InsiderAsia's model portfolio — Week 361

AFTER a good two-week start to the new year, stock market conditions turned considerably choppier last week, due to external concerns and a slump on Wall Street. More economic worries emerged last week, especially from China, which has started to tighten credit more aggressively, while economic data from the US remained weak.

The FBM KLCI crossed the psychologically important 1,300-point level on Tuesday, closing as high as 1,308.4 last Thursday. However, Thursday's Wall Street slump caused the market to fall sharply last Friday, with the index ending at 1,300.5 points.

While the index still managed to close flat for the week, gaining a mere 1.9 points or 0.1%, it masked the broader market's poor performance. Most lower liners and mid-cap stocks succumbed to profit-taking activities, more so after their recent strong gains. Trading volume also shrank considerably as more investors stayed on the sidelines, falling to one billion shares last Friday.

The two main themes for the week were Wall Street and China.

After an earlier positive start to the year, Wall Street has turned decidedly more wobbly, with the Dow Jones Industrials Average Index chalking up two consecutive days of triple-digit losses last week. This culminated with Thursday's 2% drop, which sent Asian shares reeling last Friday. All earlier gains for the new year for US stocks have also been wiped out.

Recent US economic data has been more negative, particularly on the employment front and also the manufacturing sector, leading to concerns over the strength of the recovery. The catalyst for Thursday's Wall Street slump, nonetheless, was President Barrack Obama's proposal to crack down on the big banks, regulating what the banks they can own, do or invest in.

This is positive to limit risks for the banking system in the aftermath of the recent financial crisis, which was caused by unfettered risk taking and excessive compensation packages. However, they will also severely affect the big banks' size and earnings potential, which was what Wall Street investors focused on, sending financial stocks lower.

The ongoing US earnings season saw 4Q09 results that mostly exceeded expectations. But their share price gains were limited, suggesting that much of the improvements have been factored into prevailing valuations, unlike previous quarters where expectations were low. For stocks to add to the already substantial gains from 2009, earnings will have to do far better in the coming months.

Wall Street's slump only served to exacerbate recent concerns over China's recent string of credit-tightening measures. Last week, China reported GDP growth of 10.7% in 4Q2009, and 8.7% for the full year, a relatively small drop from 2008's 9.6% pace — and well ahead of the government's earlier target of 8% growth amid the global recession.

China's strong growth, spurred by its US$586 billion (RM2 trillion) stimulus package, has played an important role in leading the region's economies out of the global downturn, but also fuelling concerns of overheating.

China has instituted a number of measures to tighten monetary policy and curb excessive lending, including raising interest rates, the reserve requirement ratio for banks and curbing loans. This underscores its concerns that the surge in lending growth is fuelling unhealthy asset price bubbles and exacerbating an overcapacity problem in certain industries.

Investors fear more credit-tightening measures ahead, and more importantly their implications on growth and asset prices, as China is expected to be a major engine of global growth again this year. We expect these concerns to continue this coming week, and investors are likely to stay cautious.

Portfolio review
Our model portfolio had performed exceedingly well over the last month, rising uninterruptedly for three weeks, but fell last week as the broader market, especially mid-cap stocks succumbed to profit-taking activities.

Our basket of 18 stocks under-performed the FBM KLCI last week, falling 2% compared with the index' flat performance. Including our large cash reserves (for which no interest is imputed), the total portfolio value fell by a smaller margin of 1.5% to RM546,185.

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 RM386,185. 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 241.4% compared with our capital of RM160,000. By comparison, the FBM KLCI was up by 101.1% 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 sake.

It is worth noting that in just three weeks from Dec 24, 2009 to Jan 15, 2010, the value of our basket of 18 stocks had surged 11%, from RM384,800 to RM426,935, far outweighing the FBM KLCI's 2.7% rise. Thus, some profit-taking was to be expected. Even with last week's losses, our basket of stocks has gained a substantial 8.7% in the past month and 5.4% so far for the new year.

Last week, we had 13 losing stocks, four gaining ones and one unchanged (Masteel). The gainers were led by Selangor PROPERTIES [] (up 3.8%) and Genting Malaysia (up 0.7%).

The two biggest losers of the week were hard-disk drive makers Notion VTec and Dufu TECHNOLOGY [], down 13.8% and 15.9%, respectively. Some profit-taking was to be expected after the two stocks had rallied very strongly on the back of increased interest in the hard-disk drive and technology sectors, as well as the entry of Nikon as a strategic investor into Notion.