InsiderAsia's model portfolio — Week 339

Tags: InsiderAsia model portfolio
Sunday, 23 August 2009 16:21

THE local stock market succumbed to profit-taking activities last week. After a strong rally, intermittent profit-taking activities are to be expected as the market digests these gains and awaits further clarity on the strength of the recovery ahead.

This will determine whether recent gains are justified or sustainable. For the week, the FBM KLCI fell a total of 24.8 points or 2.1%, ending at 1,163.8 points. This was the benchmark index's first weekly loss in six weeks. It should be noted that the index had gained a sizeable 121 points in the preceding five weeks.

In a sign of growing investor caution, daily trading volume has started to trend down. Daily trading volume had been averaging around a billion shares since the latest rally started in July — unlike in the earlier March-May rally. However, trading volume fell below this level from Wednesday to Friday, with just 604 million shares traded on Friday.

The local and regional bourses are now increasingly taking their cues from China's stock market, which has been displaying high levels of volatility. The recent steep plunge in the Shanghai Composite Index — by some 20% since early August — is affecting sentiment for Asian bourses.

Chinese shares have been among the world's best performers this year, driven by expectations that the country's economy will fare better than the rest of the world, as well as strong liquidity due to robust credit conditions.

Indeed, China's economic growth picked up momentum in the second quarter of 2009 (2Q09), boosted by massive government stimulus and record bank lending. However, there are growing concerns that some of the lending had gone into non-productive sectors, such as property and equities.

Worries that the government will try to rein in bank lending contributed to the current stock market pullback.China's robust economic growth accounted for much of Asia's resilience in 2Q09 — when the US, Europe and Japan were still mired in deep recession. It also accounted for most of the recovery in commodity prices since 2Q09.

Thus, concerns over potential overheating and credit tightening in China are valid. But equally though, the rest of the world is also starting to recover, albeit slowly. The latest US economic data released remains patchy, although a bottom has been clearly reached and the world's largest economy is the way to recovery.

The Conference Board's index of leading economic indicators rose 0.6% last month, showing the fourth straight monthly improvement and suggesting the recession has bottomed out. However, the US labour market remains very weak. Initial jobless claims rose by 15,000 to a seasonally adjusted 576,000 last week — against expectations of a fall to 550,000.

High US unemployment, weak consumer confidence and sluggish retail sales suggest that a strong consumer spending-led recovery is some way off. Consumer spending accounts for 70% of the US economy, and is the key driver of Asia's exports. But at least other segments of the US economy — including manufacturing and housing — are showing signs of recovery.

Elsewhere, Japan emerged from a year-long recession in 2Q09 — its gross domestic product (GDP) grew at an annualised pace of 3.7% after shrinking a revised 11.7% in the first three months of the year. On the local front, the second-quarter earnings season has started in earnest and will continue this coming week.

Most companies, especially the mid and smaller sized ones, have released results that were above expectations, with a strong recovery from 1Q09. Portfolio reviewAfter a strong outperformance for several consecutive weeks, our model portfolio underperformed the FBM KLCI slightly last week.

Our basket of 15 stocks fell by 3.1% last week, more than the FBM KLCI's 2.1% decline. Including our large cash reserves (for which no interest is imputed), the total portfolio value fell by a smaller margin of 1.9% to RM488,662. 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 RM328,662. Of this amount, RM221,386 has already been realised from earlier sales and the rest unrealised. This represents a hefty return of 205.4% compared with our capital of RM160,000. We continue to outperform the FBM KLCI significantly, which is up by 79.9% 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. Last week, only two of our stocks rose, two were unchanged and 11 fell. The gainers were Notion VTec (up 4.3%) and Ireka Corp (up 3.8%).

The major losers were those that rose substantially earlier, such as Dufu Technology (down 10.9%) and 3A Resources (down 8.6%). The two stocks had risen 15% and 26.1%, respectively, in the previous week. Buying 20,000 shares of CSC Steel HoldingsWe are buying 20,000 shares of CSC Steel Holdings at Friday's closing price of RM1.05 per share, for a total of RM21,000.

Following this purchase, our portfolio will be 66% equity invested. We will still have sizeable surplus cash of about RM164,000 for future investments. CSC Steel (formerly known as Ornasteel) is one of Malaysia's largest producers of cold rolled and galvanised steel.

The company is controlled by China Steel, Taiwan's largest steel player. CSC's latest earnings results for 2QFYDec2009, whilst still down significantly year-on-year (y-o-y), showed good improvement over the immediate preceding quarter. We believe the worst is over for the company, and CSC will be a major beneficiary of the cyclical recovery.