It's best to stay invested in the index
Under-investing in an under-performing market or shifting towards passive investing?
There has been a common theme running through the advice given in this column, and that is investors should as far as possible stick to investing in the index.
There are many reasons for this. For instance, when funds realise they are under-invested in a market that has under-performed for a few years - like Singapore did in 2015 and last year - the quickest way to buy exposure is through the main index, or the stocks with the largest market capitalisation.
Then there is the significant shift towards passive investing, which has spurred the development and marketing of all sorts of exchange traded funds (ETFs).
Rather than actively managing one's portfolio, which involves timing and selection issues, it is less stressful and easier to buy and hold an ETF.
The inadvertent outcome of greater passivity in investing has been a narrowing of the market into a two-tier formation, with big caps and index stocks enjoying most of the liquidity on one side, versus the rest on the other.
In addition, there is greater pressure on fund managers to perform in order to earn their fees via active strategies.
Accentuating the division of the market into the "haves and have-nots" is that brokers quite naturally gravitate towards bigger stocks that are more actively traded.
Because their resources are limited, they will drop coverage of the others, so scores of smaller caps are not covered by the broking community. In fact, some have been abandoned by analysts in recent months as business conditions tighten.
What all of this means is that in a market where inflation is not a problem, where bond yields are low and there are few justifiable safe havens - other than gold, the Japanese yen and perhaps the euro - institutional money has to remain invested in risk assets in order to earn sufficient returns to satisfy the demands of their clientele.
This applies even though there are considerable headwinds such as those currently prevailing - the North Korean situation remains tense; there is a potential US government shutdown looming this month if the rift between the Republicans and the Trump administration widens; and the US Federal Reserve is expected to start reducing its massive balance sheet, a move that would suck liquidity out of the system. There is also expectations of a taper announcement from the European Central Bank soon.
Moreover, Wall Street has remained close to all-time highs despite some unexpectedly weak economic data.
On Friday, for example, news that the US economy added only 156,000 jobs - way below the 200,000-plus that has been the monthly norm - was shrugged off as a temporary blip, leading to the suggestion that bad news is still good news.
This is because investors may expect increased fiscal stimulus and that the Fed will have to scale back on its monetary tightening.
As of Friday, the probability of a rate hike at this month's US Federal Open Markets Committee (FOMC) meeting is only 1.4 per cent, rising to only 3.3 per cent for November's FOMC.
But this goes up to about 39 per cent for December's meeting, and it will be interesting to watch what happens to this figure in the weeks ahead.
As for the local market, it has always been a price-taker rather than a price-maker, which is a fancy way of saying its movements - much like the local economy - depend much more on external than internal forces.
Given that Wall Street is the main influence, it would be a useful idea to keep an eye on the Dow futures every day, bearing in mind that it is best not to stray too far from index stocks.
This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts