Written by InsiderAsia
Sunday, 13 September 2009 17:16
THE local bourse performed well in the last week. The FBM KLCI advanced 2.5% to reach a fresh high for the year, thanks to select blue chip gains. The benchmark index ended the week at 1,208.3 points.
The gains mirrored stronger performances in major Asian stock markets. Japan’s Nikkei index closed 2.5% higher for the week while the bellwether indices in Singapore and Hong Kong gained 2.2% and 4.1%, respectively. US stocks too traded on a stronger footing for the week.
Investors continued to push share prices higher on growing evidence that the world has emerged from its worst recession in decades. In its latest report, the US Federal Reserve was “cautiously positive” on the outlook for the world’s largest economy. Economic activity in the US, euro zone, Japan and Asia has all picked up momentum over the past few months.
However, we are cautious on the outlook for equities. Whilst the global economy is undoubtedly on the mend, there remains a high degree of uncertainty as to the pace and sustainability of the recovery.
Shares on Bursa Malaysia are trading near or beyond the average fair values tagged by market analysts for 2010, in short, already fully pricing in next year’s earnings recovery. That could limit further upside gains for the broader market from hereon. To be sure, there is still value to be had in stocks but investors should select wisely and tread cautiously.
It also bears to note that economists are, on average, less bullish than market analysts when it comes to the strength of the recovery. There is a big gap between current forecasts for economic growth and corporate earnings growth for 2010.
The strong rebound in the second quarter of 2009 to the third quarter of 2009 (2Q09-3Q09) is being driven by massive government pump-priming efforts, including cash handouts, tax benefits and rebate programmes. But growing government fiscal deficits may limit the quantum of further stimulus measures, if required.
Industrial production was also bolstered by inventory replenishment after the sudden and sharp contraction in 4Q08-1Q09. The boost from stimulus packages and stock rebuilding will fade over the next year after which private spending has to pick up the slack. But that may not happen as smoothly.
Private spending, including business investment and consumer spending, has thus far shown no sign of improvement — hampered by excess capacity and rising unemployment rates around the world.
Jobless rate in the US rose to 9.7% in August, the highest since 1983, and is expected to top 10% by 2010. The US consumer is saving more and spending less to bring down record high debt levels. Consumer credit, which fuelled the last boom, is on the decline, exacerbated by more stringent bank lending requirements. Credit is still tight and most banks have not even begun to tackle their massive portfolio of bad loans.
At the same time, there are also concerns over the creation of new asset bubbles. At least part of the massive infusion of liquidity into the global financial system is believed to have gone into the equity, commodity and property markets, possibly driving prices beyond their underlying fundamentals.
For instance, crude oil prices have strengthened to above US$70 (RM244.30) per barrel — more than double from its low in February 2009 — despite falling consumption. Global oil demand is forecasted to shrink 2.2% this year before recovering some lost ground in 2010.
Indeed, some investors have started hedging their bets by buying gold, a traditional safe haven. Gold prices surged briefly past the US$1,000 an ounce mark last week, for the first time since February 2009, on worries of a weakening greenback and possible inflation.
Portfolio review
Our model portfolio under-performed the FBM KLCI in the last week. Our basket of 16 stocks rose by 0.3%, compared with the FBM KLCI’s 2.5% gain. Including our large cash reserves (for which no interest is imputed), the total portfolio value rose by a smaller margin of 0.2% to RM491,717.
Nevertheless, our model portfolio's total value and returns represent a significant achievement compared with our initial capital of just RM160,000. We started the model portfolio on March 3, 2003.
Our total profits are very substantial at RM331,717. Of this amount, RM222,366 has already been realised from earlier sales and the rest are unrealised. This represents a hefty return of 207.3% compared with our capital of RM160,000. We continue to outperform the FBM KLCI significantly, which is up by 86.8% in the same period. This was achieved even though the benchmark index is less representative of the broader market, and our portfolio holds a large amount of interest-free cash at all times for prudence reasons.
Our basket of smaller-cap stocks did not fare so well last week. This mirrors the trading pattern for the broader market where big-cap gains spurred the benchmark index while smaller-cap stocks drifted sideways. The big exception was 3A, whose share price gained 6%. We are leaving our portfolio unchanged.
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.