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Fear factor

Investors should assess how the market is acting and align their positioning accordingly


THE best investment advice I ever received was: "The degree of unprofitable anxiety in an investor's life corresponds directly to the amount of time spent dwelling on how an investment should be acting, rather than how it actually is acting."

There continues to be a high level of fear in investors ever since the Trump election win, especially for investors who cut their equity exposure on that fateful day, as the market continues to make new highs on an almost daily basis. Since the beginning of the year the rally has broadened globally, with Emerging Markets joining in, and the Hong Kong/China stock markets having the best start to a year in over a decade.

We are being barraged on a daily basis with far more negative commentaries on investing and how an imminent market drop is around the corner. From Donald Trump's continuing Twitter storm to returning fears of a breakup of the European Union, there are plenty of reasons to expect a downturn in global equities. A decade of weak returns has conditioned investors to expect that rallies are always followed by sharp corrections.

Now is always the most difficult time to invest. Persuasive arguments for both sides can always be made with the imperfect information available. Investors looking for a perfect time to invest, such as strong growth with cheap valuations, will never find it and be forever on the sidelines.

A few years ago fears of a US interest rate hike, the "Taper Tantrum", was enough to send equity markets sharply negative. Now talk of an additional rate hike is actually pushing equities higher. Clearly market sentiment has changed.

A traders' portfolio should be in line with the market action. Comments such as "I will invest after a 10 per cent pullback" are not just wishful thinking, they are self-defeating. As I write this in early March, -10 per cent was just two months' ago. Despite all the negative commentary, market up-days are stronger than down-days, with a succession of higher-highs and higher-lows.

Equity rally

Additionally, an objective analysis shows that the equity rally is broadening globally, as underlying economic fundamentals and leading indicators are improving in many countries. The probability of an economic recession is at the lowest in years. A correction is always inevitable, and when it finally happens, investors would be well served by remembering that corrections while economic growth remains positive tend to be short and shallow, similar to what we saw in January-February 2016. They are far more often a buying opportunity, rather than a warning of a bigger bear market ahead.

This pervasive fear of a market correction is reflected in the collective average portfolio of Asian private banking clients, which shows cash levels as high as 30 per cent, and equity holdings below 25 per cent. Worse than being on the sidelines, are bearish investors who, not content to be in cash, are outright shorting the US equity markets due to its high valuations, holding onto their shorts as new highs are being made almost daily. A number of professional investment managers have been negative (and short) US equities since 2010, with disastrous consequences for performance. Positioning one's portfolio in-tune with market action is a far less stressful way to achieve better results.

Another sector where market action is running contrary to investor positioning is the bond market. The chorus of forecasters proclaiming an end to the three-decade bond bull market is increasing daily, and has been joined by a number of very successful fund managers. And yet the long-end of the bond market refuses to sell off any further, with market action no longer bearish. If the deafening predictions of an unfolding bond bear market are correct, this would be the first time in history that the majority of investors have correctly identified a market top.

A forecast on the future is just another opinion - there are thousands of these and any one of them taken individually is no better than a coin toss. Instead of basing your portfolio decisions on someone else's opinions about the future, assess how the market is acting now and align your positioning accordingly. W

AL Wealth Partners is an independent Singapore-based company providing fund management and advisory services to accredited investors

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