Market Summary for March 2012

It was a mixed month in March 2012 for the equity markets in general with the developed markets posting positive returns while most of the major Emerging Markets returning losses. In the developed markets, US, Europe and Japan posted gains of 3.9%, 0.2% and 2.4% respectively in March 2012. In contrast, the Asia ex-Japan and the emerging markets regions suffered losses during the month with the MSCI Asia Ex-Japan and the MSCI Emerging Markets Indices declining by -2.5% and -2.8% respectively. This was mainly due to the hefty decline in the “BRIC” equity markets over the month (Brazil: -7.1%, Russia: -4.9%, India: -4.8%, China: -6.1%). Global equities as measured by the MSCI AC World Index ended March 1.2% higher from the previous month.

[All returns are in SGD terms]

US: No More QE?

Minutes for March's meeting released by the Federal Reserve indicated that only a "couple" of members had advocated that "the initiation of additional stimulus could become necessary if the economy lost momentum" or if inflation looked likely to fall below its mandated 2.0% target. The difference in the number of members, although not specified, showed a relatively marked decrease from "a few members", with the market interpreting it as the Federal Reserve suggesting that Quantitative Easing 3 (QE3) is not likely to be on the cards.

On the economic front, the US nonfarm payrolls rose by 120,000 in March 2012, missing the consensus expectations of 203,000. Despite this, non-farm payrolls have been on a stellar run with over 200,000 additions for each of the 3 preceding months. However, if employment growth continues to turn sluggish and economic growth deteriorate later on in the year, the option of another round of “Quantitative Easing” could very well be exercised if it is needed.

Europe: CDS Triggered with "Orderly Default" in Greece

The announcement of a take-up rate of 83.5% was boosted to 96.0%, due to the triggering of a collective action clause between Greece and the private holders of its sovereign debt, which sees EUR 206 billion of privately held debt reduced by 53.5% (the private sector takes an effective haircut of 74.15%). Nonetheless, the International Swaps and Derivatives Association (ISDA) has ruled the government's use of collective action clauses (CAC) as a credit event which will trigger credit default swaps (CDS) around the world. As a result, USD 3.2 billion worth of CDS will be triggered, but this should not rattle financial markets significantly as Greece has now undergone an "orderly default", one of the more preferred scenarios as compared to a disorderly default.

Furthermore, the European Financial Stability Facility (EFSF) has confirmed that it will contribute EUR 109 billion in funds to Greece, with the International Monetary Fund (IMF) adding another EUR 28 billion on top of the EFSF's amount. According to the IMF, Greece might face a disorderly exit from the Eurozone as, "in the absence of continued official support and access to ECB refinancing operations, a disorderly exit would be unavoidable". Looking at the Greek financial sector, the IMF has noted that bank solvency in Greece has become problematic, with non-performing loans constituting 14.7% of total loans as of September 2011 while their deposit base has shrunk by approximately 30.0%, signs of a financial sector in poor health.

Asia ex japan: China’s Policy Changes Shocked Markets But We Remain Positive

During the first day of the National People’s Congress (NPC) meeting in March 2012, Premier Wen Jiabao shocked markets when he announced that China will lower its official economic growth target from 8.0% to 7.5%, the first cut after 7 years. Markets reacted dramatically, as investors were concerned with the risk of a hard landing. Since a substantial portion of companies that make up the Hang Seng Index (HSI) are either mainland Chinese companies or have large exposure to the Chinese economy, the index started the month off in weak fashion, before finishing -4.6% lower for the month (in SGD terms).

However, we don’t think that there will be new risks following the cut in China’s economic growth target. China’s underlying goal in its 12th Five-Year Plan is to focus on high quality economic growth which aims to be increasingly driven by domestic consumption rather than exports or investments. China has also been able to exceed its growth targets in the past, therefore we would not be over-concerned even if the nation’s economic growth declines substantially from 8.0%.

March's Mixed performance

March finally saw markets take a breather following an extremely strong start to the year which saw an exceptionally strong rally led by riskier assets. For the month of March however, the safer assets led the performance charts with US, Europe, Japan and the safer segments of bonds such as SGD bonds outperforming other markets and bond segments, our more aggressive portfolios were the better performers amongst our 5 recommended portfolios partly thanks to their heavier weighting in the 3 outperforming equity markets mentioned above.

The Aggressive portfolio posted the largest gain of 0.9% as its heavier weighting in Fidelity America USD and in equities in general gave it an edge against our 4 other portfolios. 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 March was Fidelity America USD, LionGlobal Japan Growth Fund and Aberdeen Pacific Equity, which gained 3.0%, 2.4% and 1.4% respectively. As for our fixed income funds, our fund picks for the Emerging Market and SGD bond space, UOB United Emerging Markets Bond Fund and UOB United SGD Fund, provided us with gains of 1.1% and 0.3% respectively.

Investors interested in a complete picture of how the markets under our coverage, and the funds on our platform performed for 1Q 2012 can be found here:
Equity Market Review 1Q 12: A Positive Quarter for All Markets
Top Funds 1Q 12: Aggressive Funds Lead The Way

Investors should note that we have reviewed and made changes to our investment outlook. For details, kindly read Investment Outlook Review and Changes to Star Ratings – 1Q 12 .

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

reminder: key changes to our aggressive portfolio

We have altered our asset allocation for our Aggressive Portfolio in February 2012. Changes we have made are as a result of shifting 10% of the portfolio into the safer and more stable fixed income classes of Global Bonds as well as Singapore/SGD bias. We aim to stabilise the Aggressive portfolio's volatile returns and diversify its asset allocation. The weightage assigned to Singapore/SGD bias and Global Bonds are consistent with those of our Moderately Aggressive Portfolio. Moving forward, we expect to see the changes we've made to smooth out the Aggressive portfolio's returns and reduce its volatility.

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. February 2012 - FSM Portfolios - Feb's Fab Performance & Key Changes to Aggressive Portfolio
2. January 2012 - FSM Portfolios - Jumping January!
3. December 2011 - FSM Portfolios: Santa Kept Us Waiting in December
4. November 2011 - FSM Portfolios: Little Pain In November
5. October 2011 - FSM Portfolios: Oktoberfest Returns!
6. September 2011 - FSM Portfolios: September's Slumber
7. August 2011 - FSM Portfolios: August's Summer Sale
8. April 2011 - FSM Portfolios: April, the best trading month year-to-date
9. March 2011 - FSM Portfolios: Developed markets equity dragged overall performance
10. February 2011 - FSM Portfolios: Diversification does reduce systematic risk

Appendix