Time to reduce cost exposure, invest in growth stocks, precious metals etc
Updated: 2012-09-22 06:58
(HK Edition)
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With the Japanese central bank expanding its intervention on Wednesday, it is now clear that all the major central banks are now trying to stimulate the global economy. This policy intervention is unlikely to spur economic activity, however, the money creation will probably boost asset prices.
After all, when it comes to investing, monetary policy trumps everything else and the risk free rate of return determines the value of all asset prices. Today, most of the world's central banks are easing and interest rates are likely to stay artificially suppressed for years. This environment is favorable for risky assets.
Whether you like it or not, the Federal Reserve wants to save the financial institutions and its open-ended QE program will remove the mortgage backed securities from the banks' balance sheets. Furthermore, it is conceivable that this new stimulus will lower borrowing costs and assist America's housing recovery. Unfortunately, there is no such thing as a free lunch and the ongoing debasement of the US dollar will inevitably reduce the purchasing power of the world's reserve currency. Thus, from an investment perspective, I believe that investors should reduce their exposure to cash and invest in growth stocks, precious metals and high yield fixed income securities.
Turning to Wall Street, the major US indices are currently digesting their recent gains and after a brief pause, the ongoing advance should continue. The biotechnology, consumer discretionary, consumer staples and healthcare sectors have already climbed to all- time highs and this confirms that they are now in a secular uptrend. Furthermore, the S&P500 Equal Weighted Index, S&P400 Mid Cap Index, S&P600 Small Cap Index and Value Line Arithmetic Index have also climbed to all-time highs and such broad participation suggests that it is only a matter of time before the Dow Jones Industrial Average and the S&P500 Index also join the secular uptrend.
Looking at the technical data, it is noteworthy that the NYSE Advance/Decline Line has climbed to a new recovery high and this implies that the market's breadth is extremely strong. Furthermore, new 52-week highs far outweigh the number of 52-week lows and the Volatility Index (VIX) has declined to below 15. In my view, all these are positive developments.
Over in the commodities complex, it is notable that although copper is still trading above the 200-day moving average, the price of crude has reaffirmed its downtrend by slicing through that critical level. Given the state of the global economy, I maintain the view that industrial commodities will continue to disappoint investors. The Chinese economy is slowing down rapidly and under this scenario, the trend for the industrial commodities will remain down.
In the precious metals arena, it appears as though both gold and silver are consolidating their recent gains and after some additional volatility, their prices should appreciate. In terms of price levels, gold's close above $1,781.80 per ounce and silver's close above $35.10 per ounce will confirm the end of the ongoing consolidation and open up the possibility of a major advance which may last until spring. As far as the precious metals miners are concerned, the trend remains firmly up and large gains could be achieved over the following months.
In terms of currencies, it seems to me as though the US dollar Index is rallying back towards the 200-day moving average, but this rally is likely to end around that level. Thereafter, I expect a renewed decline which will probably take the US dollar Index to the 72-73 level.
Finally, over in the bond market, it appears as though the long-dated US Treasury securities will depreciate and capital will probably flow towards high yield credit and peripheral European bonds. Thus, during this rally in risky assets, income seeking investors may want to shun safe haven assets and search for yield.
(HK Edition 09/22/2012 page2)