InsiderAsia's Model Portfolio — Week 354

WORLD stock markets rebounded smartly from the selloff stemming from Dubai's debt crisis in the previous week. Closely watched bellwether indices around the world, and in particular the region, recovered lost ground, and more, as fears that Dubai will trigger a contagion effect in the global financial markets faded.

Government-owned Dubai World has asked for a moratorium while trying to restructure its debts. Although the Dubai government has distanced itself from responsibility for the debts, the United Arab Emirates' (UAE) central bank has acted quickly to provide additional liquidity to all banks in its seven emirates.

Dubai's problems raise the possibility of more debts shocks in the coming months. Around the world, governments and corporations are carrying mounting debts on their balance sheets and a good portion of these borrowings are short-term debts that will come due over the near to medium term.

Thus, we could witness more volatility over the course of the next year. For the moment though, investors are content to shrug off such concerns in favour of riskier assets and higher yields.

Although some central banks, notably Australia and Norway, have started raising interest rates, most countries are expected to maintain near zero rates for some time yet. The US Federal Reserve, in particular, has repeatedly stated its commitment to ultra loose monetary policy for an extended period of time given the fragility of its economic recovery.

The Bank of Japan has offered to pump even more funds into the system to lower rates. Meanwhile, the European Central Bank kept its key lending rate unchanged at 1% after its latest policy meeting although it did set the course for a slow withdrawal of the massive emergency liquidity pumped into the financial system.

Central banks may review their exit strategies depending on how well the global economy does in the next few months. But the wall of liquidity that has been driving up assets prices is likely to stay, at the very least for the first half of 2010.

At the same time, the US dollar appears likely to remain stuck in its downtrend. That means investors will probably continue to chase up prices for riskier assets such as equities, PROPERTIES [] and commodities in search of higher yields — fuelled by the burgeoning US dollar carry trades.

The gold rally, for instance, appears unstoppable, at least for now. Prices for the precious metal have been setting all-time record highs on a regular basis in recent weeks. Gold prices briefly broke above US$1,220 (RM4,148) an ounce last week. It started the year at about US$875 an ounce.

That may mean that barring any major negative developments, world stocks will stay fairly resilient — despite concerns of the sustainability and pace of the economic recovery and rising valuations.

On the home front, shares on Bursa Malaysia have been treading water. Investors are reluctant to get out of the market given the above-mentioned factors. But they are also cautious and many are keen to protect their gains from the earlier rally. Thus, the narrow trading ranges we saw for the better part of the week.

The FBM KLCI dropped sharply last Monday, catching up on losses from the previous Friday when Dubai triggered a global selloff, but recouped almost all lost ground as the week progressed. The benchmark index ended the week just a shade lower at 1,270.2 points.

Trading volume tapered off towards the end of the week, dropping below 700 million shares last Thursday and Friday. Daily market volume averaged at about 814 million shares last week.

The local bourse will continue to take cues from Wall Street and regional markets. But barring major volatilities, trading on the local bourse may remain range-bound heading into the year-end holidays.

Portfolio review
Our basket of 18 stocks fared better than the benchmark index for the broader market, gaining 0.99% for the week, compared to the FBM KLCI's marginal drop. Including our large cash reserves (for which no interest is imputed), the total portfolio value gained by a smaller margin of 0.75% to RM512,247.

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 RM352,247. Of this amount, RM222,366 has already been realised from earlier sales and the rest are unrealised.

This represents a hefty return of 220.2% compared with our capital of RM160,000. We continue to outperform the FBM KLCI very significantly, which is up by 96.4% 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 reasons of prudence.

Our model portfolio saw mixed performances last week, with eight stocks declining and seven advancing while three were unchanged. The big gainers were Notion Vtec, which surged 12.1% and 3A Resources, which was up by 11%. At the other end, Selangor Properties was the biggest loser, its shares dropping 3% over the week.

We kept 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.