Thoughts on the Market, Fed has Spoken, Portfolio Positioning

And the Fed has spoken. As what I suspected (and I believe most of us did too) the Fed held unto raising rates. They cited a recovering US economy but also raised concerns on the broader economy especially China and other Emerging Markets. Was there something in the data that the Fed picked up on in which many of us may not have realised? The answer is still unclear but it was spooky enough to have sent the Dow Jones Industrial Average down 200 plus points yesterday evening.

So now we ask, where do we go from here to the end of the year and to 2016? I feel that the Fed most probably should raise rates a little towards the end of the year, and at 25 basis points for a start. Interest rates need to be normalised to around 2-3% and they cannot stay at zero infinitely.

What does the current scenario look like for stocks then? It does look like a pretty tricky course ahead for equities moving ahead as we approach the end of easy money. The US which was the biggest contributor to easy money is headed to pull money out of the market. China has also still been slowing down. Thus, we increasingly need to be extremely selective about our investments so as to mitigate all the risks that we face in the next couple of years.
Thus, I think it may be useful for some of us to think through our portfolios via the following factors:

1. Quality Portfolio
- Firstly, it is important and I cannot emphasise this enough that we MUST have companies that are of quality in our portfolio. This will give us simple confidence to add unto positions when prices drop due to temporary market movements. It is simply not the time to dabble with companies with a questionable background or potential concerns surrounding them in terms of management or integrity. I have recently seen some companies in the news being involved in concerns regarding their accounting practices, background and now is simply not the time to muck around with such businesses and hoping for a turnaround of some sorts.
- One good example of a company with a solid management team is Singtel. They have continued to demonstrate a willingness to change with the times, diversify their businesses regionally and most importantly having a robust financial management team.

2. Economic Environment
- With interest rates potentially increasing, economies slowing down, oil prices at their current prices, aging populations, it is really important to position your portfolio broadly in line with those themes. For eg. I have REITs in the portfolio but am not looking to add much positions due to potential rising rates and the impact it would have on REITs (due to them needing to refinance their debt heavily and potentially at higher interest costs).
- On the other hand I have added my holdings to OCBC Bank as they would benefit from higher NIMs (Net Interest Margins) with higher interest rates. In the local context we have started to see both SOR and SIBOR rates shoot up recently.

3. Earnings and Cashflow
- Lastly, the companies we own need to be having strong and hopefully growing top-line and bottom-line earnings that then churn out good cashflows over time. The current market price does not really matter that much. What matters more to me is the historical revenue and margin numbers of the business and also what I project them to be like in future. As can be seen, alot of the 'assumptions' rely heavily on both Points 1 & 2 above.
- I don't have a crystal ball and I won't say that I can predict the future. However, businesses like ComfortDelGro and Raffles Medical are two great examples of companies that have grown their numbers well over time. Well, whether their current prices are worth investing from a valuation perspective I can't really comment. In my previous post I did comment though that I am on the sidelines for both companies due to their relatively high valuations and that viewpoint I feel still remains intact. We shall see, but again glad to have build positions in both companies over time.

I would really love to hear from you how your portfolio is currently constructed? Has it stood up to the recent tests? And are you looking to build on it moving forward? Looking forward to your comments!

Signing Off
Transitioning Stock Investor