GLOBAL financial markets were roiled last week, in one of the most tumultuous weeks since the end of the recent global financial crisis. The recent spate of concerns over Greece’s debt problems culminated resulted in steady losses throughout the week for global bourses, culminating in a major selloff last Thursday for Wall Street.
Investors remain sceptical of a resolution to Europe’s sovereign debt crisis in the near term, even though Greece won an expanded aid package from the European Union and the International Monetary Fund, totalling €110 million (RM457 million) over a three-year period. It is uncertain if the country can sustain the painful austerity conditions attached to the bailout and if it can successfully pare borrowings under a negative gross domestic product (GDP) growth outlook, as evidenced by the violent street protests in Athens.
For weeks and even months, Wall Street had been shrugging off the myriad of concerns ranging from Greece to China to the Goldman Sachs saga. Wall Street had earlier been enjoying a long running streak, as investors focused instead on a spate of positive US economic data and good corporate earnings that suggest the economic recovery was finally gaining more traction.
Indeed, US data released last week showed personal spending rising 0.6% in March, the biggest increase in five months. The Institute for Supply Management’s index jumped to 60.4% in April from 59.6% in March, the highest in six years. This suggests the US manufacturing sector – which has largely led the economic recovery late last year, continues to be robust, and is now being complemented by improving consumer spending.
However, there is now growing fear among investors that Greece's debt crisis could create a contagion effect, affecting the weaker European countries like Portugal and Spain, and then later the rest of Europe and elsewhere. This could potentially destabilise the euro currency, the global financial system and affect the ongoing economic recovery.
The Greece fears caused Wall Street to become increasingly nervous of late, causing a spate of triple-digit declines for the Dow Jones Industrials Average Index (DJIA) last week.
This culminated in a panic selling mode last Thursday, where the DJIA plunged some 1,000 points at a point in intra-day trading last Thursday, the largest drop on record. The huge intra-day drop was likely due to a trading glitch, but the benchmark index still ended down 348 points.
As a result, global markets ended with deep losses last week. Most Asian bourses fell about 5%-6% lower each, on average, for the week. By comparison, the local bourse was relatively more resilient and outperformed its peers. For the week, the FBM KLCI fell 13.5 points or just 1% to end at 1,332.9 points. Notably, last Friday, even as regional markets plunged, the FBM KLCI managed to eke out a 1-point gain.
In China, the Shanghai Composite Index slumped 6.3% for the week, and traded near eight-month lows amid fears of further credit-tightening measures. The People’s Bank of China had raised the reserve requirement ratio for banks by 50 basis points, for the third time this year. Recent measures by the Chinese government to mop up excess liquidity in the system and tame runaway property prices are a harbinger of tighter monetary policy to come.
The fiscal and debt problems in Europe will take some time to iron out, and are the legacy of the recent global financial crisis. They will also have a major impact on growth in the Eurozone area and the euro, with growth and bailout capacity largely resting on Germany’s shoulders.
Investors are now balancing between growing signs of a more sustainable economic recovery in the US, but compared with Europe’s growing debt and contagion fears, and concerns of further credit-tightening measures in China.
With stock valuations that have risen sharply after the 14-month long global equities rally — and with few earlier major pull-backs in between — evidently, these recent concerns have become catalysts for more aggressive profit-taking activities for global investors.
Portfolio review
Our basket of 19 stocks underperformed the FBM KLCI last week, declining by 4.66% compared with the benchmark index’s 1% fall.
Including our large cash reserves (for which no interest is imputed), the total portfolio value increased by 3.95% to RM570,740.
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 RM410,740. Of this amount, RM224,946 has already been realised from earlier sales, and the rest are unrealised.
Since its inception, our model portfolio has registered a hefty return of 256.7% compared with our capital of RM160,000. By comparison, the FBM KLCI was up by 106.1% over the same period, even though it has been less representative of the broader market’s performance. Plus, our portfolio holds a significant amount of non-interest yielding cash at all times for prudence's sake.
Reflecting the broader market’s severe selloff, all but two of our stocks fell last week. The gainers were MyEG Services (up 12.2%) and DiGi (up 0.9%).
The week’s top losers were Faber Group (down 10%), Notion VTec (down 9.1%), Dijaya Corp (down 8%) and HELP (down 8.%). HELP’s shares traded ex for a five sen dividend last week.
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.
