Where I am Putting Our Money in 2010

At the start of 2009, the allocation strategy for our fund can be summarized under the central theme of "Global Economic Recovery". Everybody was risk adverse and doom was predicted everywhere. This was expanded from our 2008 focus on sectoral recovery in home building, building materials and furniture, specifically in the US markets when valuations across the markets nose dived.

In 2009 , the broad tactical allocation was the easiest in the last 4 years of our fund's operations - collection of quality big cap companies at really depressed prices and starting exposure to cyclicals. This was when we picked up shares on Merck, Pfizer, Philip Morris, P&G, General Electric and loaded up on Coca Cola. And subsequently, expanded on Coach, Estee Lauder.

Before I talk about 2010's strategic allocation, let's look at some macro risks and how I considered them when shaping my strategy going forward:

1) Government Stimulus- Towards Q3 2008, there was injection of huge amount of liquidity to the capital markets and governments around the world launched their stimulus plans in hope of preventing their economies from plunging into a deep recession. M2 money stock seems to have stablised. Going into 2010, governments are wary about the inflationary pressures facing their countries but at the same time are cautious about withdrawing their stimulus packages too quickly that will stall growth in their economies. WSJ reported that the chinese central banks are starting to pull back on stimulus efforts through increases in reserve requirement ratios and potential interest rate increases later in the year.
[refer to Fed's chart: http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=M2&s[1][range]=5yrs]

2) Interest rates - Fed fund rates remains near zero and central banks, especially asian ones, are starting to increase rates as combating inflation becomes a key priority of the governments. This will result in the higher cost of capital and the reduction of money supply to the market.
[see Fed's charts: http://research.stlouisfed.org/fred2/series/FF?cid=118]

3) US Dollar - As investors move into riskier assets, asian central banks raise interest rates, US deficits remain large, and feds maintain their easy money policy, US dollar will continue to weaken further.

In 2010, the 2 key themes to my strategic allocation are:
1) Global Economic Recovery
- US Housing Recovery - Home building, building materials
- Global Consumer Spending Recovery - Discretionary Spending
- Increase in Industrial Production Capacity - Machinery, tools and material

2) Rise in Wealth of the Asian Middle Incomer
- Education
- Fashion: Cheap Chic
- Travel

The first theme is basically a continuation of last year's, except for the changes in the sector focus. My intention is to get out from the stable big caps and focus on housing which has generically lagged in the overall recovery, maintain exposure in consumer spending and explore expansion in industrial production as the last 2 years has been taking a lot of capacity out of the system.

I have always wanted to gain exposure in the BRIC economies. Brazil and Russia are rather foreign markets to me and i have limited access to the data available and the trading platforms i have easy access to. For India and China, i have always been wary abt the sky high valuations tagged to the growth of the companies in these markets. in the long run, i believe that there will be a lot of potential in the development of these 2 large economies. Thus, i will be adopting a prudent approach when allocating to the 2nd theme stated above.

With stock markets rising dramatically over the past year, tactical allocation in individually counters will be challenging. I never believe in timing the market or in any technical analysis. The approach that i have been taking in the search for oportunities has always been price (usually a distressed one) first then visiting the qualitative and quantitative valuations of the firm... i am a firm believer of Warren Buffet's saying that 'everyone knows the price of something but the value of nothing'. and i always enjoy finding value in companies that everyone dismisses prematurely.

This year will be challenging and i personally think that the returns from equity markets in the 20-30% days are over. But as your fund manager i will continue to work hard in finding value and good returns for you. Here's wishing u a very happy new year!