InsiderAsia's model portfolio — Week 365

THIS review covers the last two weeks, due to the Chinese New Year holidays last Monday.

While the local stock market's benchmark index rose over the last two weeks, but it was a choppy period. Investor sentiment shifted between optimism and pessimism almost every other day. Over the two-week period, the FBM KLCI added 9.8 points or 0.8% to end at 1,257.7 points.

The long Chinese New Year holidays also saw trading volumes contract significantly, both before and after the lunar new year. Many investors took an extended holiday, or preferred to sit on the sidelines due to Wall Street's recent volatility and lingering external uncertainties.

After the holidays, the lunar new year initially got off to a good start for Asian bourses, thanks to a rally on Wall Street. Wall Street's rally earlier in the week was fuelled by hopes that the global economy recovery was on track following a number of positive economic data as well as optimism Greece's debt problems will be resolved, if not contained.

The rash of better-than-expected US data include those on the manufacturing and housing sectors. The Empire State manufacturing index for New York rose to 24.91 from 15.92 last month. US housing starts rose by a much better-than-expected 2.8% to a seasonally adjusted annual rate of 591,000 units in January, the highest level in six months. US industrial production also rose by a higher-than-expected 0.9% in January. It was the seventh consecutive monthly rise in output.

Elsewhere — and underscoring the patchiness of the recovery, UK jobless claims unexpectedly jumped in January to the highest level since 1997, with unemployment at 7.8%.

However, all this was later overshadowed by an unexpected turn of events. Sentiment for global equities took a turn for the worse at the end of the week, following an unexpected US rate hike.

Stock markets across Asia slumped last Friday, following a move by the US Federal Reserve to raise the discount rate last Thursday night, after Wall Street had closed. This raised fears that the inevitable US monetary tightening could come sooner than expected.

The Federal Reserve raised the overnight rate, the rate it charges banks for emergency loans by 25 basis points to 0.75%. This was to withdraw some of the emergency measures in place during the crisis, towards a more normalised structure with the economy on a recovery path.

Investors should note the distinction between the discount rate and the federal funds interbank lending rate. The key federal funds rate, the main monetary policy tool, remains unchanged near zero, and within the target of 0%-0.25% established since late 2008 during the crisis.

The key federal funds rate is likely to remain low for some time to sustain the still fragile US economic recovery, especially amid high unemployment.

Thus, the raising of the overnight rate itself does not necessarily mark the start of monetary tightening in the US yet, which many expect to happen in the second half of 2010 or early 2011.

Nonetheless, the sudden move, especially in between Federal Open Market Committee (FOMC) meetings, roiled global financial markets last Friday, sending stock markets and commodities lower and the US dollar higher.

Most affected were cyclical and export-oriented stocks, as well as the Hong Kong bourse, whose currency and monetary policies are closely tied to the US. The Malaysian bourse, fortunately, was more resilient as our monetary policies have been independent of US' for quite some time.

Global equity investors have been hit by several rough patches lately, with problems ranging from mixed economic data, fears of monetary tightening, China's credit-tightening measures and sovereign debt problems in Europe, among others.

The ongoing tug of war between investor optimism and pessimism will likely continue for some time, as long as US economic data remain mixed and external concerns linger. This will unfortunately cause more day-to-day gyrations, depending on developments overseas and on Wall Street.

Portfolio review
Our basket of 19 stocks rose by 0.13% over the last two weeks, slightly less than the FBM KLCI's 0.79% rise.

Including our large cash reserves (for which no interest is imputed), the total portfolio value increased by a smaller margin of 0.1% to RM538,680.

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 RM378,680. 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 236.7% compared with our capital of RM160,000. By comparison, the FBM KLCI was up by 94.4% 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.

Reflecting the mixed broader market conditions, we had eight gaining stocks, 10 losing ones and one unchanged (Tanjung Offshore) over the two-week period.

The major gainers were CSC Steel (up 7.8%), 3A Resources (up 7.2%), Ireka (up 6.9%) and Masteel (up 4.8%).

At RM2.24, 3A's shares are now yielding us hefty returns of 611% compared with our dividend-adjusted acquisition cost of just 31.5 sen back in December 2008. CSC's shares are yielding us a 57% gain, since we acquired them just last August 2009. We had bought the stock primarily for its high dividends, but it has since given us very good capital gains too.

The declining stocks over the last two weeks were led by the portfolio's latest newcomer Green Packet (down 7.6%), followed by Pantech (down 6.9%) and Muhibbah (down 6.1%).

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.