Stay Defensive, De-Risk Portfolio, Protecting the Down Side in Current Market Condition

I invited my good friend and my soccer buddy for more than 20 years, Sani Hamid, to speak at a private event organized by Online Traders Club Singapore.

I shared about Sun Tzu in Investing while Sani talked about “Short vs Long Term Investing: Who Wins?“, how he convinced his mother in-law to invest in gold (lol) and how to build a portfolio to reduce market risk and business risk through asset allocation and diversification.

All participants were impressed by Sani Hamid’s knowledge in this great event.

 

 

Kenny Loh’s sharing on Sun Tzu in Investing

 

Sani Hamid’s Sharing his topic :Short Term vs Long Term Investing and how to use a Diversified Portfolio strategy to Stay Defensive, De-Risk Portfolio, Protecting the Down Side in Current Market Condition.


Current Market Risks

1.       The U.S. markets are clearly overbought and despite any correction, will continue into even more overbought territory if it moves higher from here. The only way to bring valuations back to historical norms of around 16-18x P/E is for a major decline to take place. And as we all know markets will tend to overshoot to the downside (in the same way they overshoot to the upside like now);

2.       The current market expansion is already into its 8th year and is the second longest after World War 2 – second only to the 1990 to 2000 rally. That rally came to an abrupt end thanks to the bursting of the Dot Com bubble. As it stands, we find it hard to justify further sustainable gains on the U.S. markets as we enter into a period where we will have the Federal Reserve tightening interest rates AND withdrawing liquidity at the same time (see NY Times  March 13, 2017 “The Fed’s Era of Easy Money Is Ending”);

3.       Further out, we expect the U.S. economy to sputter as the short-term hype over President Trump’s policies either wanes or prove to be difficult to be implemented. And even if these make it off the drawing board, the majority are counter intuitive and will lead to a less competitive, less efficient & slower economy.

Advice from Sani Hamid, Wealth Director, Wealth Management (Economy & Market Strategy), FINANCIAL ALLIANCE PTE LTD

What should investors do?

Any rally from here should be taken as a step closer to the top of the market cycle. In other words, U.S. markets today are neither at the bottom or middle of the cycle but in the last quadrant. This means a deteriorating risk/reward ratio – investors will be taking on more and more risk without being sufficiently rewarded.

As such investors should take a cautious and defensive approach when investing under such market conditions. The term “caught holding the baby” should be of a primary concern. De-risking one’s portfolio, protecting the downside, investing into non-market correlated assets etc all come to mind at this point.

On our end, our risk-based portfolios are in a defensive mode which should guard against the ensuring volatility. We have also introduced a thematic portfolio called “90/10” which seeks to provide investors with a lower volatility option on their investments in this uncertain market environment.

 

I will be conducting a “Diversified Investment Portfolio Construction” workshop to share the strategy and methods to DIY an investment portfolio to manage risk. I will share how the professional investment managers use Asset Allocation, Diversification, Core-Satellite strategy to build their portfolio for investors.

Seats are very limited. Sign up here https://www.eventbrite.sg/e/diversified-investment-portfolio-construction-workshop-30mar2017-tickets-31085303981

 

Events

 

2017 – So Far, So Good?

By Sani Hamid, Director (Economy & Market Strategy)

Rising Risks

At the moment, we feel there is a sense of “lingering optimism” that the rally we saw in the second half of last year – from the June Brexit lows which continued and even got a boost from Trump’s November electoral win – is merely taking a breather. It’s hard to fault such thinking. After all, markets are higher today – the S&P500 is up 18.5%, Stoxx 600 +18.8% and MSCI Emerging Market +19.8 – than where they were from the Brexit lows despite going through two of the most turbulent events in recent political history.

 

As mentioned earlier, the rally seems to be taking a breather at the moment. Markets are generally holding up and, in some cases, apparently doing well. For example, take the Dow which crossed the psychological 20,000 for the first time in its history. Year-to-date, in Singapore dollar terms, the STI has also rallied sharply by just over 4%, while Asia is up 2.2% and Emerging Markets up 1.8%, based on their respective MSCI indices. Both Europe and the US are down a tad at 1.0% and 1.6% respectively based on the Stoxx 600 & S&P500 (see Chart 1).

 

An interesting point to note is that in local currency terms, both Europe and the US indices are in positive territory at 1.8% & 1.5% respectively but because of a stronger Singapore dollar, in local currency terms, these two indices are in negative territory as mentioned earlier. For example, year to-date, the Singapore dollar has appreciated against the US dollar by about 2% (see Chart 2).

