<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR>April 26, 2009
small change
</TR><!-- headline one : start --><TR>Fortune favours the brave in uncertain times
</TR><!-- headline one : end --><TR>Volatile markets present trading opportunities but discipline is vital </TR><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By Vasu Menon
</TD></TR><!-- show image if available --><TR vAlign=bottom><TD width=330>
</TD><TD width=10>
</TD></TR></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->The recent rally has left many investors confused about where markets are headed and what to do next.
It highlights the difficulties of investing in uncertain times.
Despite glimmers of hope, the problems behind the current financial crisis have not been resolved and there are still several uncertainties looming on the horizon.
So what strategy can investors adopt in times of uncertainty and extreme volatility?
Before we address this, let us look at some uncertainties and risks that investors should bear in mind.
Uncertainties
Even though some recent economic data turned out to be better than expected, global indicators are by and large still grim.
Although the Obama administration has come up with a plan to rid US banks of toxic assets, it remains to be seen if the plan can be executed successfully.
And although there have been some positive news flows from US banks, it is still too early to say that the troubles are over.
For one thing, the amount of toxic assets in banks' balance sheets may have been underestimated and could turn out to be much larger than expected.
This would have implications for a successful economic recovery, probably rendering it more complicated and lengthy than expected.
The International Monetary Fund recently doubled its forecast for troubled assets in global financial institutions to US$4.1trillion (S$6.18 trillion), from its previous estimate of US$2.2 trillion.
Part of the higher forecast is probably due to troubled loans originating out of Europe. European banks have significant exposure to central and eastern European economies which are in dire straits and the problems in these regions could rear their ugly head in due course.
How best to deal with uncertainties
For a start, investors can consider maintaining two types of portfolios - a tactical one for short-term trades and a strategic one to capitalise on medium- to long-term opportunities.
Be disciplined when managing tactical positions
Even though the outlook is uncertain and markets could see more downside, it does not mean that more sophisticated investors with a strong risk appetite should stay out of markets altogether.
There will be tactical or trading opportunities from time to time after occasional bouts of sharp sell-offs, as we saw recently.
But those looking to trade ought to be disciplined.
For one thing, they should not get carried away and trade too heavily, risking a substantial portion of their available funds.
Also, realistic targets should be set to take profits and cut losses, and these levels should be adhered to strictly.
When stocks rally like we saw recently, traders who have made profits get over-confident and greedy, and may take on larger bets as markets head higher.
This is not very wise.
On the contrary, trading positions should be reduced gradually as markets surge. There will always be another opportunity to re-enter markets after they have see a decent pull-back.
It is never easy to sell into a rally even though targets have been met. But unless you sell, the gains you have made will remain as nothing more than paper profits.
A friend who bought into the gold-backed exchange-traded fund listed on the Singapore Exchange found it hard to take profit although she was sitting on a good return after only four months.
She had bought into the fund on Oct 23 last year, at a unit price of about US$72, intending to trade. She felt that gold had been oversold in the aftermath of the Lehman Brothers collapse, when in fact the precious metal should have been sought after for its safe-haven status.
Her assessment was right.
Gold rebounded sharply and by February this year she was sitting on a hefty gain of more than 30 per cent (in Singapore-dollar terms); higher than her targeted 15 per cent return.
Yet she was hopeful that gold would head higher and wanted to hang on to her trading position.
She may not have been wrong as gold is probably a good long-term bet and could head higher over the next three to five years.
But she had bought into the precious metal with a short-term perspective, aiming for a specific return that was not only achieved, but surpassed by a wide margin.
When rationality finally prevailed, she took profit at US$96, and it was good that she did - the fund's unit price fell subsequently to around US$87.
Capitalise on downturn to build strategic portfolio
The current crisis also presents medium- to long-term opportunities for those looking to build a strategic portfolio, as several markets have fallen substantially from their peaks.
However, this is not to say that prices will not fall further.
Nevertheless, it is hard to time the bottom and those who are afraid of missing the boat can nibble gradually through a monthly investment plan, spreading their purchases over the next 12 months or longer.
This way, should markets weaken further, one can stay invested and benefit from the lower prices.
For those with a strong risk appetite, Asia is one area that offers attractive long-term investment opportunities as the region's economies are likely to outperform their Western counterparts over the next five years.
Asian governments, which have been relatively prudent, also enjoy a stronger financial standing compared to their peers in the West.
Aside from Asia, the commodity sector also looks attractive from a long-term perspective. The sector stands to benefit from emerging economies like China and India, where population growth, consumption spending and infrastructure development are likely to boost demand for soft commodities and base metals in the coming years.
Gold is another commodity with a lot of promise.
The supply of precious metals is limited, while investment demand looks set to grow. Gold is also likely to benefit if the greenback loses its appeal in due course.
Don't throw caution to the wind
The uncertainties facing markets are unlikely to go away any time soon. Volatility will remain a fixture and for the strong-hearted with deeper pockets, this could present trading opportunities.
However, be careful not to throw caution to the wind and trade excessively during market rallies. Go ahead and trade but set limits and realistic targets to manage risk.
