While most investors will concentrate on the poor performance of the financial markets in January (especially after such a strong first week), the important issue to focus on is the shift in institutional money out of Asia generally, and China specifically.

Where is the money going? If you look at the individual portfolios, it is a mix. It is not flying for the safety of gold or US Treasury bonds. We are seeing a rational re-evaluation of opportunities. Strength remains in Real Estate, Technology, Health Care, Emerging Europe, Latin America, and Precious Metals (with Silver still catching up to Gold). In Asia, that has translated into a preference for Indonesia (as a commodities supplier to emerging giants China and India) and Taiwan (a critical juncture in the Technology supply chain). Looking deeper into Taiwan, the subsectors that pop to the top of the list are Optoelectronics and Electronic Components, confirming that the relative buoyancy in Taiwan is due to the Tech Sector.

However, it should be noted that the signals are much more subdued than they were even three months ago, suggesting that investment returns will return to more “normal” rates in the coming months. That squares with the newsflow. The strong US GDP figure for the fourth quarter, which was largely driven by inventory replenishment, is a lagging indicator. All of the market reaction to that figure already happened in the second half of 2009. Unless there is a dramatic pickup in consumer demand, the next few GDP readings will be more like 1% or 2% growth.

So, what are we looking for in the coming months? Overall, we think the markets will be volatile on a daily and intra week basis but that the week to week or month to month overall performance will not be dramatic. We are not looking at another trip off the cliff like the one we saw in 2008 and the beginning of 2009. Nor are we looking for a fresh bull market from these levels. Rather, we think there will be a return to rotational interest as the excess reserves created by the world’s Central Bankers continue to slosh around the globe. There is no doubt that Central Bankers and their governments are looking for exit strategies and that the volume of their money pumping activities will drop year on year but the high powered money from last year will remain in the system. With unemployment high, governments will continue to concentrate on inflation measurements that exclude commodities so that interest rates can stay at low levels. This is important for stabilizing the banking system but excess liquidity will continue to leak out into financial markets. Politics (US elections in November) and the ghosts of 1937 will keep the FED from doing anything dramatic. The ECB is unlikely to do anything that will exacerbate the sovereign default risk or make the Euro appreciate.

For investors, we recommend that you check your portfolios on a weekly basis and check other portfolios for ideas.


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