Global Equities Getting Out Of Sync - Time for A New Model

"The end is nigh for stocks to rally", or is it? 
In the last paragraph of my post from February 12th, I outlined a four-week window for a last ditch effort by the equity bulls, - very much against the noise and chatter in the media, who preferred to stir up fear that we see a disastrous extension of January's bloody correction in equities and commodities. 

Needless to say that my proposed strategy returned a handsome profit, even with as basic an investment tool as mutual funds.Importantly, the choice of funds, and the tactical adjustments in between, made all the difference. 

Re-Introducing A Model Portfolio

Due to change of software and provider, I am restarting the model as of January 1st, 2016. This portfolio is in line with a high risk profile, which means we limit the equity exposure to a maximum quotient of 90%, with the remaining 10% invested in bonds and cash. At no point during this period did we expose the portfolio to more risk than prescribed. 

High Risk Model Portfolio from 1-1-2016 to 20-3-2016
compared with balanced fund and global fund,
fund price data by First State, Singapore.

In the portfolio chart, we compare the model with a global balanced fund (50% equity/50% bonds) and a global equity fund (up to 100% in equity), with % returns reflected in SGD (Singapore Dollars). 

The portfolio has avoided the drastic falls of January. We had switched to safety in December 28. Only on January 25, did we purchase a first tranche of equity and precious metal funds again. It was the Asian equity holdings, which made the renewed downturn in February look bigger than in the global equity and balanced funds. However, we stuck with the decision, and proved right. Shortly thereafter, gold prices rallied hard and the Asian equity market also came alive. 

As of February 18, we increased equity (inclusive of commodities) exposure to near 80%, still below the target levels for bullish markets. This was not a bull rally, it was a bear rally. Therefore, we made do with a lower equity allocation and thus reduced the volatility in the portfolio and settling on a steady upward path. 

When proposing the tactical adjustments for February 18, I advised my investors to expect a target return of 4% from that day to the end of the rally, which I think - is NOW. The market was friendly, and with the right choice of funds, the portfolio returned 6.7%, while suffering a fraction of the downside volatility of the global equity fund, which year-to-date finally sees a positive result, but no better than the model portfolio. 

During the time we prepared 3 exits: 

1. the first one for March 4, exiting European equity. With the proceeds we purchased global bond funds and precious metal funds. 
2. The second one on March 14, reducing mainly global equity funds and small cap equity funds. The proceeds were used to purchase more bond funds and place money on deposit. 
3. The third exit is today, March 21, and we are exiting the remaining equity holdings in US and global equity, leaving only a 25% contingent of Asian equity funds and precious metal / commodity funds. 
4. Does that mean, we trust the markets in Asia and in resources to maintain their upward trend? - OR, might we be getting ready for yet another exit?

Going Forward - Short Term

My views in January/February allowed for a bear rally of no more than 4 weeks. These are now over. However, last week, the ECB accelerated their liquidity injections by buying various assets including gold, and oil etc.. Their move was followed by the JCB, which stayed the course of unlimited liquidity ("whatever it takes"), kept interest rates negative,but would not move them further into negative territory, much to the chagrin of punters. They, in turn, bought YEN instead of the NIKKEI, which is not what the JCB had hoped for. They want the YEN to weaken so that the threat of deflation fades and the momentum for some inflation can restart. In the end, it was the US Federal Reserve, who gave the clearest signal for investors, by stating that the path to interest rate tightening would be slower than previously proposed. The markets now expect no more 2 hikes this year. That is saying in a round about way: "investors, please go and buy assets if you want to make money." And buy they did.  

There is this "old" saying (not THAT old, only since April 2009, but the new breed of high risk punters love to run with it) that investors should not bet against the FED, i.e. if they say, we give you free money, you might as well go buy something to make money, then we punters should, against all cyclical and technical signals the markets might flash! So, why am I even thinking about yet another exit?

The overall pattern in the markets is altogether changing and in the medium term provides more signals that markets have indeed peaked long term and that - after more than 7 year bull cycle (so the talking heads proclaim) - a bear market must follow. Before you drop everything to push the sell button, - there are profitable periods in bear markets, too, as we have just seen since end of January. And there will be bargains to be had for long term investors, the closer we get to the bottom of the bear market.

I will show you in the next blog, to be ready by end of the week, how I assess the present situation.  This is critical stuff. After all, the end of tax year is coming up, and that, too, means, more money is chasing after good returns. This could support yet a further extension of this 7+ year-old bull market. On the surface, this bull does look very old and too tired to start chasing after yet another torero's red cape.

Till my next post, be selective where you position yourself with your investments.