Market Summary for January 2010
Stock markets started the year in a turbulent mood. While initially extending gains from last year’s rally, they soon corrected heavily as investors reacted negatively to market happenings. As investors’ sentiments took a hit, we witnessed a flight to safety phenomena as safer assets gained at the expense of riskier ones. Amidst the slide in risky assets especially equities, the conservative portfolio weathered the downturn best, falling only 0.2% while the aggressive portfolio took the greatest hit, falling 5.8% (Table 1).

Monetary Tightening in China
The first sign of tremor took place when China unexpectedly announced a hike of 50 basis points in the required reserve ratio of banks. This raises the existing level of required reserve ratios of banks from 15.5% to 16.0%, removing about 300 million yuan of liquidity from China’s economy. Investors are concerned that this sudden tightening came prematurely and will impact the outlook of China’s economy, hence triggering a sell-off as investors took profit after last year marvelous rally. Our previous article “China’s Faster-than-expected Recovery Leads to an Unexpected Rate Hike!” offers a more in-depth analysis and outlook on China’s tightening policy.

Proposed Regulatory Reforms for US Financials
On an uncoordinated move, US president Obama proposed plans to reform the financial industry, sending shivers down investors’ spine, re-igniting fears among investors while they fought to wane off the aftershock first brought upon by China’s tightening policy. The US government intends to implement a “Financial Crisis Responsibility Fee” which will be levied on the largest banks with assets larger than US$50 billion. The tax is targeted at recovering the anticipated cost of the TARP programme which is currently estimated at US$117 billion. On top of that, the Obama administration further announced a proposal which will see a clampdown on proprietary trading by commercial banks. The proposal aims at reducing excessive trading that is believed to result in excess market volatility. It also aims to limit the size of banks so as to prevent the creation of “too big to fail” institutions. However, there is no concise plan till date in explaining how the regulators intend to proceed with the reforms. In the article “Increased regulation for US banks?” we dwell deeper into the changes in regulations proposed, its implication to the financial institutions in US and provide our take on the potential developments moving ahead.

Global Equities fell while US Treasuries gained
The chain of market happenings did not go down well with investors and steep corrections took place in major stock markets. Global equity fell 2.9% in January 2010. Bad news for equities market turned out to be good news for investors of safer bonds. US Treasuries as represented by iBoxx USD Treasuries Total Return Index gained 1.37%. Yields on 2 year UST and 10 year UST fell 22 bps and 19 bps respectively. (All data are as at 27 Jan 10 in USD terms). A notable credit event that took place was Japan’s credit outlook was cut to negative by S&P. S&P cited diminished “flexibility” to cope with the nation’s swelling debt load as the reason for the cut.

Maintain overweight in equities
With the strong run last year, this correction, as argued by the bears, is deemed overdue. Despite the sell-down, there is a lack of substantial negative developments that suggest a return of the bears. Therefore we believe this correction to be temporary and the market will eventually pick up once again and continue its upward trend. As such, we maintain our overweight position in equities positioning for all five recommended portfolios.

Conservative Portfolio Best Performer in Jan 10
While December 2009 rewarded risk takers, the same cannot be said for January 2010. Most of gains made by the 5 portfolios were taken back by the market swiftly during the last 2 weeks of January 2010. The best performing portfolio for January 2010 goes to the “Conservative” portfolio. By holding majority of its assets in bonds (particularly relatively safer bonds such as Singapore fixed income and a global bond fund currently focused on investment grade corporate bonds), the portfolio managed to avert most of the losses brought about by the equity class. In contrast, the Aggressive portfolio was worst hit as it declined by 5.8% in January.

Global Emerging Markets Debt Best Performer in Jan 10
Among the investments within the portfolios, global emerging markets debt did particularly well in January as we saw UOB United Glb Emerging Mkts Portfolios S$ returning 1.43%, averting part of the losses faced by equities funds. On the other hand, the supplementary portion of both “Moderately Aggressive” and “Aggressive” portfolios performed the worst, particularly that of DWS China Eqty Fund CL A SGD which fell by 10.19%. The tech sector was also heavily hit as Henderson Global Technology fell by 7.14%. For more details of the funds performance with respect to individual portfolios, please refer to the monthly factsheet of respective recommended portfolios.

Start with $20,000
Investors would be able to follow the target allocation in Table 2 with a S$20,000 starting capital. The research team at Fundsupermart.com will be providing the portfolio review on a monthly basis at the start of the month.