I would like to examine the key issues in coming year and try to formulate the strategy for 2008.

Key issues

• Sub prime problem. It is expected that more sub prime borrowers would default. The housing slump would continue and credit crunch would persist. Credit crunch because those financial institutions who might have potential more write down would be reluctant to lend money. Insufficient credit would hurt the economy. It might take another 6 months for the sky to be cleared.

• Slow US consumer demand. The rising inflation, high oil price and housing slump would surely hurt the consumer demand.

• Oil price. It might go up a little bit more, if tension at middle east escalated. However, I believe the downside probability is higher.

• Commodity price. The price should soften if the US demand slowed, which is a good thing for everybody.

• Direction of US economy. We have the sub prime problem, slow consumer demand. But, would the recession come? Analysts have different view. Some say US could avoid recession because Fed would keep cutting interest rate. Some fore casted a mild recession. I think the downside surprise risk is higher.

• More bank write down. Goldman Sachs mentioned more write down expected from Citi, Merrill Lynch and JPMorgan. Every piece of bad news could rattle the market for a short while.

Trend

• China QDII flow. It has been discussed for quite a while. I believe it is a sure thing, except the time line is unknown. When the time comes, we should see smile on everybody's face.

• Sovereign wealth fund. The SWF by Asia or middle east country would keep the investment momentum. Whenever there is trouble in US financial institutions, they would come and pump in the money.

Market characteristic

It is going to be a volatile year. For some of the key issues, the consequence/resolution is unknown. We don't know how things would pan out eventually. We should see market movement base on news flow. As a fundamental investor, consider to add small position in your favourite stock if valuation become attractive and you haven't hit the allocation quota. Don't trade if you have no time to monitor, because sudden news flow would cause the market to move in different direction.

Strategy

• We are unlikely to see a broad base rally, until the sky is clear. Focus on the key individual company development. Company that shows a sustainable earning growth should hold up well.

• Focus on stock which rely on domestic demand, not export.

• Focus on strong trend and have a longer investment horizon.

• Keep your stock exposure at 50-70%.

• Be patient and have discipline

• Get out of over valued country, where everything is expensive. (For example, if you are holding the India unit trust)

• Avoid catching commodity linked stock at high valuation. Stock like Wilmar would suffer if oil price drop which cause CPO demand to cool. It is a strong cycle, but we are not sure where we are.