InvestRationale: My 2008 approach - mid year review

July 2008 analysis

Re-visited the portfolio and re-considered the market factors, altering the investment mix. At that time, in July 2008, view was:

Top 5 market facts as we go in for fresh round of buying

* Oil price uncertainty to continue – wide ranging estimates

* Financial/credit crunch impact uncertain – new revelations, bank crash speculation

* Emerging countries disentanglement with US not as good as previously thought on stocks, but economic disentanglement will be real

* Money fleeing equity market towards commodities, bonds and sitting in low interest cash

* USD has fallen but there is uncertainty as to how much bigger the fall will be

"Call” on the economy and the world as uncertainty continues

* Oil price will go down in the coming 2-3 quarters dramatically (go to 60) and come back after the fall. Factors that have driven up oil in my view from highest to lowest and my forecast for each:

1. Speculation and lack of alternative investments, so “hot money” chasing oil and commodities – this will move out the moment other modes of investment return to normalcy

2. Subsidies in Venezuela and Middle East drastically distort consumption especially as people feel rich – this wont change significantly hence the return to low 100s price after dramatic fall in oil price

3. Perception that demand is huge – this wont hold too long as subsidies in Emerging countries will get chopped due to inflation and huge subsidy loss currently undergone + my belief that US consumers will make real changes to reduce consumption

4. Mid-east tension especially Israel attacking Iran – this will reduce as reality of an attack diminishes

5. Perception that supply is constrained – this will continue to be a factor as we have no clear reality check on Mid East oil, the largest supplier and there is continued under-investment despite price rise in middle East

* The global financial crisis will ease in 2-3 quarters and the write-offs in the banks in reflection will look very large when people look back a year out

* The US consumer is not coming back to the mall for the next 12 months nor are they traveling or buying homes despite whatever happens. Period.

* Among emerging countries, the N-11 (Pak, Bangladesh, Viet, Eastern Europe etc) will suffer as long as the US is down. Read atleast 12 months.

* Amongst the BRICs, Brazil will continue its story of upward growth, Indian and Chinese stock markets will be pessimistic for another 2 to 3 quarters and can see negative trend too, not just flatness as inflation and probable interest rate hikes dents them (see backgrounder on inflation below that I believe in)

* USD wont see further significant erosion for next 18 months as Euro falls (economy set to tank there), Asian currencies are kept low and Commodity boom sizzles

So how do we play in next 12 months - buying

* Only ETFs for sectors + 2 stocks MAX

* Pick US Defence ETF – when average of top 5 P/E less than 15

* Pick as Financial ETF (global preferred?) – confirm P/E less than 12 for top 5 holdings

* Pick Middle East ETF

* Confirm time for Technology (Internet services, internet infrastructure or communication sector invested in tapping new world economy) ETF

* Transport – follow Warren or CP or CN – when things get hit due to slowdown

* One pure risky 10 K play - Water or alternative energy or both – narrow on ETF

* Pick a staple – Nestle or Lever (later), ETF NOW

* Narrow on Health theme to follow and pick ETF – Global ? Sub-sector

* Track Brazil ETF, at slightest respite or LatAm once commodity craze subsides

* Pick India, after 3 quarters and trip to India

* Pick Spanish ETF if LatAm component high and average P/E sensible (below 15)

* M&E play or travel play as stocks continue to get beaten

* Pick an India infrastructure play after India visit

* Pick A US and a European global infrastructure or engineering player if not ETF

* Pick luxury ETF after “forecast” murder in 2008

* Pick oily ETF (from Canada?) once price crashes

* Pick Agricultural ETF when price comes down

* Think about parking portion in Target Date funds

So how do we play in next 12 months - selling

* Sell China and Pacific Play at 1st rise back above 25%

* Sell anything that has increased by 30% for old holdings and 25% for any new buys