Market Summary for january 2012
In January, global stock markets around the world began the new year in bullish fashion. Investor sentiment together with risk appetite staged a strong comeback, propelling global equities higher by 2.6% with Global Emerging Markets and Asia Ex Japan leading the way with gains of 7.9% and 7.3% respectively. GEMs were led by a resurgent India and Brazil, who posted returns of 15.7% and 14.6% respectively. Russia and China fared well too, returning 10.7% and 7.9% respectively. In Asia Ex Japan, the open economies of Singapore and Hong Kong were the best performers, generating gains of 9.8% and 7.4% respectively. The developed markets, led by Japan and Europe, posted returns of 1.9% and 1.8% respectively, while the US gained 1.2%. Overall, January was an extremely positive month for equities, with no market under our coverage posting losses.

[All returns are in SGD terms]

us: the return of jobs, a willing fed
In the US, January painted a brighter picture of the economy despite 4Q 2011 GDP missing consensus estimates. US payrolls registered a 243,000 gain in January, with December's figure revised upwards to 203,000. Private payrolls rose 257,000 in the month, reflecting an increase in private sector hiring which bodes well for the economy. With such strong gains in jobs, the unemployment rate declined to 8.3%, its lowest level since February 2009. 4Q 2011 GDP came in at annualised 2.8% rate as compared to the previous quarter's 1.8% growth rate. For the year as a whole, GDP growth was 1.7% in 2011 as compared to 2010's 3.0% growth rate. On a quarterly basis, consumer and business spending grew by 2.0% and 1.7% respectively, with the latter slowing down significantly from 3Q 2011's 15.7% growth rate.

In the latest FOMC statement (25 January 2012), the Federal Reserve reiterated its concerns over the “elevated” unemployment rate, as well as a slowdown in business fixed investment. Nevertheless, the committee noted that “inflation has been subdued in recent months”, which will allow for “a highly accommodative stance for monetary policy”. The committee kept the target range for the Fed Funds Rate at 0 to 0.25%, but more importantly, guided that exceptionally-low levels for the federal funds rate will likely stretch “at least through late 2014”. That the FOMC intends for rates to be kept low until late 2014 is significant, since previous guidance was for low rates “at least through mid-2013”. While this signifies that the economy may possibly experience some weakness in upcoming quarters (which requires further “nursing” until 2014), it also highlights the Federal Reserve’s willingness to take bolder steps to foster price stability and create a more accommodative environment.

europe: is the worst over?
Over in Europe, little policy changes with regards to the sovereign debt crisis took place in January. However, economic data out of Europe indicated a slowing in the German economy, while France saw several of its banks' rating cut. Despite these matters, European equities as measured by the Stoxx 600 were stable for the month of January.

In January, Standard & Poor’s (S&P) ratings were slashed for nine Eurozone countries which saw France and Austria lose their coveted AAA ratings, bringing into doubt the eventual rating of the European Financial Stability Facility (EFSF) as well as potentially reducing the facility’s effectiveness. Already troubled nations such as Italy and Spain saw their ratings cut by two notches, while Portugal saw its rating cut to junk status. Despite such developments in Europe, S&P had previously announced its intentions early in December 2011 and thus markets had priced some of the information in. Also, S&P clearly stated that it had not factored in a breakup of the Eurozone into its ratings, a key factor providing insight into the survivability of the Euro.

The German economy again grew strongly in 2011 with GDP increasing by 3.0% compared with the previous year's growth rate of 3.6%. The growth was mainly driven by domestic demand in 2011 as household consumption expenditure grew by 1.5%, a rate last reached prior to the financial crisis of 2008. Despite decelerating, Germany’s exports rose by 8.2% in 2011. Despite relatively strong GDP growth for the year, German GDP is expected to have posted weak quarter-on-quarter growth for 4Q 2011 as a result of the continent's sovereign debt crisis. With moderate increases in employment and wage growth as well as relatively weak consumer confidence, private consumption is expected to contribute less to GDP in 2012 from an addition of 0.9 percentage points in 2011. As it is, latest readings of retail sales showed an unexpected decline in growth for December 2011, with sales contracting by -1.4% on a month-on-month basis despite growing by 0.9% on a year-on-year basis.

In France, Standard & Poor's downgraded the long term ratings of Societe Generale, Credit Agricole, Groupe BCE and Caisse des Depots et Consignations, mostly as an aftershock effect of the cut in France's AAA rating to AA+. The cut in ratings was telegraphed by markets well ahead of the announcement and had little impact on the affected banks.

Asia ex japan: weak data & accomodative policy

Across Asia, generally weak economic data was released across the board in North Asia. Korea saw its exports decline, Hong Kong and Korea saw GDP growth slow in 2011 while Taiwan entered a technical recession following consecutive quarters of GDP contractions. Meanwhile, Southeast Asia saw monetary policy continue to remain accomodative as evidenced by Thailand's rate cut and Malaysia's decision to hold rates steady as the global economic environment remains generally weak.

