Market risks realised

The last few months have provided some graphic illustrations of the risks of investing in equities. As I have reviewed the declines in the values of my investments over the last few months, it's worth making a note of the reasons for the decline. It's even more important for me to remember that fluctuation is the normal condition of the world's equity markets and downward movements are opportunities above all else.

Some observations on the declines:

1. equity markets have declined globally. The declines have been attributed to a number of factors: the Greek financial crisis and problems in the Eurozone generally, the USA's own budgetary problems, the end of QEII etc;

2. locally, China is facing rising inflationary pressures and the measures it is adopting to curb inflation are impacting several companies in the portfolio. Specifically, China is preventing companies from raising prices - Sinopec and my toll road operating companies have been hit hard by price controls. Likewise, my investment in CCB has been impacted by increases in reserve requirements (as well as the spectre of rising loan losses);

3. several PRC companies have been the subject of allegations of fraud or other irregularities. While no company in the private portfolio has been subject to such allegations, small and some mid-caps generally have been sold off in response to this problem. CMR, Aupu and others;

4. some company results have been disappointing (China Gas, Allen International, Specialty Fashion) and other companies have been subject to analyst downgrades (Caltex, Nufarm);

5. talk of a collapse of the property bubbles in Hong Kong and China continues unabated. Such talk has been going on for years. Sooner or later prices probably will decline. I just have no idea when. So far the only company which has been adversely affected is Ka Wah.

While some of these issues are not going to go away very easily (in particular the US and Euro zone debt problems), they are presenting opportunities. Both trailing and forward earnings estimates for Hong Kong and China are will below historical averages. Even allowing for downward revisions to earnings estimates, prices still look attractive and it is very tempting to make some more investments.

How much of my cash pile to invest is a question I need to think about. Once I stop working, the position changes and I will need to maintain a reasonable amount of cash. My target is around 24 months worth of expenses. However, as long as I am working, I have no need to hold much more than a couple of months of expenses in cash form. So I can more or less spend as much as I want.

The next question is which investments to make. I'll give some thought to that over the long weekend.