Market Summary for december 2011
In December, global stock markets around the world around the world took a breather from what has been an extremely hectic year. Following the Greater China's heavy sell-off in November, the region clawed back some of the losses, posting returns of 3.6%, 3.7% and 3.7% respectively for Hong Kong, Taiwan and China. Amongst the best markets under our coverage for December were the Great China region as well as Malaysia and Indonesia which posted returns of 5.4% and 3.5% respectively. Global Emerging Markets, led by Russia and India, led the way for the losers of the month. The two constituents of the BRIC connotation posted losses of -9.3% and -4.6%. Amongst the developed markets, only Europe posted losses (-0.8%) as the US and Japan returned investors 2.0% each for the month. [All returns are in SGD terms]

us: Economic data lookin' good
The US Housing sector continued its path of recovery (part 1, part 2) as both housing starts as well as building permits came in better expected. Housing starts rose to 685,000 in November from a downward revised 627,000 in October, easily steaming pass expectations of a 635,000 figure. Building permits similarly blew past consensus estimates of a 635,000 figure to register 681,000 permits issued on the back of a downward revised 644,000 number in October. On a month-on-month basis, housing starts and building permits grew 9.3% and 5.7% respectively, surpassing estimates of a 1.1% and -1.4% growth rate respectively.

3Q 2011 GDP was revised downwards from an initial reading of 2.0% to 1.8% on a quarter-on-quarter basis, as hefty revisions were made to the health services sector. With this backdrop, the markets warmly welcomed data showing Initial Jobless claims fell more than expected despite an upwards revised 368,000 reading for the previous week. Initial Jobless claims as of 17 Dec 2011 was recorded as 364,000, a healthy 16,000 short of consensus estimates. Durable Goods Orders added an additional rosy tint to investors' lenses. Orders for durable goods rose 3.8% in November following an upward revised 0% rate in October, predominantly due to Boeing receiving orders believed to be numbering approximately 96 new orders. Removing transportation goods, durable goods orders rose by 0.3% in November following a 1.5% growth rate in October.

The Conference Board Consumer Sentiment index spiked to 64.5 in December 2011, up from a revised 55.2 in November and marked the highest level since April. The reading was also stronger than the 59.0 reading expected by the consensus. The survey highlighted strength in income expectations, with optimists outnumbering pessimists, and the percentage of respondents indicating that jobs are difficult to obtain fell to 41.8%, the lowest level since the economic recovery began. Our initial expectations were for corporate investment to moderate in 2011 with consumers picking up the slack, but a potent mix of high energy prices, a weak job market, and a languishing domestic housing market has hurt consumption this year. Correspondingly, consumer sentiment has remained relatively muted in the recent economic recovery, remaining at levels consistent with past recessions. Despite confidence surveys having demonstrated low inclinations for consumers to spend, retail sales have been strong (with or without automobile sales), and with continued signs of recovery in both the housing and labour market, we are likely to see a strengthening of consumer spending going into 2012.

europe: back door quantitative easing?
The EU summit saw some breakthrough as politicians (with the exception of the UK) agreed on deeper integration in the Eurozone, but the drafting of a new treaty will likely be a long-drawn process. While the EU summit developments were generally a step in the right direction (towards greater fiscal integration within the Eurozone), investors were troubled by the ECB’s reluctance to play a more significant role in the crisis. Even as the ECB cut its main refinancing rate by 25bps to 1% (bringing the rate back to where it was at the beginning of 2011), president Mario Draghi made it clear that the ECB – which has been a “reluctant” buyer of bonds so far in the crisis - would not ramp up purchases of European government bonds. Nevertheless, the central bank announced measures to improve liquidity by providing credit to banks with a 36-month maturity, up from a maximum of a year previously, while the bank reserve ratio (proportion of the bank’s reserve base it must hold in reserves with the ECB) was also reduced from 2% to 1%. In addition, lower-rated mortgages and bank loans will now be accepted as collateral, which should help soothe the credit strain on European banks.

