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Some Thoughts on Market for the Next 6 Months

For the last 12 months we have witnessed first a huge rebound from pricing in a catastrophic meltdown, to a deep recession, extreme over deleveraging and now modest/sluggish growth.  From a historical valuation perspective, the market is not over valued.  Coming from where it was (Nov to Mar low), we are now back to the “new normal”.  This rally has been characterized by skeptics’ and disbelief, and disciples of Jesse Livermore who sit thru this cyclical bull has been duly rewarded.

Enough has been read about in the market about double dip, liquidity withdrawal etc.  From a macro investments point of view, what should we as investors be looking for so we can better judge central banks’ policy inclinations?

Here are my few cents’ worth:

  1. The market is not frothy, yet. Stay invested but very selectively.  Sectors such as property and other interest rate sensitive will undergo some shakeout.
  2. When we see real economic activity picks up, more funds will be channeled into real economic activities away from the financial markets. This has following implications.

a. The competition from corp for credit with public debt will result in higher govt bonds yield, this is negative for equity and govt bonds
b. The pick up in yield will drive down property prices.
c. Banks will benefit
d. USD will strengthen
e. Equity will correct

Our advice on where to put money:

  1. Continue to overweight china/hk/sg/tw.
  2. Avoid interest rate sensitive stocks (property, utility, reits, telecom services). Especially those with high gearing.
  3. Top 5 Sectors I like: Banks, pharmaceutical, insurance, consumer discretionary, integrated commodity and energy companies.

Your comments are welcome.