The sell off in Asian and US equities overnight was apparently triggered by China's Central Bank's decision to tighten bank credit and to reduce credit growth from more than 30% in 2009 to a more realsitic level of 16% in 2010.  If you remove the global financial crisis from the picture, it is normal for credit growth to be about 2 times GDP growth so - credit growth of 16% in China is reasonable and on the positive side probably reflects a gradual return to normalcy as crisis concerns start to ease.

Putting China aside, all Central Banks around the world need to address the issue of excessive credit and near zero interest rates.  While these have averted a collapse of the global financial system, they are not sustainable for prolonged periods.  We already see severe stress in national balance sheets in Europe with most economies there having national debt to GDP near or exceeding 80% (this is typical of developing not developed economies). 

The credit and interest rate tightening is inevitable.  It will remove excess liquidity from the system and eventually lead to the correct pricing of capital.  For stocks and stock investments it is positive as it means that the global economy is recovering, corporate earnings are improving if not Central Banks wouldn't be so quick to tighten albeit even modestly.

As we enter this new phase, investors have to be cautious as this excess liquidity leaves the system.  The most vulnerable area would be in liquidity premiums or higher than normal PERs for stocks.  One way of trying to insulate or protect yourself from this risk is to look for value.  At the beginning of 2010, I said that the Singapore market was trading at about 28 times historic and 18 times prospective earnings and if earnings growth didnt match expectations - the market looked expensive.  This applies primarily to blue chips which are the major components of market indices.  I think there is still value in the mid-caps which comprise the bulk of the stocks in my stock picls/portfolio.  These are likely to continue to perform and are supported by undemanding financial valuations.  They however still have to deliver the earnings we are forecasting.  So far, I have not been disappointed by any of the stocks which we have recommended and will closely monitor their performance and more importantly their forward guidance.