Updated: May 19
My note: it was a bit embarrassing to be called one of 'smartest financial minds in the market' as I certainly, and perhaps clearly, wasn't. Nevertheless, here is the piece!
by Debasish Roy Chowdhury
Top money men warn of turbulent times with global markets set for a significant correction
The Year of the Ox lived up to its name, but what does the Tiger hold? Can we be equally bullish on our investments this year or is it time to tread carefully? Will the good times keep rolling or was it too good to be true? Will the investment strategy and asset classes that served us well last year continue to deliver, or is it time to change stripes?
Your Money took these questions to some of the smartest financial minds in the market to see if we can borrow a page from their playbook for the coming months. The experts
we talk to are Marc Faber, editor of the Gloom Boom & Doom report, billionaire investor Jim Rogers, Mark Mobius, executive chairman of Templeton Asset Management, and Peter Elston, chief Asia strategist at Aberdeen Asset Management. Here is their take:
Are we heading for a double dip? Where do you see global and Hong Kong stock markets heading this year?
Peter Elston Possibly, but investor confidence in governments’ ability to manage deficits will, for the time being, somehow be maintained. But this confidence is fragile. The so-called recovery has been the result of prescribing performance-enhancing drugs. The true health of the patient remains seriously in doubt and the question is, which will come first: a meaningful recovery in final private demand or a loss of confidence in governments’ abilities to manage deficits. I expect a gradual improvement in the world economy and stocks to move higher. But don’t be surprised if markets fall this year. Consider any such falls opportunities to buy, not reason to sell. The long-term outlook for Hong Kong remains rosy.
Mark Mobius The idea of a “double dip” is an economist’s construct that does not have an equivalent in reality. We live in a big world and a downturn in one economy is not necessarily translated into a downturn in another. We also must be careful to differentiate between the economy and the stock market. Markets tend to lead economic results. In a bull market, as we are now experiencing, there will be corrections as the market continues to march upwards, and such short-term corrections could be anywhere from 15 per cent to 20 per cent, or even 30 per cent. We have to be ready for such volatility.
Jim Rogers The world economy is not recovering and governments are not solving the problem, merely papering it over. The problem is getting worse. I don’t think governments can get away with this much longer. But things have got better for China. It saved a lot of money for a rainy day, it started to rain, and China started spending the money. They have spent it
reasonably well, becoming more competitive. So if things go bad again, China will be more
competitive down the road. As for Hong Kong specifically, as long as it has a rich and successful neighbour, it will be all right. But I don’t know if the stock markets will be all right this year. I am not buying shares in Hong Kong, or anywhere, right now. Down the road, we might see currency crises or semi-crises that will lead to more disturbances in the financial markets around the world. We have great imbalances in the world – Asia has huge assets and the West is the great debtor. Such imbalances are usually sorted out by defaults or by currency turmoil.
Marc Faber The current reflation both in terms of fiscal and monetary stimulus around the world is unprecedented and the outcome is highly uncertain. But what is certain is that these economic policies lead to increased economic and financial volatility. So following an economic recovery, another dip is very probable. A marginal new high above the January high is possible for the Hong Kong market but I would expect it to close the year either around the current level or somewhat lower.
What changes from last year should investors make in their 2010 investing strategy?
Jim Rogers I am not making any change in my investment strategy except looking for shorts since I have had none for a good while. I’m selling US stocks in a small way but not shorting any country in Asia. If world stock markets go down again, they are going to go down more in
the West than in Asia. So it is better to short in the West than in Asia. Unlike last year, everything won’t go up this year. If they do, it’ll only be because they are printing money. You might think you have more money but you could very well be losing money because the value of paper money is going down.
Mark Mobius Last year was amazing in the way emerging markets rose like a phoenix. While I am positive on emerging markets in 2010, as I said, I also expect corrections along the way. These corrections are welcome because they present buying opportunities. Volatility resides in all markets and bad times can be good for investors, which is why bottom-up research is
important. Given the expected volatility this year, attention to research and individual companies will be crucially important in the coming months.
