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Smart Investing in the Year of the Wooden Horse 2014

The lunar new year will arrive on 31st Jan 2014, heralding in the Year o f Horse.  According to the Chinese Astrology calendar, this lunar new year will be the year of the Wood Horse.

Chinese astrology is based on yin-yang 5 elements of wood, fire, water, earth and metal.  Combined with each of the 12 animals, every birth chart will have its own 5 element weights which is the basis of prediction of one’s fortune, marriage, health and life.  The lucky element this coming lunar new year is wood.

The Horse is one of Chinese favourite animals.  From ancient times, the horse’s usefulness was its transportation role which is the lynchpin of winning battles and wars.  Almost any good Chinese general pay tributes to his own horse.  Not surprisingly, over the centuries, the Horse has transformed into a symbol of staying ahead of competition and victory.

According to Chinese horoscopes, the Horse hour is between 11 am till 1 pm when it is best to make hay while the shine shines.  Effectively, sunshine generates the heat required for horses to shine and populate.  Not surprisingly, the Horse is connected to heat, fire and the colour red.  It tends to be a show stunner with its presence and is also seen as a romantic star.
To me, the Year of the Wooden Horse will herald in a few investment trends –

  1.  Equities will outperform yield-dependent assets like bonds, but can be more volatile

I know of many friends and relatives that are Horses.  They tend to be lively, hearty and energetic people.  I do expect equity markets to resonate like horses in the coming lunar new year and I expect equities to outperform bonds on the back of accelerating global growth, controlled inflation and good corporate earnings growth with supportive valuations.

Recent US figures have portend to faster economic growth of 2.8 – 3.2% GDP growth next year.  Europe is slowly, but surely transiting from no growth to meaningful growth.  Abenomics in Japan has also been instrumental  in spurring higher economic growth.  The new leadership in China has shown that reining in shadow banking and mis-directed lending does not necessarily result in lower growth.

However, like horses, markets can go to test extreme levels and investors should be prepared to  experience black swan events.  In the Horse year 1990 for example, equity markets went into a tailspin when the First Gulf War began in August 1990 with the invasion of Kuwait by Iraq forces.  Markets subsequently recovered sharply when the US forces intervened.

  1.  Emerging markets (EM) will start to gallop again

Emerging markets were hard hit since talks of tapering started on 22nd May 2013.  Continued uncertainties in US monetary tapering, exodus of funds outflows and country-specific crisis afflicted India, Indonesia, Brazil and Turkey which were the hardest hit.

While I do not expect a dark and shining stallion to ride from these markets, I would expect these unloved EM markets to have a better year in 2014 in view of better trade growth, reining in of current account deficits and more stable currencies.

For example in India, with the appointment of a market savvy central banker, the RBI has raised interest rates and help rein in an exodus of foreign funds outflows and help the Rupee to settle at a more stable INR 60/US$1 compared to its throes of IND68.85/US$1 during the sell-off in August 2013.

  1.  Monetary tapering will continue without the tantrum

Like a wild stallion not wanting to be leashed, markets threw a huge tantrum when monetary easing was first talked about on 22nd May 2013. Bond and equity markets fell sharply as they reflected the headwinds of a rising yield fear environment as well as perceived Fed miscommunication about the “tapering” rather than the “raising” of interest rates. 

As it is, tapering has started – the Fed announced the decrease of US$10 billion monthly bond purchases, down to US$75 billion in December 2013. 

I certainly expect tapering to continue through the Year of the Horse, but the dark stallion is unlikely to impact markets so negatively as compared to 2H2013.  The stallion certainly knows how to gallop down the slope and win the local derby.

  1.  “Oxen work hard, horses enjoy the good grain”

There is a famous Chinese proverb which translated means “oxen work hard ,  horses enjoy the good grain”.  In my asset allocation policies, I continue to advocate that there is no room for complacency and always leave some hard cash to take advantage of a possible black swan event that may afflict markets badly.

While it is important to clear the mind and “enjoy the good grain” in my mountain climbing and trekking trips in the Dandenongs forest region in Melbourne, I am always cognisant of the various probabilities of a market sell off if market expections are not met.  Over the years, these situations normally offer very good buying opportunities and the chance to beg mega beggars, especially among the small-cap stocks section.

  1.  As always, be prepared for black swan events that can hurt markets on a systematic scale

The past few years have been bewildering, at least for investors that thought that after 1989, when the Berlin Wall came down heralding the end of the Communism and Socialism, markets would be well dictated by sound Capitalism.

Alas, street protests and people marches from Greece, Spain and Italy during the Global Financial Crisis (GFC) to Thailand, Turkey and Brazil currently, have rattled many investors in the bond and equity markets.

The real rivalry during the Cold WAR was the clash of 2 different economic systems – Communism/Socialism vs Capitalism.  Now that Capitalism has prevailed, markets have discovered it is indeed not the economic panacea.    Instead, it probably has caused many a investor pancreatic disorders with the severe crash of 1990, the Asian Financial Crisis of 1997 and the GFC crash of 2007.

 For my regular readers and all,  may I take this chance to wish one and all a Happy and Prosperous Horse Year.  Remember to run with the horse, but do pull back for a breather here and there, so as to enjoy the scenery surrounding the fields that the horse runs on.

Gabriel Yap
Gabriel Yap

Mr Gabriel Yap, CFA was Senior Dealing Director with various stockbroking organizations, including a 3-year stint in Wall Street, for 20 years before he retired in 2009 to devote his money and time to philanthropy.  He has donated and assisted the Charities Aid Foundation, Australia and Little Bird NGO, the largest NGO in China.  He also oversees the running of Golden Saint Resources Anti-Aids clinics, a humanitarian and charitable program for the people of Sierra Leone and Liberia.

He still appears in popular media like CNBC,Bloomberg TV, CNA and Mediacorp Radio on stock markets, capital markets and industry analysis and travels round the world to give investment seminars and conferences. He runs investment firm GCP Global which invest in global equities, bonds, reits, derivatives, real estate and commodities.  GCP Global is anchor investors in several IPOs in Asia and Australia.

Mr Yap anchored the Money Savvy column in the venerable Readers Digest magazine for 2 years.   Mr Yap also currently contributes to MillionaireAsia and The Independent newspapers on all things finance and investments.Mr Yap is also Special Advisor of London listed Golden Saints Resources, GSR which owns 340 sq km of diamond and gold mines in Sierra Leone.  GSR presently has a market capitalization of S$100 million.

Mr Yap splits his time between his home in Australia and Singapore as well as Europe, Hong Kong and China.