Wednesday, September 28, 2011

InsiderAsia’s model portfolio - 448

It was a blood bath for equity markets the world over. Selling pressure intensified last week on the back of mounting evidence of a global slowdown and worries that governments have little ammunition left in their arsenal to prop up flagging economies. An increasing number of market observers see rising risks of a double dip recession. Continued deterioration in the eurozone sovereign debt crisis, with no imminent solution in sight, further weighed on investor psyche.

As fear mounted, investors abandoned a broad range of risky assets — including equities and commodities — in droves and fled to the relative safety of the US dollar and Treasury bonds. Emerging markets, which are perceived to be riskier, were among the worst hit in last week’s global sell-off.

The Group of 20 major economies pledged to “take all necessary actions to preserve the stability of banking systems and financial markets” amid the sell-off. That stemmed losses, for a while.

Bellwether indices in all of the major Asian markets ended deep in the red. Hong Kong’s Hang Seng Index tumbled 9.2% while bellwether indices in Taiwan and South Korea were down by 7%-7.7%. Markets in Japan and Singapore fared slightly better, but still ended the week 3.4% and 3.2% lower respectively.

Shares on the local bourse did not escape unscathed, despite being generally viewed as a relatively defensive market. The FBM KLCI lost 65 points to finish at 1,365.9 last Friday. The sell-off was broad-based and led by big cap blue chip index heavyweights.

Last week’s 4.5% losses sent the benchmark index deeper into negative territory for the year to date, now down 10.1%, though still lagging losses registered in other key Asian markets. Reflecting the heightened selling and outflow of funds, the ringgit also fell sharply against the greenback, now trading at its lowest level this year.

On the other hand, trading volume remains comparatively low. This could have exaggerated the price decline. But we suspect not many investors are persuaded to bargain hunt, at least not in any significant way anytime soon.

Markets are likely to remain volatile given the limited visibility on the global economic front and uncertainties surrounding the evolving sovereign debt crisis in Europe.

About 808 million shares were traded last week on average compared with the average of 721 million shares transacted in the previous week.

Intensified selling pressure towards the later part of last week was largely attributed to the US Federal Reserve’s grim prognosis on the US economy, which it believes is facing “significant downside risks”. The bleak outlook more than offset any positive impact from its latest policy easing measures.

Much hope had been placed on more aggressive measures out of the two-day Fed meeting earlier in the week. However, the two main moves proposed fell short of market expectations — and were widely seen to have limited impact in terms of jump-starting the economy.

The Fed will undertake to switch some US$400 billion (RM1.27 trillion) of its short-term Treasury holdings into longer-dated bonds as well as reinvest proceeds from maturing mortgages back into that market. Both measures were aimed at stimulating mortgage refinancing and corporate investments by lowering the long-term borrowings costs.

Market observers, however, believe that the lack of demand visibility and confidence are the key reasons why businesses are not reinvesting — not the cost of borrowing. Indeed, corporate balance sheets are strong with many just contend to sit on cash piles instead of putting them to work.

The International Monetary Fund also weighed in on the grim outlook, revising down its forecast for global growth next year to 4%, down from the 4.5% estimate made barely three months ago. US growth was revised to just 1.8% from the previous forecast of 2.7%.

Last week’s data out of Europe and China added to growing evidence of slowing global demand. According to a preliminary survey, private sector activities in Germany dipped to their weakest since July 2009 while that in the 17-member eurozone contracted. A similar survey showed China’s factory output down for the third consecutive month in September.

Portfolio review
Our model portfolio marginally outperformed the benchmark index last week. Total market value for our basket of 19 stocks was down 4.09% to RM440,505, compared with the FBM KLCI’s 4.54% decline.

All but two stocks in our portfolio closed lower last week mirroring the broader market sell-off. Some of the top losers were DiGi (-6.2%), Maybank (-7%), Media Chinese International (-14.2%) and Genting (-9.4%). Al-Aqar KPJ REIT (+1.8%) and HELP International (+0.5%) were our only gainers for the week.

Including our cash holdings, for which no interest income is imputed, our total portfolio value was down by a lower 2.85% to RM940,949. Our cash holding remains quite substantial at RM200,444, accounting for about 31% of our total portfolio value. The relatively high cash holding is, primarily, for prudence’s sake — reflecting our cautious stance on the market outlook in the near term.

Last week’s losses pared our model portfolio’s cumulative returns since inception to 300.6% on our initial capital of just RM160,000. We continue to outperform the FBM KLCI, which was up by about 111.2% over the same period, by some distance.

Our total profits are substantial at RM480,949, of which RM401,644 has already been realised from previous share sales. We kept our portfolio unchanged and will continue to monitor developments in the market.

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.

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