InsiderAsia's model portfolio — Week 360

IT was another good week for the local bourse. After an earlier good start to the new year, the second week of 2010 saw further gains for the stock market. Investor interest broadened out from blue chips to a number of sectors as well as laggards and smaller capitalised stocks.

The FBM KLCI inched closer to the psychologically important 1,300-point level, closing just below it last Friday. For the week, the benchmark index gained 5.6 points or 0.4%, ending at 1,298.6 points. This brings the index's gains for the new year so far to 25.8 points or 2%, which is commendable as the index had already gained 45.2% in 2009.

Shares on Bursa Malaysia had traded somewhat ambivalent at the start of the new week. Price movements were mostly limited and the index traded flat last Monday. Investor interest improved as the week wore on, as investors looked towards various themes and sectors, although blue chips stayed relatively flat.

Indeed, interest broadened out very considerably last week, from the usual blue chips to lower-liner stocks, small-cap laggards and specific sectors. Most noticeable was the rubber glove sector, which saw practically all stocks in the sector chalking up large gains before succumbing to profit-taking activities last Friday.

Hard-disk drive makers Notion VTec and Dufu TECHNOLOGY [] also charted good gains. Apart from the sector's positive earnings outlook and low valuations, investors were also anticipating the entry of a strategic investor into Notion following its recent private placement exercise.

Other sectors that saw increased investor interest and notable gains include healthcare, as well as technology, especially last Friday with MPI and Unisem among the day's major gainers. This came as investors cheered Intel Corp's strong results and positive outlook for the year.

On the economic front, the picture was more mixed to negative. Nonetheless, investors on Wall Street were expecting more positive corporate earnings this season, and that has helped shave off concerns over patchy economic data.

The US labour market remains weak. The number of job losses in the world's largest economy widened to 85,000 in December 2009. This was a reversal of the improving trend recorded through 2H09, which culminated in the economy adding 4,000 jobs in November.

The unemployment rate stayed at 10% but the figure including part-timers who want to work longer hours and those who have given up looking for a job is much higher. Weak job prospects in the US will continue to cast doubt on the recovery.

Indeed, this was also reflected in retail sales, which fell unexpectedly by 0.3% in December for the first time in three months. For the year, they fell 6.2%.

Japan's machinery orders dropped in November 2009, a sign that companies are still reluctant to spend amid industry-wide excess capacity and caution on the demand recovery. The mixed economic data we have been seeing suggests the global economic recovery remains fragile and dependent on stimulus spending.

On the other hand, China released stronger-than-expected export numbers for December 2009, which grew 17.7% year-on-year (y-o-y). This was the country's first exports growth in 14 months.

However, China's strong economic growth is fuelling concerns of overheating and more credit-tightening measures. This underscores its concerns that last year's surge in lending growth is fuelling unhealthy asset price bubbles and exacerbating an overcapacity problem in certain industries.

The Chinese government has instituted several credit-tightening measures in the last two weeks, including higher yields on short-term bills and raising the reserve requirement ratio for banks by 50 basis points. The move to remove some excess liquidity in the banking system and check credit growth was expected but not this soon. Investors fear the tightening measures will dampen China's economic expansion even as the rest of the world faces the prospect of tepid growth.

Portfolio review
Our basket of 18 stocks fared exceeding well again last week.

After surging 3.4% the previous week, our basket of stocks rose another 4% last week, much more than the FBM KLCI's 0.4% rise. Including our large cash reserves (for which no interest is imputed), the total portfolio value increased by 3.1% to RM554,750.

In the last two weeks alone, since the start of the new year, the value of our 18 stocks held has increased by a significant 7.5% from RM397,060 to RM426,935. This compares favourably against the FBM KLCI, which rose 2%.

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 RM394,750. Of this amount, RM223,866 has already been realised from earlier sales and the rest are unrealised.

Since its inception, our model portfolio has registered a hefty return of 246.7% compared with our capital of RM160,000. By comparison, the FBM KLCI was up by 100.8% 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 sake.

We currently have surplus cash of RM127,815 for future investments, and the portfolio's equity weighting currently stands at 77%, which we are comfortable with.

Last week, we had 16 gaining stocks and 2 losing ones.

Our portfolio's strong performance was helped by large double-digit weekly gains in four stocks, notably Dufu Technology (up a hefty 23.5%), Notion VTec (up 15.3%), 3A Resources (up 13%) and MyEG Services (up 10%).

Other major gainers include Masteel (up 8.8%) and CSC Steel (up 8.1%), Ireka Corp (up 7.2%), Pantech (up 4.8%) and Muhibbah (up 4.5%).

Notion VTec's recent strong rally has pushed our returns on the stock to 109%, from our dividend adjusted cost of RM1.66 versus the current share price of RM3.47. Dufu's shares are also yielding us a decent return of 31% after a long period of underperformance earlier. Meanwhile, 3A Resources' recent rally has also raised our returns on the stock to a hefty 506%.

We are keeping 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.