Singapore saw its CPI rise 5.5% year-on-year in December 2011, as housing and transport costs posted year-on-year increases of 9.9% and 10% respectively. The two segments (which collectively make up 41% of the CPI basket) have contributed significantly to Singapore’s inflation in 2011, but 2012 may see housing-related inflationary pressure alleviate, given the latest round of cooling measures in the private property market (in the form of an additional buyer’s stamp duty) as well as the huge impending supply of new homes which could moderate home price appreciation somewhat in 2012. In better news for the city state, the unemployment rate measured 2.0% in 4Q 2011. The Lion city's economy added 36,300 jobs last quarter as compared to 31,900 jobs in 3Q 2011. In 4Q 2011 and among the industries, manufacturing was the only one to witness a decline in employment with a loss of 1,900 jobs. The services and construction industries posted job growth of 8,600 and 29,200 respectively.

GEms: a solid foundation made of bric

Global Emerging Markets, with the BRIC countries as its foundation, were the best performer amongst the markets under our coverage, and with indicators pointing to further growth, the future of GEMs continues to remain bright. In China, latest data suggests that the economy although weakened, still had measurable strength in it along with plausible support from monetary policy. Despite the purchasing managers' index (PMI) indicating a moderate expansion, export orders PMI indicated a contraction as global economic data continues to remain depressed. Nonetheless, new loans growth in December had reached 640.5 billion Yuan, which is not only the highest level seen since April 2011, but is also significantly higher than the market consensus of 575 billion Yuan. The better-than-expected figures suggests that the People’s Bank of China’s (PBoC) move to cut reserve ratio requirements (RRR) and loosen credit conditions through halting sale of central bank bills had successfully prevented a liquidity crunch as the year-end approached. Signs of loosening credit conditions will also ease pressure on banks’ refinancing and capital raising activities.

The Indian central bank has given the early sign of benign monetary policy regime by reducing the cash reserve ratio (CRR), a reserve requirement banks have to maintain with RBI, by 50 bps to 5.5% from 6% in the monetary policy review on 24 January 2012 while leaving the other key policy rates unchanged. The CRR cut by RBI was primarily driven by the goal of pumping liquidity into the banking system which will leave Rs. 320 billion in the hands of Banks. The recent cut in CRR will slightly improve the liquidity in a cash crunched banking system which was borrowing more than Rs. 1000 Billion for more than 2 months via RBI LAF window. We believe that RBI will probably look to cutting rates in next financial year (starting 2Q 2012) and meanwhile they may cut CRR again to restore the liquidity in banking as the daily borrowing amount by banks are above the comfort level of RBI.

In Brazil, the unemployment rate dropped to record low levels, registering a rate of 4.7% in December 2011. The relatively high rate of employment in Brazil on a historical basis, coupled with continually rising wages has helped to keep its consumer demand engine going with retail sales remaining in growth territory. With interest rates in Brazil expected to further decline, and with tax cuts aimed at spurring its economy, we expect consumer demand in Brazil to continue its show of strength.

Over in Russia, Russian protesters took to the streets in the cold of Winter to protest against Putin for the third time since his party won a parliamentary election on 4 December 2011, which was tarred with widespread accusations of fraud and vote rigging. Despite attempting to appease protesters by making promises of liberal reforms and guaranteeing a fair vote come election day on 4 March 2012, it is of our view that political risk in Russia has increased and investors might wish to pay close attention to events unfolding in the country.

2012 off to a flyer!

2012 saw markets start the year with an exceptionally strong rally led by riskier assets. With Global Emerging Markets, Asia ex Japan and the riskier segments of bonds such as High Yield and Emerging Market Debt outperforming other markets and bond segments, our more aggressive portfolios were the better performers amongst our 5 recommended portfolios.

The Moderately Aggressive portfolio posted the largest gain of 4.7% as its heavier weighting in FTIF-Templeton Glb Bond A(mdis) SGD-H1 gave it an edge against our Aggressive portfolio which has no fixed income funds. Our long-standing call to underweight bonds vis-à-vis equities remains intact despite the recent market rally given that bond yields remain low and equities continue to be cheaply priced.

Among all the funds within the five portfolios, the best performing equity funds for January was Aberdeen Global Emerging Markets, Aberdeen Pacific Equity and Henderson Hzn Pan Euro Eq A2 EUR which gained 7.3%, 6.0% and 5.7% respectively. As for our fixed income funds, our more volatile FTIF-Templeton Glb Bond A(mdis) SGD-H1 (as explained in this article) returned 5.2%, while our fund pick for the High Yield space, PRU Monthly Income Plan Cl A provided us with gains of 2.6%. None of our funds posted losses for the month of January.

Investors interested in a complete picture of the best and worst performing funds of 2011, an informative and a great write-up by our Content Team specialist Jasmine, 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. December 2011 - FSM Portfolios: Santa Kept Us Waiting in December
2. November 2011 - FSM Portfolios: Little Pain In November
3. October 2011 - FSM Portfolios: Oktoberfest Returns!
4. September 2011 - FSM Portfolios: September's Slumber
5. August 2011 - FSM Portfolios: August's Summer Sale
6. April 2011 - FSM Portfolios: April, the best trading month year-to-date
7. March 2011 - FSM Portfolios: Developed markets equity dragged overall performance
8. February 2011 - FSM Portfolios: Diversification does reduce systematic risk
9. December 2010 - FSM Portfolios: And the winner is….. the BALANCED PORTFOLIO!
10. November 2010 - FSM Portfolios: Performance mostly flat on weak sentiments
11. September 2010 - FSM Portfolios: Sep was probably the best month for most equity markets in recent times
12. August 2010 - FSM Portfolios: Equity market volatility evident in portfolio performance

Appendix