InsiderAsia's Model Portfolio — Week 349

STOCK prices on Bursa closed lower last week as steep falls on Wall Street and mixed economic data prompted investors to lock in some gains.

For the week, the FBM KLCI lost a total of 23.9 points or 1.9%, to end at 1,243.2.

The latest batch of US economic data was mostly mixed, unfortunately, showing renewed weakness in the housing market and consumer confidence, although 3Q09 GDP was better than expected. This has fostered some doubts over the sustainability of the rapid global economic recovery recorded in 2Q-3Q09.

Investor confidence in global bourses was also shaken by the unexpectedly sharp fall in US consumer confidence. The Conference Board's confidence index dropped to 47.7 from 53.4 in September 2009. This is the second straight month of decline for the index, which had improved to 54.5 in August from 47.4 in July 2009.

The erratic readings underscore prevailing uncertainties where consumers are concerned. So far, a sustained recovery in consumer spending, which accounts for 70% of US economic activities, has been elusive. The weakness is attributed to poor employment outlook. US unemployment is expected to top 10% next year and will likely take years to return to pre-crisis levels.

Nonetheless, investors were later assuaged by the US' third quarter (3Q) GDP data, which showed the economy returning to growth with a 3.5% annualised rate — after four quarters of contraction. This in turn led Wall Street's major indices rallying last Thursday, with their best one-day percentage gain in three months, and regional stock markets to rise last Friday.

Investors also welcomed data from Japan showing its unemployment rate fell to 5.3% in September from 5.5% in August.

The US GDP data came on the back of stronger than expected 3Q09 GDP growth for South Korea earlier in the week, as well as strong growth numbers for Singapore and China released earlier this month. These data support the view that economies are charting a V-shaped recovery after plunging in 4Q08-1Q09.

To be sure, 3Q09 GDP for most countries were buoyed by massive government stimulus policy and inventory rebalancing. While they signal an end to the recession, there remain significant differences in opinions as to the sustainability of the recovery.

For instance, there are concerns that the imminent expiry of tax credits for first-time home owners in the US will threaten the nascent housing market recovery. Home sales have improved in the past months as buyers rushed to take advantage of the government tax break, set to end this month.

Case in point, Japan's latest month-on-month exports number for September 2009 was lower for the third consecutive month. This suggests that whilst the fall may have hit bottom, a sustained recovery remains elusive. Relatively healthier Asian economies, including China, are still lacking in terms of consumption power, the primary driver for global growth.

We expect global stock markets to show some volatility going forward given the uncertain outlook and concerns over the strength of the recovery. Economic data will probably turn patchy, after the strong rebound supported by stimulus policy and inventory rebalancing in 2Q-3Q09.

While the recession is officially over, the road to recovery will likely be slow and uneven.

As the US earnings season start to wind down, investors will increasing look towards economic data for further leads, and this could lead to more volatility on Wall Street. On the local front, investors will look towards the upcoming earnings season for fresh leads.

Portfolio review
Our model portfolio declined marginally last week, but outperformed the FBM KLCI by falling much less than the benchmark index.

Our basket of 17 stocks fell 0.9% for the week, less than half of the FBM KLCI's 1.9% decline. Including our large cash reserves (for which no interest is imputed), the total portfolio value declined by a smaller margin of 0.6% to RM513,212.

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 RM353,212. Of this amount, RM222,366 has already been realised from earlier sales and the rest are unrealised.

This represents a hefty return of 220.8% compared with our capital of RM160,000. We continue to outperform the FBM KLCI very significantly, which is up by 92.2% 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, seven of our stocks rose, nine fell and one was unchanged (HELP International Corp).

3A Resources was our biggest weekly gainer, rising 8.6% to RM1.65. Compared with our cost of just 31.5 sen, the stock is yielding us a gain of 424% for a 10-month investment. Other major gainers include Notion VTec (up 7.1%) and Dufu TECHNOLOGY [] (up 4.6%). Losers include CSC Steel (down 5.9%), Muhibbah Engineering (down 5.6%) and Selangor PROPERTIES [] (down 3.6%).

During the week, shares of Notion VTec trade ex for a 0.5 sen dividend, which we have adjusted accordingly.

For the coming week, investors should note that Notion Vtec's shares will trade ex for a 5-into-1 share consolidation exercise on Nov 3, 2009. Meanwhile, Dijaya Corp's shares will trade ex on Nov 6, 2009 for its two-call rights issue, on the basis of three rights shares priced at RM1 each (but shareholders only need to pay 80 sen) and two free warrants for every four shares held.

We are keeping our portfolio unchanged. We are currently 70% equity invested and still have sizable cash of RM155,847 for future investments.

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.