 

“…the Trump administration to adopt an aggressive protectionism, anti-globalisation stance and a tough “American First” approach. Under this scenario, we could see U.S. markets rising by another 5%, while buoyed by stronger domestic-centric policies but off-set by weaker international trade. With a higher cost-of-production, there will a rise in inflationary expectations (+50bp) and the U.S. dollar will strengthen further by 10%. Emerging Markets would likely get hammered, declining by 20% as protectionism and trade wars break out, impacting exports severely. We attribute a 15% probability of this scenario taking place.”

 

We now believe that the odds of this scenario unfolding has increased to around 20-30% from our original estimate of 15%. Why? Because since taking office on January 20, 2017, the Trump administration has taken such a hardline stance that a lot of the rhetoric, which some argued would be toned down once he takes office, is now becoming actual policy. These include the building of a wall at the Mexican border and issues relating to immigration.

 

Such callous actions, to us, is going to be the hallmark of the Trump administration where “Everything is strictly business and if it doesn’t benefit America directly, we’re not spending our money and it’s not our problem”. And little wonder that China has already offered herself by saying recently that it is prepared to assume the global leadership role if necessary.

 

So what we have seen so far (a mere 10 days into the new administration!) tells us that the odds for the worst case is building up.

 

So what can we expect for the rest of 2017?

We can expect a whole lot more uncertainty, and the financial markets cannot remain immune to this. While presently driven by the excess liquidity in the system and a T.I.N.A. (There Is No Alternative) mentality, eventually, the increasingly socio-political-economic storm that is being kicked-up by the Trump administration will eventually have its repercussions. As such we continue to advocate investors take an overall defensive stance. Are there still opportunities out there? Of course. But one has to be selective and most importantly, nimble enough to get risk off the table when needed in a timely manner. One key development to look out for is the Trump administration’s relationship with the press. This seems to be at an all-time low and is set to go even lower with the White House chief strategist, Stephen Bannon, calling the press the “opposition party” of the current administration, that it should “keep its mouth shut” and that the media has “zero integrity, zero intelligence, and no hard work”.

Unlike Watergate, where it took a blotched burglary to unravel Washington’s biggest scandal at that time to lead to President Nixon’s resignation, we believe the press will have a field day finding reasons to put President Trump on the back foot.

 

Comment from Blog Owner of My Stocks Investing Journey:

Markets are expected to be volatile after Trump takes office. Interested to know where are the investment risks and opportunities? I manage to convince Sani Hamid (often seen on CNBC) to share with us on Trump Era; Where are the Risks & Opportunities?

Come join me to learn from him at this free workshop I’m organising on 13 Feb and share with / bring some friends: Register here https://msi170213.eventbrite.sg/

Risk should be THE key focus, not returns

Attended a Business Conference yesterday. I summarize the key points for the investment outlook presented by Sani Hamid (Director, Wealth Management (Economy and Market Strategy) of Financial Alliance Pte Ltd).

  • Gold’s tumble is not a concern. Focus remains on gold as insurance, not a commodity nor currency.
  • Gold is the ultimate ‘anti-bubble’ amid falling bond yields.
  • There are bigger concerns:
    • Increasingly a very worrisome “dysfunctional” environment:
      – Dysfunctional Monetary Policy
      – Dysfunctional Economies
      – Dysfunctional Fiscal Policy
      – Dysfunctional Markets
  • Not a normal environment. Risk should be THE key focus, not returns.
  • Dysfunctional Economies
    • Despite low interest rates and abundant liquidity, economies remain mired in slow & low growth.
    • Current debt levels now sit at a record 225 percent of world gross domestic product, the IMF said in its semi-annual Fiscal Monitor.
    • Financial crises tend to be associated with excessive private debt in both advanced and emerging economies.
    • If companies postpone paying off debt,they could become “very sensitive to shocks, increasing the risk of an abrupt deleveraging process.
  • Dysfunctional Fiscal Policy
  • debt-gdpfiscal-policyDysfunctional Markets
    • Equity markets continue to hold up despite weak profitability and revenue growth.
    • While bond markets burst at their seems despite being a crowded trade.
  • Investment Strategy:
    • Not about timing the market but rather smoothing volatility
      • Our defensive strategy should not be confused with timing the market. Done to lower the market volatility.
      • Because clients are only human –inability to take sharp swings.

My key take away for current market condition:

  • Defensive
  • Manage Risk by portfolio diversification
  • Focus on out performers
  • Portfolio re-balancing to manage the volatility

Join the coming workshop on “How to construct your retirement investment portfolio without losing sleep?”

See other event here. http://mystocksinvesting.com/events/