The writer is OCBC Bank's vice-president of group wealth management.
small change
</TR><!-- headline one : start --><TR>Fortune favours the brave in uncertain times
</TR><!-- headline one : end --><TR>Volatile markets present trading opportunities but discipline is vital </TR><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By Vasu Menon
</TD></TR><!-- show image if available --><TR vAlign=bottom><TD width=330>
</TD><TD width=10>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->The recent rally has left many investors confused about where markets are headed and what to do next.
It highlights the difficulties of investing in uncertain times.
Despite glimmers of hope, the problems behind the current financial crisis have not been resolved and there are still several uncertainties looming on the horizon.
So what strategy can investors adopt in times of uncertainty and extreme volatility?
Before we address this, let us look at some uncertainties and risks that investors should bear in mind.
Uncertainties
Even though some recent economic data turned out to be better than expected, global indicators are by and large still grim.
Although the Obama administration has come up with a plan to rid US banks of toxic assets, it remains to be seen if the plan can be executed successfully.
And although there have been some positive news flows from US banks, it is still too early to say that the troubles are over.
For one thing, the amount of toxic assets in banks' balance sheets may have been underestimated and could turn out to be much larger than expected.
This would have implications for a successful economic recovery, probably rendering it more complicated and lengthy than expected.
The International Monetary Fund recently doubled its forecast for troubled assets in global financial institutions to US$4.1trillion (S$6.18 trillion), from its previous estimate of US$2.2 trillion.
Part of the higher forecast is probably due to troubled loans originating out of Europe. European banks have significant exposure to central and eastern European economies which are in dire straits and the problems in these regions could rear their ugly head in due course.
How best to deal with uncertainties
For a start, investors can consider maintaining two types of portfolios - a tactical one for short-term trades and a strategic one to capitalise on medium- to long-term opportunities.
Be disciplined when managing tactical positions
Even though the outlook is uncertain and markets could see more downside, it does not mean that more sophisticated investors with a strong risk appetite should stay out of markets altogether.
There will be tactical or trading opportunities from time to time after occasional bouts of sharp sell-offs, as we saw recently.
But those looking to trade ought to be disciplined.
For one thing, they should not get carried away and trade too heavily, risking a substantial portion of their available funds.
Also, realistic targets should be set to take profits and cut losses, and these levels should be adhered to strictly.
When stocks rally like we saw recently, traders who have made profits get over-confident and greedy, and may take on larger bets as markets head higher.
This is not very wise.
On the contrary, trading positions should be reduced gradually as markets surge. There will always be another opportunity to re-enter markets after they have see a decent pull-back.
It is never easy to sell into a rally even though targets have been met. But unless you sell, the gains you have made will remain as nothing more than paper profits.
A friend who bought into the gold-backed exchange-traded fund listed on the Singapore Exchange found it hard to take profit although she was sitting on a good return after only four months.
She had bought into the fund on Oct 23 last year, at a unit price of about US$72, intending to trade. She felt that gold had been oversold in the aftermath of the Lehman Brothers collapse, when in fact the precious metal should have been sought after for its safe-haven status.
Her assessment was right.
Gold rebounded sharply and by February this year she was sitting on a hefty gain of more than 30 per cent (in Singapore-dollar terms); higher than her targeted 15 per cent return.
Yet she was hopeful that gold would head higher and wanted to hang on to her trading position.
She may not have been wrong as gold is probably a good long-term bet and could head higher over the next three to five years.
But she had bought into the precious metal with a short-term perspective, aiming for a specific return that was not only achieved, but surpassed by a wide margin.
When rationality finally prevailed, she took profit at US$96, and it was good that she did - the fund's unit price fell subsequently to around US$87.
Capitalise on downturn to build strategic portfolio
The current crisis also presents medium- to long-term opportunities for those looking to build a strategic portfolio, as several markets have fallen substantially from their peaks.
However, this is not to say that prices will not fall further.
Nevertheless, it is hard to time the bottom and those who are afraid of missing the boat can nibble gradually through a monthly investment plan, spreading their purchases over the next 12 months or longer.
This way, should markets weaken further, one can stay invested and benefit from the lower prices.
For those with a strong risk appetite, Asia is one area that offers attractive long-term investment opportunities as the region's economies are likely to outperform their Western counterparts over the next five years.
Asian governments, which have been relatively prudent, also enjoy a stronger financial standing compared to their peers in the West.
Aside from Asia, the commodity sector also looks attractive from a long-term perspective. The sector stands to benefit from emerging economies like China and India, where population growth, consumption spending and infrastructure development are likely to boost demand for soft commodities and base metals in the coming years.
Gold is another commodity with a lot of promise.
The supply of precious metals is limited, while investment demand looks set to grow. Gold is also likely to benefit if the greenback loses its appeal in due course.
Don't throw caution to the wind
The uncertainties facing markets are unlikely to go away any time soon. Volatility will remain a fixture and for the strong-hearted with deeper pockets, this could present trading opportunities.
However, be careful not to throw caution to the wind and trade excessively during market rallies. Go ahead and trade but set limits and realistic targets to manage risk.
The writer is OCBC Bank's vice-president of group wealth management.
