Cash is King

Today, the S&P 500 hits 1,872.341; after closing the highest ever, at 1878.042, on March 7, 2014. The last low for the current bull run was March 9, 20093, more than five years ago. Since 1950, with S&P 500 as a gauge, the length of a bull market in the U.S. has averaged 54 months4, or only four and a half years.   Also, as chart shows below, the S&P 500 has gone far beyond what the market reached in 2007.   How much longer and higher can it go?

Source: http://www.dollardex.com/sg/index.cfm?current=investUTgraph/home&productID=731 and http://www.dollardex.com/sg/index.cfm?current=investUTgraph/home&previous=investUTgraph/home (after adjustment to a 8-year View Period)

Thus, after our last profit-taking exercise as we exit from the U.S. market last year (Unicorn Issue 12, November 2013), we are ready to give our current Unicorn Investment Portfolio Allocation a radical make-over from:

China – 45%

Asia – 20%

Emerging Markets – 20%

Resources – 10%

Singapore – 5%

to:

China – 50%

Cash – 50%

Essentially, Unicorn’s investment philosophy is prudence and conservatism, and we are recommending a rather significant re-allocation in order to help safeguard clients’ portfolio from potential adverse volatility in many equity markets so as to achieve clients’ longer-term goals.

We expect a correction in the U.S., which might well affect the other markets. As such, we are recommending the above move to reduce the exposure to equities at this point in time to hold more cash and cash equivalents in order to create a Value Cost Averaging Fund or Opportunity Fund as described in our Three Bags Strategy for investing (Unicorn Issue 5, April 2013) in order to take advantage of undervalued assets when a correction takes place.

We are expecting a correction in the U.S. market because with the current Price-Earnings ratio at 18 times5; we believe it has reached fair value for the Price-Earnings ratio of S&P 500 which has ranged between 10 times to 26 times6 from 1989 till today. In addition, the slowing of money creation in the U.S. (“tapering”) has created expectations of lower liquidity and eventually the interest rate increases. Liquidity in the U.S. has partly been maintained by investors withdrawing from developing world markets and bringing their money home to the U.S. market. This too, cannot go on indefinitely.

We also recommend remaining invested and even increasing the allocation into China as the price of Chinese equities, represented by the HSCEI Index below, has stayed relatively constant for the last few years. It currently has a price-earnings ratio of 7.5 times (as at March 31, 2014)7. It was 7.93 times on a factsheet dated December 31, 2013, which was the lowest in nearly 10 years8 and thus it is very attractively priced currently.

Cash is King Pic2

Source: http://finance.yahoo.com/echarts?s=^HSCE+Interactive#symbol=^HSCE (after adjustment to a 10-year View Period)

Moreover, due to China having huge savings and foreign exchange reserves as well as capital controls9 in place, the Chinese economy is relatively insulated to the economic situation in the U.S. and their monetary policies than most other economies. Additionally, as China’s GDP grows, its consumption is also growing about 9 percent a year for the past decade10, which would make it relatively resistant against external shocks. Given the above, we assess the risk-reward balance of investing in Chinese equities as favourable.

Please note that it is not our view that global equities will have a correction in the immediate future; rather it is part of our continuous investment risk management process to plan well ahead. As such, we reallocate out from assets we believe have reached fair value into assets we believe are undervalued, and we continue to look for new opportunities so that funds can be put to work for optimal results over the longer term.

References:

1S&P 500 Index http://www.bloomberg.com/quote/SPX:IND

2S&P 500 http://en.wikipedia.org/wiki/S&P_500

3United States bear market of 2007–09 http://en.wikipedia.org/wiki/United_States_bear_market_of_2007%E2%80%9309

4Preparing For When This Bull Market Breathes Its Last http://www.forbes.com/sites/greatspeculations/2013/08/13/preparing-for-when-this-bull-market-breathes-its-last/

5The Wall Street Journal http://online.wsj.com/mdc/public/page/2_3021-peyield.html

6Seeking Alpha http://seekingalpha.com/article/1564812-s-p-500-price-not-expensive-by-historical-p-es

7Derived from Index Daily Bulletin, Hang Seng China Enterprises Index http://www.hsi.com.hk/HSI-Net/HSI-Net 

8Intereffekt Investment funds commentary http://www.intereffektfunds.com/mediadepot/589a85422f9/FactsheetChina2013-12.pdf

9China Times: China insulated from US QE hot money flux http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20140218000098&cid=1102

10China: Fastest Growing Consumer Market in the World http://blog-imfdirect.imf.org/2013/12/02/china-fastest-growing-consumer-market-in-the-world/

Do Funds in Your ILP Matter? Of Course!Superpower China

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