Wonderful! That was a “bounce”. So far so good this year after basically every asset class was down in 2018.

Last year was admittedly a tough one for emerging markets, where some of the currencies were under considerable pressure, and even falling to record or near-record lows against the strong US dollar. From its 52-week high set in January 2018, the MSCI Emerging Markets Index sunk into bear market territory by the end of October.

Regardless of the positive market action so far this year, investors are more pessimistic, maintaining record levels of cash as the global economy is rapidly slowing down, earnings are under pressure and trade wars are a fact of life thanks to Trump.

The latest Bank of America Merrill Lynch Global Fund Manager Survey,which drew responses from 218 participants with US$625 billion in assets under management, notes that the biggest tail risk for fund managers remains a US-China trade war, as Trump continued to take a tough stance against what he considers an unfair relationship.

Not forgetting the potential of a no-deal Brexit that could roil the sentiment in a highly connected world. A no-deal Brexit would be highly disruptive to markets. Notably, all bilateral trade deals would need to be renegotiated without the benefit of a transition period. British authorities estimate that this scenario could cause a 25% drop in the pound, which is already down significantly since June 2016, and a 30% decline in home prices!

Well, the global recession narrative continues to gather adherents regardless of what the stock markets are doing. In macro terms, many places across the world are getting worse. A report that crossed my desk notes the economic data across the Eurozone has deteriorated at an accelerated pace. While Italy is the only country officially declared recession at this point, the data is suggestive that Germany, France, and the broader EU are not far behind. Meanwhile, some economists on my radar screen see China’s economic malaise continuing.

Recessions are a normal part of the economic cycle. Yes, we will have a recession – eventually. And life will go on. There is no reason to panic. A recession does not mean that people cannot make money in the global markets.

The mainstream media loves pandering to the most extreme views to get viewers to tune in each day. Remember that reading some sensational news articles in the internet gets you closer to blowing up your account than here.

Moving on, some investors are asking me where do we go from here after my non-consensus approach nailed the markets in 2018. Will it next turn into the Bitcoin market? I am just kidding. Investing is not easy. For sure, no one can be correct all of the time.

Stepping in and making any hard predictions on where the markets may be headed from here is a useless exercise. But that will not stop the “gurus” from coming up with some predictions that is void of all the necessary data to make an informed decision.

The market action we have seen in the last few months suggests there may be more to this volatile market action than meets the eye. It is true that some bad news and uncertainty are widely priced into the markets, the only question is, how much?

In my work, it is all about lining up the probabilities using a variety of proprietary tools to navigate the markets. While history does not predict future returns, it certainly does give us ideas on how the markets react given similar circumstances and investor psychology has an impact on how markets react too. These periods of uncertainty can fool many investors.

I am more bullish than some of my fishing buddies this year but the humble view here is that the markets have not priced in enough bad news.

For short-term portfolio and are sitting on a comfortable profit from last year, why sweat trying to eke out a few more basis points especially when the risk/reward ratio sucks so badly at this juncture?  For medium to longer term portfolios, short-term volatility is not a big concern as long as investors know what they are doing.

Risk Control

You never know when a flock of black swans is going to come out of nowhere causing the markets to crash. I am too old to lose all my money and start over again as a junior trader. Therefore, I am pretty careful when it comes to risk control. The first goal of risk control is to preserve whatever capital I have. The other goal of risk control is to make sure it is profitable no matter what happens in the markets.

I am not fully invested at the time of writing this article. I can always find good buying opportunities when I have excess cash available but I won’t follow the big boys that continue to have the story wrong. My personal advice-please ignore your advisor who keeps telling you to stay fully invested all the time. 

On another note, it is a shame that investors have never really been taught on how to allocate their assets to anything other than certain investments within their advisors’ own comfort zone. It is a very big world out there with lots of different opportunities.

– By YH Wong

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