The world economy continues to surge ahead, firing on all cylinders. The American market remains resilient, Europe is strong, Japan has woken up out of its Coma and India, Russia, Brazil and China have dumped their various forms of socialism. A lot of lesser economies are also following this new trend.
The dramatic conversion from socialism in its various guises to capitalist market economies is probably the most remarkable economic event of the last 50 years. One should remember that it was only during the reign of Margaret Thatcher that the UK abolished exchange control and dumped socialism. The French are probably the last major socialist country to wake up.
The Chinese have proved to be very good at capitalism, amassing $ 1 trillion in of foreign reserves within a short period. The Russians used to give cheap oil to friends and relatives whereas they now sell it at the highest price achievable. This has also led to a huge build up of their foreign reserves.
The new players of the capitalist game typified by, but not limited to, Russia and China initially banked their winnings by buying low risk assets like US Treasuries and Bonds. These countries have now expressed the desire to become more imaginative in investing their reserves.
This should on the face of it be very good for equities the problem is that this may push up bond yields and interest rates which is bad for equities. Whatever happens one must conclude that the there will be more hot money in the system and thus more volatility.
We believe that the short term effect will be positive for stock markets but medium term risks have increased due to the impact of higher interest rates on the USA housing market and world economies in general. We have positioned the Value Trend fund in companies where we see solid fundamental reasons to own the share. We are consciously avoiding hype and the desire to chase performance. Due to concerns of higher volatility we have kept 20% of the fund in cash type assets. We have also kept the 15% foreign investment (note: half of this is in cash type assets)