Market Summary for September 2010
September was probably the best month for most equity markets in recent times, resulting in a strong third quarter. Global equity markets were generally higher in 3Q 2010 with markets under our coverage returning between -0.1% and 23.2% (from 30 June 2010 to 30 September 2010, in SGD terms). Both Thailand and Indonesia retained their top spots, returning 23.2% and 15.0% respectively. Australia came in third after finishing at the bottom as of end 2Q 2010. The total return for Australian equity was 14.5%, helped by an 8.2% appreciation of AUD against SGD. Single-country markets generally outperformed regional markets.
Divergence in consensus estimates
We have observed a divergence in consensus estimates. With signs suggesting a global economic slow down, economists have been revising their expectations lower. However, while economic progression on the whole wasn’t impressive, companies on the other hand continue to record better-than-expected profits. This has led to analysts revising earnings estimate higher. As investors turned their focus from weak economic growth to strong corporate earnings, there was a reversal in risk appetite which saw healthy inflows into equities. The bullish trend in equity markets extended into the first week of October and will likely continue or even accelerate should 3Q earnings reporting continue to show net positive surprises.
No widespread value across the board for fixed income
As of end 3Q 2010, we do not see widespread value across the board for fixed income. Emerging market debt turned in an extremely strong quarter with a 5.2% gain, bringing year-to-date returns to 8.2%. Asian bonds were flat in the quarter but nonetheless still managed to gain 5.0% year-to-date. Currency had been a strong driver (or detractor) for bond fund returns. Meanwhile, US Fed’s pledge to continue quantitative easing has hurt the US dollar which resulted in currency losses for non-USD focused investors.
Volatile currency market kept central banks on their toes
The currency market has been extremely volatile this year. The EUR was the first to fall from grace in 1H 2010, depreciating sharply against USD. It soon reversed when Europe recorded a stronger-than-expect rate of growth while US saw its growth being revised lower. With both major currencies showing weakness, other countries such as Japan, Brazil and Korea, saw a relatively rapid appreciation of their currencies. This has hurt their nation’s exporters as well as industry competitiveness, prompting the central bankers to take actions recently in a bid to curb further appreciation of their currency. JPY, BRL and KRW have appreciated 5.9%, 7.0% and 7.2% against the USD respectively in 3Q (from 30 Jun 10 to 30 Sep 10).
Maintain overweight in equities
Corporate earnings have been particularly strong this year and most equity markets are expected to hit record earnings over the next two years, if not by end of 2010. Record earnings are expected to lead stock markets to their all-time highs (refer to Record Earnings Will Lead to All-Time Market Highs). Corporate earnings remain the most important fundamental driver of stock market performance over the long run, and we believe that even if earnings disappoint somewhat in 2011 and 2012, valuations based on 2010’s forecasts are still relatively attractive. We therefore continue to maintain our overweight position in equities for all five recommended portfolios.
|Table 1: Past 6 Months Portfolio Performance
|Rolling 1-year chain-linked performance
|Chain-linked performance since revamp (end Aug 2009)
|Source: iFAST Compilation
Over-aggressive investing did not pay off
The Aggressive portfolio saw its strongest monthly return as it gained 7.2% in September. Being overweight in equities, the aggressive portfolio was the only one among the five not to have any fixed income exposure. As a result, the portfolio returns tend to be more volatile, falling as much as 8.0% when equity markets correct and rebounding as much as 7.2% when market bulls are in control. Over a rolling one-year period, the aggressive portfolio was however the bottom performing portfolio, gaining 4.3% while the top performing portfolio (the Conservative portfolio) gained 9.4%.
Positive returns from all funds
All the funds, both equity and bond funds, were higher in September. While equity funds have led the charge, they did not do so at the expense of bonds. The best performing fund for the month was Henderson Global Technology which gained 9.6%. This was followed by PRU Pan European Fund and Aberdeen Global Emerging Markets which gained 8.4% and 7.8% respectively. For more details of the fund performance with respect to individual portfolios, please refer to the monthly factsheet of respective recommended portfolios.
Changes to our Bond Class Allocation
As we had mentioned earlier, currency remains a strong driver (or detractor) of bond fund returns. We believe that the US dollar is likely to remain volatile over the near term with fundamentals suggesting a longer-term depreciation of the USD against most Asian currencies.
While high yield bonds spreads have been tightening since hitting all time high during the crisis, they are still trading near historical averages. However, it is important to note that absolute yields are relatively lower (given the comparison with multi-year low Treasury yields), suggesting that the bonds may tend to being expensive. Coupled with a lack of currency-hedged high yield products available to investors, we decide to shift our high yield allocation from overweight to neutral. We are also further underweighting our position in global bonds, shifting the allocation into Asian bonds (from underweight to overweight). Table 3 shows our new bond class allocation target while table 2 shows the new allocation breakdown at funds level (changes are listed within the parentheses).
|Table 3: Bond Class Target Allocation (changes)
|Singapore / SGD Bias Bonds
|Emerging Market Debts
|High Yield Bonds
|Source: iFAST Compilation
Start with $20,000
Investors shall be able to follow the target allocation in Table 2 with S$20,000 starting capital. The research team at iFAST will be providing the portfolio review on a monthly basis at the start of each month.
Latest Portfolio factsheets
The portfolios' factsheets are updated on a monthly basis and links for the most up-to-date factsheets are as provided below:
- Conservative Portfolio
- Moderately Conservative Portfolio
- Balanced Portfolio
- Moderately Aggressive Portfolio
- Aggressive Portfolio