In the beginning of the year I mentioned about our local banks, how raising long term interest rates would benefit them and also how they were dirt cheap (PE 10-11 only). I personally bought into OCBC with about 20% of my funds and it contributed well to my overall portfolio.
Now we are in another bull phase as the STI gained 10% over the last 6 months
Most of these gains came from our bank stocks which made up about 1/3 of the straits time index
6 months performance
Currently the index trades at slightly above 14 times earnings with a dividend yield of close to 2.5%, which is really getting close to its historical PE of 15 times. As such level I really think the market is fairly valued and any purchase at this level would have little to no margin of safety.
If you ask me whether the market would go higher or a major crash would come, my answer would be "I really don't know"
However there are two key areas that I would pay close attention to
1) Interest rates
As the US ends its bond purchases by 2014, long term interest rates would likely to start picking up from 2015, thus the rally we have seen in bank stocks, as they benefit most from the steeper yield curve. However do note that for that to be true the short term interest rates must continue to stay low! Keep a close watch at short term interest rates, it wouldn't be near zero forever... eventually it has to become back to the norm of say 2-5% levels instead, but for when? we can only ask the feds.
As you read the headlines, there's a lot going on and here's my simple thought. Its easier for things to get a lot worse, but very difficult for a sudden peace and recovery.
Oil prices are likely to stay at around $100 or higher for a longer time than most would expect. As such it would be wise to avoid certain industries that are negatively affected by such extended periods of high prices. Such as the transport industry (I don't wanna go into detail about how bad airlines are, just pick up a report on SIA or Tiger.. its pretty gloomy with no signs of recovery)
Sectors that continue to support the Oil and Gas industry would be good areas to park your money in. My recent choice was Semb Corp Industries in which I mentioned in detail from my previous post, their Marine business has a pretty solid order book for the coming 5 years and their Utilities business is stable with recurring income, at net cash position I'm pretty confident in this golden chicken laying eggs.
Lastly as the stock market rallies, investors of all sorts are getting more confident and looking like geniuses. Don't let a winning streak cloud your judgement, continue to look for great companies with honest management and hold these businesses for long term.
A rising tide lifts all boats
Felix Leong aka pipi486