Marc Faber At the beginning of 2009, lifetime buying opportunities arose as equity and commodity markets became oversold both from a shortand very long-term perspective. This unusual situation that arose then is today no longer available and markets are at a juncture where they could rise 10 per cent to 20 per cent or fall 10 per cent to 20 per cent. So from my point of view, 2010 is the year you want to preserve the huge gains you made in 2009.
Peter Elston The key to last year’s investment strategy was having the right portfolio, this year it will be having the right mindset. Being able to deal with a scenario in which sovereign risks materialise and stocks fall will be paramount. If you’re not mentally prepared for a
significant market correction this year, you risk making the cardinal error of selling when you should be buying.
Which investments look the most promising this year?
Marc Faber I wish I knew! Markets, let me repeat, will be very volatile and will move up and down easily by 20 per cent to 30 per cent. This year will favour short-term traders. When gold dropped to US$1,045 and the S&P 500 to 1,045, both on February 5, they became oversold
and rallied. This volatility will characterise the markets in 2010 and beyond. I’m still accumulating gold although I think it could drop to around US$950-1,050 before it really takes off. In general, I would buy equities and gold on weakness because central bankers will
continue to print money like water and will make sure that paper money becomes worthless. Grains like soybeans, wheat and corn are exceptionally low but for individuals these markets are hard to play apart from buying into potash companies.
Jim Rogers If we are talking both long and shorts as investments, I would say long on commodities, yen and US dollar and short on Chinese real estate. But I can tell you what
I’m doing right now – nothing, just watching, apart from shorting some US equity. This is a year when trends will unfold. I’m holding what I have – US dollar, yen, agricultural commodities – but I’m not getting into anything new. I expect some of the things that I own, like gold, to go down for a while because the market may go down for a while. But I’m not
selling them as I believe they will do well over the next decade or so.
Mark Mobius Consumers and commodities are our key investment themes. The consumer story in China is starting to play out nicely and there is further upside in this area. Let’s not forget India either, it has another billion-plus people with disposable income rising steadily.
Commodities are yet another area that will continue to do well, albeit with significant volatility.
Peter Elston Equities, particularly those in stronger emerging countries, still look good value on a long-term basis, though that does not mean they can’t get cheaper over the next few months. But being in the right companies and sectors will make a big difference. This year
will see investors becoming much more discerning, focusing on companies with low debt,
identifiable competitive advantages and simple businesses. Outside equities, be cautious about longer-dated government bonds in the US and Europe. Debt levels are heading closer to tipping points at which investors question governments’ ability to ever repay. These tipping points for major economies are unlikely to be reached in 2010 but markets are discounting machines and so will anticipate such an event in advance, possibly this year.
Give us a must-have and must-not-have investment for this year
Mark Mobius A portion of your portfolio in emerging markets is a must have. Also take note of frontier markets such as Vietnam. I don’t believe the level of risk is necessarily higher in frontier markets. As for must-not-haves, be cautious on companies with too many derivatives on their balance sheets.
Peter Elston A must-have investment this year would be a self-help book on how to remain calm in a storm. The past 18 months have simply seen problems swept under the carpet. You must be ready to deal with these problems when they re-emerge. One to avoid? If the US
Treasury were a company, investors would have fled for the hills a while ago. It is racking up massive losses and borrowing huge sums which it is not investing in productive assets but giving away.
Marc Faber The must-haves are “diversification” in order to preserve wealth and “patience” during times of market extremes, which will provide selling and buying opportunities. Putting your money in Asian property, gold, Asian equities and some cash would be a good way to diversify. But cash and US government bonds, except for brief times and trading opportunities, are not desirable.
Jim Rogers As I said, I’m not getting into anything new. Some must-nothaves would be US government long bonds and real estate in Hong Kong and Shanghai.