The ECB's unlimited 3 year loan program has thus far proven to be a great success with over 532 banks taking approximately EUR 490 billion in loans, easily beating estimates in the EUR 300 billion range. The funding program should aid the finances of banks, ease the credit crunch and liquidity crisis in the financial sector, and perhaps even partially bring down the high yields of European Sovereign debt. With "appropriate collateral" more than likely to include sovereign debt of the likes of Italy and Spain, it is plausible that banks could purchase sovereign debt off the open market, deposit the purchased debt with the ECB and gain fuss-free loans, leading to lower yields on the sovereigns. However, this will require them to increase their leverage and thus further recapitalise themselves, something which the European Banking Authority has forced many banks to undertake by June 2012. While the ECB has resisted the idea of printing money, the current loan program could be interpreted as the ECB executing both Quantitative and Qualitative Easing by expanding the riskier and more illiquid composition of its balance sheet as well as increasing the composition of assets it deems as "appropriate collateral".

Asia ex japan - A month of changes

Latest data out of China suggests that the economy is weakening, paving the way for monetary policy to turn supportive. New loans fell to 562.2 billion RMB in November, declining from the 586.8 billion RMB seen in October, while M2 money supply growth continued to moderate for the fifth consecutive month to 12.7% year-on-year, the lowest growth seen in over 10 years. Foreign direct investments (FDI) saw its first decline since 2009, dropping by -9.8% from a year earlier in November, while the HSBC flash manufacturing PMI remained below 50 in December, suggesting that manufacturing contracted for a second consecutive month. Over in Hong Kong, exports growth in November slowed to a 2% growth rate on a year-on-year basis. Although a slowdown from the surprising 11.5% year-on-year growth seen in October was expected, the figure nonetheless disappointed markets which expected a 3.9% growth in exports. While the export-led economy as a whole has been hit by a slowdown in the global economy this year, Hong Kong’s retail sector has been relatively resilient.

In Taiwan, weak performance in the Taiwan Stock Exchange Weighted Index prompted the government to intervene in the markets in the week ended 23 December 2011. On 21 December, the government announced that it will support equity markets by purchasing equities with its NT$500 billion National Stabilisation Fund. This led the index to post its biggest daily gain in more than two years, recording a 4.6% gain on 21 December 2011, outperforming all markets in our coverage ending the week as the best performing equity market.

The South Korean equity market plunged 3.4% to 1776.9 on 19 December 2011 after the death of North Korean leader Kim Jong Il was announced. It was the largest decline in five weeks, reflecting jittery market conditions given the worries about the power struggle or the rising instability on the Korean peninsula. However, after the over-concern on Monday and Tuesday, the KOSPI index bounced back to close 1.5% higher for the week. It again supports our views that the tensions on Korean Peninsula will only have very short term impact to the market while it won’t affect the fundamentals.

In Singapore, the government has announced additional cooling measures in the residential property market, in the form of an additional buyer’s stamp duty (ABSD). For foreigners, the ABSD will amount to a hefty 10%, in addition to the existing tier-system stamp duty. The government revealed that foreign purchases accounted for 19% of all private residential property purchases in 2H 11, up from 7% in 1H 09, making up a significant proportion of total transactions and highlighting the strong demand for SGD-denominated assets by foreign investors.. From a broader perspective, the latest measures are aligned with our view that inflation is likely to be less of a problem going into 2012, with elevated property prices being one of the drivers of inflation so far this year, especially in the Singapore context. With more targeted policy response in the Singapore residential housing market, the MAS now has more leeway to adopt looser monetary policy in 2012, aligning itself with the actions of other central banks in the region.

Singapore's neighbours, Indonesia and Malaysia have signalled an intention to reform sectors they belief are of strategic national interests. In Indonesia, the Indonesian Ministry of Energy and Mineral Resources is considering imposing an export tax on the mining industry to encourage miners to further process mineral ores, specifically coal, and move up the value-added chain to enhance the productivity of the industry. Although such a proposal will likely be unwelcomed by the local mining companies as it increases their cost of productions and put them in a disadvantages position compared to overseas competitors, the end result should be worthwhile at the end of the day.

