Tuesday, 21 January 2014

Article on Mr Hu Li Yang: Don’t Fall Off The Horse’s Back In 2014

Source from Shares Investment:


If the previous 10 years were years of wealth appreciation, then the next 10 years will be years of wealth depreciation. This is the grim and stark prediction that Asian investment guru, Hu Li Yang had when I caught up with him when he was in town over the weekend.
Eager to find out more, I asked him about his outlook for 2014 as well as what investors should look out for in the year of the horse.

Outlook 2014 – High US Stock Prices A Bad Omen

Off the bat, Hu was very pessimistic. When asked about his outlook for 2014, he mentioned two major factors that have fed his naysaying. The first factor being that US stock indices are currently at their peaks. And as with most situations, when prices have hit peaks, they usually fall dramatically.
In fact, all three major US stock indices (S&P 500, NASDAQ, Dow Jones) are currently at historic highs. Hu felt that US markets are currently reflecting all future expectations of an economic recovery. In fact, he feels that US markets are currently overpriced.

Source: FactSet, 5 year chart on S&P 500 (Blue) vs Dow Jones Industrial (Green) vs NASDAQ (Red)

Hence, in an overpriced market, all that is needed is a small nudge in the opposite direction and the house of cards would fall.

The second major issue that Hu noticed was that during the first few days of trading, the broad Straits Times Index (STI) had black candles for four out of five days.
In his analysis over the years, Hu found that the yearly performance of the STI can be extrapolated from the first five days of trading. He realised that this extrapolation had a 70 percent probability of being true.

Source: FactSet, candlestick chart of the STI in the first few days of 2014 trading
A quick screening of the past two years revealed that Hu’s assertion seems to bear some weight. In the beginning of 2013, the STI had black candles for four out of five days while in 2012, the STI had white candles for four out of five days.

Source: FactSet, candlestick chart of the STI in the first few days of 2013 trading

Source: FactSet, candlestick chart of the STI in the first few days of 2012 trading
Coincidentally, the STI recorded double digit growth by the end of 2012 while by the end of 2013, the STI barely managed to eke out growth.

In Agreement With Goldman And The Two Morgans
With this much foreboding, I asked Hu if he agreed with an equally pessimistic report ( http://www.businessweek.com/news/2014-01-06/goldman-to-jpmorgan-say-sell-emerging-markets-after-2013-tumble) on emerging markets by three top US banks. Without hesitating, Hu replied with a resounding yes.

He mentioned that back in 2003, he had written that the decade to follow would result in wealth accumulation in which asset prices will appreciate. With the exception of the Great Recession of 2008/09, asset prices did appreciate.

However, from 2014 onwards, Hu feels that the decade to follow will be that of wealth depreciation. He feels that asset prices are currently in the overpriced region and will have to correct.
In particular, the following two to three years will see price corrections that will hurt. Immensely. Given that the US is expected to start increasing interest rates in 2015, Hu feels that the second half of 2014 and 2015 will prove to be immensely challenging for traders or investors who are holding on to assets.

Cash Will Be King

Conversely, Hu said that investors or traders who are sitting on hoards of cash will stand to benefit from the price correction. However, Hu cautions that such value investments will be long term and investors who value invest should not be eager to cash out.

Value investing is a form of investing in which investors buy oversold or underpriced assets. High profile proponents of value investing include the Oracle of Omaha, Warren Buffett as well as Benjamin Graham.
But as so often repeated by Hu during his seminar as well as during the interview with me, caution should reign supreme in investors’ minds. In the year of the horse, it is pertinent that investors not fall off the horse’s back in the search for yield and returns. Hence, hold onto your cash tightly and only invest after you have done your homework.

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