Should we exit China?

China is the first country to recover from the global recession. Now, some people are predicting that it will also be the first to run into potential problems. Why? Because things have been good for so long. What kinds of problems would China face? The problems related to trying to grow too much. As Micheal Shulman puts it, "Chinese land developers and industrialists are now engaged in financial musical chairs — they will keep borrowing to grow until they absolutely, positively cannot borrow any more, assuming someone else will get left standing without a chair. Well, the U.S. financial crisis began when Bear Stearns found itself without a chair." The whole story here. Remember, Richard Band also mentioned about getting out of China in my past post. And, so has Martin Lau. I think it is time to sit up and pay attention, at least for the short term.

As of now, I am still vested in China Construction Bank. I am long term bullish on China, and believe that one day, the SSE will break its high of 5522. It is currently at 2808, so a long way to go before bracing for a crash.

A slightly different view of the stock market in 2011

Richard Band asked everyone to buy stocks in his mass emails in March 2009, and of course, he was spot on (but I regret now that I didn't follow his advice then). I googled for reviews on his stock recommendation newsletters, and the majority were approving of his performance. He has written on his predictions for 2011. It is interesting to note that whilst many others are bullish on emerging markets including China, he has turned very negative on China. Also, while others are bearish on the dollar, he is very bullish on the dollar.

1. The S&P 500 and Dow will breeze past this year's 9%+ performance in 2011.

2. Obama and the Republican Congress will shove aside their differences and work together in the New Year. Good news for investors.

3. The Dollar Will Rebound

4. Look for Serious Cracks in the China "Miracle"

5. Brazil & India Will Be Red-Hot

6. Gold, Silver & Oil Will Hit New Multiyear Highs

7. Home Sales Will Bounce Back

Caveat Emptor.

Analysts' picks for 2011

A strategy of selective buying is recommended in a mature year of the bull market in 2011. Some analysts reveal their buying lists:

Credit Suisse: Kep Corp ($12.10), SembMar ($5.50).
Wilmar ($7.35)

Kim Eng: Noble ($2.95), Olam ($3.88), Kepland ($5.60)

Citi: DBS ($15.90)

Views from various analysts on stock market performance in 2011

These views are gathered from an article in The Edge, after interviews with Angus Tulloch (First Inv), Bob Doll (Blackrock), Frederic Lamotte (Credit Agricole), Lim Say Boon (DBS Pte Banking), Mark Mobius (Templeton), Tan Teng Boo (Capital Dynamics) and Xavier Baraton (HSBC Global Asset Mgt).

1. Bull run to continue
Bull run is not over, as markets have not reached the euphoric stage. However, there is an increased need to practise stock selection, and also to pay attention to valuations.

My opinion: Bull run will remain, at least till middle 2011.

2. Emerging markets remain the place to be
Fund flows into emerging markets to continue, but there is a case for developed countries, especially those with operations in emerging economies. However, Tulloch is not too excited on China, citing further interest rate increases needed than market anticipates. He is negative on Chinese banks (oops, China Construction Bank is in my portfolio), as he believes deposit rates will rise more than lending rates, is squeezing margins). Tan(a reputed contrarian who correctly predicted a bull market back in 2009)is however, more optimistic on China. In fact, he sees a recovery in the Chinese stock market next year as valuations look attractive and there are just too many China bashers.

My opinion: The US may have more room to recover, but STI is still the place I am most comfortable investing in, and it will not change in 2011. I just have to pick the right sectors.


3. Gold and commodities price to continue to rise. Emerging market currencies to rise against dollar.

My opinion: My stance is still to long gold and the commodities companies in Singapore.


4. Some events that may derail the stock market recovery
These include the euro soverign debt, Iran, N. Korea, investor concerns with governments running out of stimulus bullets, hard landing in China, deflation and of course, finally an asset bubble that will eventually burst. But, no one believes that the bubble will burst in 2011, yet.

My opinion: I am optimistic, but cautiously so. Valuations are not exactly cheap now, and I will never stake everything on stocks. Especially in 2011, the 3rd year of the bull run that started in early 2009.

If the last bear has turned positive, is it time to be weary?

Marc Faber, the last bear, has stated that he does not foresee a double dip recession. This is definitely positive. But does that mean that stock prices are going to fly off the window from here on?

Remember, the markets have rallied hard from the low of March 2009. Our local STI, for example, has rallied by as much as 120% since. Will the market continue to go up in a straight line? Well, someone told me that a bull market can last anything from 2.5 to 5 years. Going by the most conservative measure, the earliest the bull market can peak is by the middle of 2011. This leaves us with just 6 months to prepare sufficiently for an exit from our long positions!

What can derail the stock market? For one, stocks are getting expensive in relation to their dividend yield and price/earnings multiples. And I read in the headlines today that inflation will be the key threat in 2011. With inflation, comes rising interest rates, and although rising rates and stock prices can rise simultaneously, after a while, they begin to go in different directions. And I expect this to happen sometime in the second half of 2011.

Whilst I am positive on selective sectors in the first part of 2011 such as gaming, plantation and oil (I am invested in these sectors), I will avoid property due to likelihood of increase in interest rates.

Even Marc Faber does not think there will be a double dip

Dr Doom Marc Faber has finally admitted that he does not expect a double dip recession. Now, this is a major major statement coming from the bear of bears. This is what he wrote in his blog: "I don`t think it will double dip for now, we are living in a global economy today and you have parts of the world that are relatively weak, like the US and Europe, although from the lows they have recovered somewhat. Than you have other parts of the world that are very strong, emerging economies, especially China and India. The big question is what will happen to that part of the world."

Three cheers to the economic economy.

Wilmar's woes continue

My decision to cut Wilmar off from my portfolio should prove to be right, given that the stock is now off more than 5% from my purchase price - only thing is, I have not managed to dispose of it (at the price I want), and am now "holding the bomb".

Here is what triggers the massive sell-off in its shares: Wilmar (F34.SG) is down 1.5% at a 6-month low of S$5.83 on concerns the group may be losing its focus as it ventures into property development in China with Kerry Properties (0683.HK) and Shangri-la Asia (0069.HK). OSK, which has a Buy call with a S$7.35 target, says while the project in Liaoning''s Yingkou City would be profitable given the expertise of Wilmar's partners, "this could mark the start of Wilmar''s loss of business focus and corporate discipline."

Citigroup, which has a Hold call and a S$6.76 target, expects Wilmar to bid for more sites in China; "we agree that Wilmar can leverage on its existing contacts and network, but we are not entirely comfortable with the fact that they are expanding beyond the consumer food-related business." The companies will jointly develop residential and commercial properties and a hotel in Yingkou. Near-term support is at S$5.60 (June 30 low).

In a separate report, Phillip Securities has highlighted that " most of the negative developments have already been prices in to its share price, and moreover we do not expect price control to be long drawn. Growth story of WIL still intact, and we see buying opportunity in current price and upgrade our recommendation to a Buy while keeping our target price of S$7.08.

I retain my stance of looking for the best opportunity to get rid of this stock from my portfolio. This is more to do with my wishing to lighten my portfolio than about Wilmar's foray into property. Between Wilmar and Olam, Olam is the stock I prefer in my portfolio.

This may not occur over the next few days, but I believe a temporary reversal in the price of Wilmar could result in an opportunity to exit at a more desirable price.