Review on 2007:
As we are approaching the end of 2007, let us review what has gone wrong in the financial market this year. Subprime loans going bad; US investment banks, hedge funds and insurance companies who had invested in those loans had suffered losses. Then Middle East and Asia companies (including Singapore's Temasek Holdings) come into rescue. And along the way, many economists, fund managers saying that the worse had occurred, housing problem in US has reached the peak.
I begged to differ in this opinion. I believe more problem will occur in 2008, subprime problem is a contagious problem. With the huge investment banks losing so much money, their next step would be cutting labour cost to boost the bottomline, so we may see retrenchment coming up over the next few months. Hence unemployment rate in US will rise.
And when the US consumers are facing the risk of losing their jobs, they will tighten up their wallets and relunctant to spend. Consumer spending slows down, resulting in US economy slowing down as well, and countries that export good and services to US will be affected.
Light at the end of the tunnel:
Ops, I'm getting too gloomy. But there is light at the end of the tunnel. In my view all these problem will eventually be resolved when the source of the problem is resolved. The source of the problem is oversupply of US housing. When US property falls by another 10% - 30%, domestic and foreign investors will find value. And there will be buying interest in property market in America, reducing supply of unsold homes, and hence stablised the housing price in America.
If you have friends in America, probably you would know that some of the houses in America are already much cheaper compared to those in Hong Kong and Singapore. Not sure if institutional investors will shift their attention back to US property then.
But I believe all these will only happen at the end of 2008.
So what should we be investing in 2008?
Slowing economy accompanied with high inflation resulted in an economic situation call Stagflation. In this environment, many companies will suffer. This is because revenue and profit growth will slow down, while costs are rising, many stocks will suffer, hence value stock selection will becoming more important.
Since inflation will remain high as Federal Reserves is unlikely to raise interest rate to curb inflation; I'll be interested to invest in companies that benefit from high inflation, ie copper miners and agricultural industry. There are frequent talks about rising food cost in the newspapers these days, and rising cost is due to price appreciation of wheats, soy beans and corns (sugar will join in soon). Even in a slowing economy, demand for agricultural products will not slow down as those are staple food for people all over the world. Population of the world has been rising and will keep on rising, hence demand for food will still be healthy.
The other sectors that I'll be interested in 2008 are precious metals and military industry. Credit problems had encouraged US government to keep cutting rates, printing more money to fund the credit crunch, this will continue to create a downward pressure on the USD. Falling USD will cause prices of precious metals to rise. I'll be looking to buy gold and silver ETFs next year.
The world today is always at risk of another war. Tensions between US and Iran & Venesuela have become tense, US military companies will continue to win new weapons, warplanes and tanks contracts.
And lastly the sector that I have been bullish for years is oil. Oil is not just a demand issue, it is a supply issue as well. About 53% of the proven oil wells come from Middle East. For the past 5 years, there has not been significant new oil reserves been added, and existing oil wells are in declining stage.
Currently 1 person in China and India are consuming less than 2 barrels of oil a year. While 1 person in US and Japan are consuming more than 15 barrels of oil a year. As China and India economies continue to grow, more and more people in China and India will own cars, refrigerators, TV, air-conditions, and this will rise current 2 barrels of oil to 10 barrels of oil in the next 5 years. At that time, oil price could be priced at $180/barrels then.
Merry Christmas everybody!
As we merry and party, let us not forget that Christmas is about celebrating the birth of Jesus Christ.