is the name of the volatility game. You win big or lose big.

What has been performing steadily upwards are still Real Estate, Oil & Gas and Financials. Of course, if you are plotting a long-period portfolio, it is very obvious what needs to be in your portfolio as mainstays. This will allow a steady appreciation in time to come with balanced risks and volatility. Build a core around it and then if you are still cash-rich and ready for more risks, get in to the more volatile industries and make a decent bet. In this case today, the bet is also obvious - Maritime, given its pretty oversold nature. Don't take my word for granted here though, nothing is constant. Very obviously, you know what you should be doing.


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