Over in Malaysia, the Financial Sector Blueprint 2011 – 2020 aims to strengthen regional and international financial Integration The development of the financial sector going forward over the next 10 years will focus on facilitating regional integration and internationalisation of Islamic finance. More liberalisations in the financial sector such as the liberalisation of foreign exchange administration rules are expected in order to improve the efficiency and effectiveness of the sector as well as attract increased foreign participation in the financial market. Learning from the recent global financial crisis, the blueprint also focuses on improving financial stability, ensuring sound risk management and corporate governance practices by financial market players. The contribution of the financial sector to nominal GDP is expected to grow from 8.6% of nominal GDP to between 10% and 12% by 2020, according to the blueprint.

Faretheewell 2011

2011 saw markets whipsaw as market events came at investors left, right and centre. (Read our 2011 Market Review for more information) With both persistent and fleeting issues afflicting markets, investors often had to react to the latest developments while not losing track of their long term strategies and goals.

With markets staging a broad based advance in December, all five recommended portfolios gained abit of ground, with the Balanced portfolio posting the largest gain of 2.6% as its heavier weighting in Aberdeen Global Opportunities helped it outperform the other 4 portfolios. With 2011 now done and dusted, it pains us that none of the portfolios under our watch managed to gain positive returns following what has been a poor year for financial markets as a whole. Despite this setback, our long-standing call to underweight bonds vis-à-vis equities remains intact, given that yields remain low and equities continue to be cheaply priced. We aspire to do significantly better in 2012.

Among all the funds within the five portfolios, the best performing funds for December was the Aberdeen Global Opportunities, Henderson Hzn Pan Euro Eq A2 Eur, UOB United Asian Bond Fund SGD which gained 3.9%, 3.4% and 2.8% respectively. None of our funds posted losses for the month of December. FTIF-Templeton Glb Bond A(mdis) SGD-H1 was negatively impacted by USD strength against the the currencies of its underlying holdings of Asian Sovereign bonds. The fund was also hampered by the credit rating of Hungary which was cut from investment grade to speculative grade. The fund held 5.8% of its portfolio in the nation's sovereign debt as of 31 October 2011, but nevertheless, the fund managed to return gains for the month.

For a more complete picture of the best and worst performing funds of 2011, an informative and a great write-up by our Content Team can be found here: Top Funds Review 2011: South-East Asia Equity Funds Outperformed.

For more details of the fund performance with respect to individual portfolios, please refer to the monthly factsheet of respective recommended portfolios.

Table 3 shows our current funds selection as well as their respective weights for each of the five FSM recommended portfolios. You may refer to table 4, 5 and 6 under the “Appendix” section for more details on the asset allocation breakdown.

Start with $20,000
Investors should be able to follow the target allocation in Table 3 with S$20,000 as 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 with monthly factsheets archived up to 1 year.

• FSM Recommended Portfolios

previous months portfolio summary

1. November 2011 - FSM Portfolios: Little Pain In November
2. October 2011 - FSM Portfolios: Oktoberfest Returns!
3. September 2011 - FSM Portfolios: September's Slumber
4. August 2011 - FSM Portfolios: August's Summer Sale
5. April 2011 - FSM Portfolios: April, the best trading month year-to-date
6. March 2011 - FSM Portfolios: Developed markets equity dragged overall performance
7. February 2011 - FSM Portfolios: Diversification does reduce systematic risk
8. December 2010 - FSM Portfolios: And the winner is….. the BALANCED PORTFOLIO!
9. November 2010 - FSM Portfolios: Performance mostly flat on weak sentiments
10. September 2010 - FSM Portfolios: Sep was probably the best month for most equity markets in recent times
11. August - FSM Portfolios: Equity market volatility evident in portfolio performance
12. July 2010 - FSM Portfolios: Risk takers rewarded with bigger winnings
13. June 2010 - FSM Portfolio: Supplementary portfolio can be a double edged sword

Appendix