Wednesday, July 20, 2011

InsiderAsia’s model portfolio - 438

Written by Insider Asia
Monday, 18 July 2011 11:17



Renewed selling pressure in the equity markets last week, after trading higher in the first half of July, underscores growing uncertainty in the global economy. Investors remain skittish as the growth outlook turns more opaque. Yet many are loath to unload their holdings of risky assets given the prevailing low interest rate (by historical standards) environment. For instance, interest rates in the US are near zero and look set to remain so for the foreseeable future.

The global economy is still flush with liquidity, which has played a major role in driving prices for risky assets, including stocks, higher since the end of the global financial crisis.

Thus, although expectations for global economic growth are being revised down, stock prices in general have stayed fairly resilient. For the moment, most investors prefer to wait and see — in the belief that the current soft patch is temporary and growth momentum will pick up pace towards the later part of the year.

For the near term, investors will continue to react to developments as they occur on a day-to-day basis.

Trading started on a weak note last Monday, after disappointing job market data out of the US the previous Friday (after Asian trading hours). The world’s largest economy added just 18,000 jobs in June — while the number of jobs in April and May were also revised down — a mere fraction of what the market had been forecasting. Unemployment inched higher to 9.2%. The poor job numbers burst the growing bubble of optimism following better-than-expected manufacturing and retail sales, in the run-up to last Friday’s US Labor Department report.

The US Federal Reserve was also giving out mixed signals on the probability of further stimulus last week. After hinting at a third quantitative easing programme, chairman Bernanke backtracked by suggesting it would only be considered if the US economy deteriorates significantly from here on.

Elsewhere, there were some noises from rating agencies, Moody’s and Standard & Poor’s, on the possibility of a US ratings downgrade. The White House and lawmakers, controlled by Republicans, are at an impasse on how to balance the budget and raise the debt ceiling. Having said that, few believe that a compromise will not be reached before the deadline in early August.


The listing of OldTown Bhd provided a boost a market trading volume at least for a day last week.
The outlook for the evolving sovereign debt crisis in Europe is far less upbeat. Last week, Italy became the latest country to be dragged into the crisis as rumours of political infighting sent yields on its bonds soaring.

The development was worrying given that Italy’s economy, the third largest in the eurozone, is much larger than that of Greece, Ireland and Portugal. Bailing out the country would exceed the capacity of the existing European Financing Stability Facility. The Italian government reacted quickly by fast-tracking the passage of a four-year austerity package to calm markets.

Nonetheless, this development as well as recent ratings downgrades for Portugal and Ireland to junk status appeared to tip the balance for the EU towards engineering a more aggressive solution, especially for Greece.

So far, the bailout packages were tailored to buy time for the embattled countries rather than tackle the underlying problem of mounting debts. Clearly, such containment measures are not working very well. Rising bond yields indicate that investors remain convinced that their debt levels are unsustainable through austerity measures alone and that a default is ultimately unavoidable. Many believe that Greece needs to pare its debt burden by significant amount to be able to begin its recovery process.

On a more positive note, China grew at a stronger-than-expected pace in 2Q11. GDP growth of 9.5% was slower than the 9.7% of 1Q11 but strong enough to suggest that the government is on track to engineer a soft landing for its economy rather than the hard landing feared by some.

On the home front, stocks on the Bursa Malaysia traded broadly lower last week. Profit taking sent the FBM KLCI 17.5 points lower to close at 1,577.3 points last Friday, after hitting a record high of 1,594.7 points the previous week.

News of the proposed merger between SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd generated some buzz for the market last week. The listing of OldTown Bhd too provided a boost to market trading volume, at least for a day. However, investor interest remained, by and large, lacklustre.

Trading volume for the week dipped sharply. Daily on-market trading volume stood at little over 700 million shares, on average, down from the daily average of over 931 million shares in the immediate preceding week.

The local bourse will see two more IPOs this week, including the listing of high-profile Bumi Armada on Thursday. The oil and gas services company, controlled by tycoon Ananda Krishnan, is the biggest IPO this year and is expected to do well. The IPO has attracted strong interest from institutional investors. The IPO price was fixed at RM3.03.

Several big cap stocks are also scheduled to release their latest quarterly earnings results this week, including the stock exchange operator, Bursa Malaysia, DiGi.Com Bhd and Tenaga Nasional Bhd. The current reporting season may provide some fresh leads for investors. But market sentiment is likely to stay cautious in the near term.

Portfolio review
Our model portfolio underperformed the benchmark index last week. Total market value for our basket of 17 stocks was down 1.71% at RM569,985, compared with the FBM KLCI’s 1.1% decline.

Only three stocks in our portfolio closed higher for the week while 13 ended in the red and one other traded unchanged.

Including our large cash reserves totalling RM147,653, for which no interest income is imputed, our total portfolio value was down by 1.37% to RM717,638. Our cash holding is fairly substantial, accounting for roughly 21% of our total portfolio value, primarily, for prudence’s sake.

The three gainers last week were Al-Aqar KPJ REIT (+1.7%), 3A Resources Bhd (+0.7%) and Axiata Bhd (+0.2%). At the other end, Malaysia Steel Works (KL) Bhd (-5.5%), Masterskill Education Group Bhd (-3.5%) and Media Chinese International Ltd (-3.2%) were among the bigger losers for the week.

Last week’s losses pared our model portfolio’s cumulative returns since inception to 348.5% on our initial capital of RM160,000. Nevertheless, we continue to outperform the FBM KLCI, which was up by about 143.9% over the same period, by some distance.

Our total profits are very substantial at RM557,638, of which RM359,558 has already been realised from previous shares sales. We kept our model portfolio unchanged and will continue to monitor the market for opportunities.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


This article appeared in The Edge Financial Daily, July 18, 2011.

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