A Walk Back Memory Lane: The Hong Kong Market Rally And The Oil Slump

Every quarter, I tend to write a personal memo, just to pen out my thoughts during that time. Many times, it is my personal view on some of the macro situations at that point in time. For example, I have been bullish about the Hong Kong market for the past 2 years. However, the longer I advocate for the market which seems to be trading at what I perceived at depressed levels, the lower it kept falling. In a personal memo back in 2013, I have written the following comment:

Q4-2013: ‘China is undergoing a major restructuring exercise. Fighting corruption and restructuring their financial system might take some huge effort and time, but given the current valuation of the region, it might seem to be worth the wait. There was once a famous investor who said “Be fearful when others are greedy, and be greedy when others are fearful.” We always try to do just that.’

 

And finally it seems that with the recent Hong Kong market rally, which has saw the Hang Seng Index jumped more than 12% in the last two weeks. Although many news reports have surfaced talking about the buildup of a bubble in the Chinese market. However, we have to note that the Hang Seng Index, even after its recent rally is still trading at a price to earnings ratio of only 11.5 times, which is one of the lowest range in the Asia market. I can’t speak for other investors but I certainly am in no hurry to sell any of my Hong Kong portfolio.

 

I written another personal memo at the end of first quarter 2014 where I talk about the US recovery and what it meant for China and the oil price in particular.

Q1-2014: ‘We are strong believer of being a contrarian when investing, meaning that whatever is straightforward is wrong. So what are the visible truths currently in the market?

1)      Federal Reserve will start tapering this year, therefore interest rate is going up

2)      US is on the road to recovery

3)      US will be energy independent with the shale gas boom

4)      China is facing a prolong slowdown

5)      Commodity prices are facing downward pressure

We are not saying we should bet against all these statements. Being a contrarian does not mean being different for the sake of being different. However, we should investigate if all these things can in fact occur as the same time?

If the US is on its road to recovery, why is its household median income not improved? Currently, it is has not return to the pre-crisis level or even to the level 10 years ago. Furthermore, if interest rates are in fact coming up, wouldn’t that slow down the recovery of the US? If the US is on its road to recovery and China is the main supplier to the US economy, wouldn’t they benefit on US recovery? With the shale gas boom, the US is planning to be energy independent by 2020. However, the cost of drilling shale oil is as least 3 times more expensive than traditional oil.

We can see that the US is still highly dependable of oil coming from Latin America and the Persian Gulf. It seems unlikely they will allow the US to complete cut off this trade revenue for them without creating a price war. So logically, some of the events might occur but all of them are unlikely to occur together. We are well positioned for any “surprise” that might arise.’

 

At the time of writing, oil prices are mainly hovering around US$100 per barrel. Today, oil price are hovering around US$50 per barrel.  Although, I never take pride in being a forecaster, it does show that my concern last year was quite well justified. And that is the key issue here. The key advantage of writing down my thoughts about the market conditions quarter on quarter is not a way to predict the market direction of the market, but rather it is a method I use to remind myself of the possible risks that existed in the current market place.

 

These risks are what we need to look out for when building our portfolio. I tried to diversify my portfolio away from the risks that I am most concern of at a certain point in time. That is not to say that I will completely refrain from investing in that particular sector or industry, but rather I will limit my investment in these fields so that if my concern is proven right (as in the case of the oil slump), my total portfolio would not suffer a widespread destruction.

 

I hope the lessons I learned from my personal memo would be valuable to you as well. The next time you build your portfolio, try to think of it as a combined entity instead of the individual stocks that made up the portfolio. Most of the time in investing, picking the right stock is only the beginning, similar if not more effort should be put into constructing a portfolio that allows you to whether through the storms ahead.

 

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned.

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