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Overview of the Markets

The ongoing bull-market in global stocks is gathering steam and over the past few days, the momentum has shifted in favour of the West. Yesterday, the S&P500 Index closed at a 17-month high and we expect further gains over the following weeks. Over in Asia, our preferred markets are performing well, with India leading the way. Furthermore, it seems to us as though China and Vietnam are also about to commence another upleg within their primary uptrends. Given the fact that the Asian economies are in a much better shape than the West, we continue to believe that stocks in India, China and Vietnam will produce solid growth over the course of this business cycle. Therefore, we are holding on to our positions and believe that near-term weakness represents a buying opportunity.

As far as the technical picture goes, it is notable that the market's breadth is extremely strong and the Advance/Decline line on the NYSE has broken out to a new high. Furthermore, the number of new highs is significantly greater than the number of new lows, the bank index has started outperforming the broad market, volatility has subsided and the yield curve is very steep. All these are positive signs and suggest that we are still in the early stages of the ongoing bull-market. Remember, interest-rates are very low in most nations and the monetary backdrop is supportive for asset prices. As long as the interest-rate environment is favourable, we will maintain our growth seeking investment positions.

Over in the commodities complex, the price of crude oil is trading above US$82 per barrel. This is in line with our expectation and as long as the economic recovery is intact, we should see more upside. Regardless of what you might hear in the mainstream media, hard data confirms that the world will struggle to produce more than 89 million barrels per day of crude oil and with demand rising in the developing world, the stage is set for a serious oil crunch. Our view remains that the price of crude will rise significantly and we have allocated roughly 35% of our clients' capital to superb energy companies. Apart from upstream oil companies, we have stakes in world-class solar, wind and power companies. Moreover, we have recently acquired a stake in a railway company which should be a prime beneficiary in an era where trucks will prove to be big losers.

In the metals arena, base metals are holding steady and this is despite the big build up in inventories. In our view, this rally is mainly due to speculation via 'long only' commodity trackers and at some point, we will get a nasty correction. Accordingly, we have recently liquidated our positions in the base metals miners and have allocated capital elsewhere. With so many opportunities around, we do not see the point in making a speculative bet when the supply/demand fundamentals do not support base metals.

As far as precious metals are concerned, gold and silver are trying to build a base. It is worth noting that precious metals are in the seasonally strong time of the year and a spring rally is still possible. As George Soros stated in Davos, "with near-zero interest-rates, gold is the ultimate asset bubble". We agree with his assessment and believe that monetary inflation together with the massive debt overhang in the West will propel gold and silver to new highs. Accordingly, we are holding on to our positions in our preferred gold and silver mining stocks.

In the world of money, the US Dollar Index is trading in a tight range and it is struggling to break above the 81 level. Furthermore, the Euro and the British Pound are now extremely oversold, so a sharp rally cannot be ruled out. Amongst the paper currencies of the developed world, we prefer the Canadian, Singaporean and Australian Dollars. And in the developing nations, we like the Indian Rupee and the Chinese Yuan.

The above 'Weekly Update' was sent out to subscribers of Money Matters on Friday, 12 March 2010.


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