Excerpts from a monthly investment outlook by Financial Alliance (FA) sent to its clients recently.

In November 2008, Financial Alliance (www.fa.com.sg) became the first and only Financial Adviser Firm in Singapore to achieve both the Singapore Quality Class and the People Developer status.

Sani Hamid, Director (Economy & Market Strategy)

Key points:

> The saying “Sell in May and go away” could not have been more accurate as equity markets had a torrid month (till May 29). Many suffered sharp losses which effectively wiped out the gains seen in Q1, leaving many markets with no gains and even large losses year-to-date.

> We are in a very good position to take advantage of opportunities in the market as we have remained defensive since August last year. Thus we were generally spared the large decline in August and September. We have also managed to avoid the see-saw movements over the past few months. The question now is one of timing.

> Be prepared to re-enter markets. We have made it no secret since late last year that we are looking to re-enter this market in stages via a Dollar Cost Averaging strategy in 2012. What is for sure is that we are getting closer to pulling the trigger.

Q. Are there opportunities?

FA: We are in a very good position to take advantage of opportunities in the market as we have remained defensive since August last year. Thus we were generally spared the large decline in August and September.

We have also managed to avoid the see-saw movements over the past few months. The question now is one of timing.

Overall, we believe that markets may experience some more downside from here. This is because markets have broken to the downside from a 3-month consolidation and, technically, this normally leads to a sustained move.

At this point, we see markets pricing in a slowdown in global growth and the happenings in Europe, but there is a chance it will also over-react and price in the worst case scenario in both these cases.

For instance, we have read a few fresh reports that expect a potential global recession later this year or in early 2013 as the European crisis worsens.

On the European front, the discussion is also moving from what will happen to the rest of the crisis-hit countries like Spain, Portugal and Italy to whether a potential exit is in store for France and even Germany – which we find a bit far-fetched. But as such discussions intensify, as usual, we are likely to see markets over-reacting and pricing in the worst-case scenario.

Similarly, valuation matrices suggest a bit more downside may be in the pipeline.

The forward price/earnings ratio for the S&P at the bottoms of recent crashes reached 11.5 and 10.4, while it is currently at 12.2.

According to a report, Morgan Stanley’s market timing indicator is presently at -0.4, which is close to the buying signal of -0.5, although it is still a long way off the 2009 low of about -2.5.

However, it is also at these depressing times that opportunities arise. Larry Fink, chief executive of BlackRock, the world’s largest asset manager, believes that “because they’re scary times, it’s a good entry level to be a long term investor.”

One well-known name in European fund management was quoted by CNBC as saying he believes a contrarian buying opportunity is approaching, but things need to get worse first.

In his words, “I would like the situation to be even more stressful, and I’m waiting for that to happen. We are keeping some powder dry.”

He definitely took the words out of our mouth.

Q. So what do we do now?

FA: Be prepared to re-enter markets. We have made it no secret since late last year that we are looking to re-enter this market in stages via a Dollar Cost Averaging strategy in 2012. What is for sure is that we are getting closer to pulling the trigger.

Understandably, some may feel we are being too aggressive given the situation. Our reply to this is that we have always stuck to our views: we called for investors to go defensive ahead of the August 2011 crash and again for investors to stay sidelined despite the strong rally in the markets earlier this year.

Both these calls were clearly contrarian in nature but have proven to be correct. Right now, we feel that the best time to re-build our equity position is in the second half of 2012, when the global economic and European situations may be at their worst.

What about the Greek elections on June 17?  We don’t have a view on the outcome itself but we feel it could lead to very different consequences. If Greece leaves, the problems outlined earlier in this report will unfold and we could see a Lehman-type of sell-off.

If it remains in the euro zone, it is easy to imagine that the social-politicaleconomical situation in Europe would remain a mess for some time to come, especially as Spain and Italy have increasing problems of their own.


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