InsiderAsia's Model Portfolio — Week 375

IT was a tough week for global equity investors as European debt worries roiled financial markets in the middle of the week. Adding to that were concerns over further monetary tightening in China, but balanced out by robust US corporate earnings, continued gains on Wall Street and more evidence the US economic recovery is on track.

For the week, the FBM KLCI rose a total of 9.6 points or 0.72% to end at 1,346.4 points, all of it coming from last Friday's 10.5-point rise.

The week had started off on a firm footing, riding on the coat tails of Wall Street gains. In the preceding week, the benchmark Dow Jones Industrial Average index extended its gains to the eighth consecutive week, making it one of the longest winning streaks in recent years.

Confidence on Wall Street was bolstered by growing evidence the US economic recovery is on track. Among the latest supporting data was strong new home sales numbers for March 2010 and latest weekly jobs data, which suggested the pace of layoffs was slowing. Initial unemployment claims fell for the second week, down 11,000 to 448,000.

US corporate earnings too have either met or exceeded market expectations, notably from the industrial and TECHNOLOGY [] companies. Following from the recent post-crisis reforms and the Goldman Sachs saga, interest in bank stocks was, however, muted by fears of further financial reform and regulations that could affect their operations and profits.

As the week wore on, more concerns emerged, particularly from China and Europe. The Shanghai Composite Index fell to near seven-month lows. This comes as investors fear further credit tightening measures after the government imposed more restrictions to curb property speculation, following a record 11.7% rise in property prices in March 2010.

The biggest event was no doubt the credit downgrades for several European nations, which precipitated a major sell-off in global equities markets.

Concerns over Greece's debt woes have kept investors on edge for several weeks now. The initial relief from the bailout package, to be given by countries in the eurozone and the International Monetary Fund, had fizzled out quickly as investors fear the agreed €45 billion (RM190.8 billion) will be insufficient to solve Greece's mounting problems.

The latest sell-off was triggered by the sharp ratings downgrade for Greece' debts, to junk status. This is the first time a member of the eurozone has been rated below investment grade. Concerns over the need for Greece to restructure its borrowings are growing and are spreading to other debt-laden countries. The debt ratings for Portugal were simultaneously cut by two notches with a negative outlook, pushing up its cost of borrowings. A day later, Spain's ratings were also cut.

Investors later recouped their courage, as a Wall Street rally last Thursday sent regional bourses sharply higher last Friday. Investors started to take the view that the sovereign debt problems in Greece would be under control, and will be resolved soon through rescue packages

Despite the sizable gains last Friday, some investor caution should probably still be warranted.

The fiscal and debt problems in Europe will take some time to iron out, and are the legacy of the recent global financial crisis. They will also have a major impact on growth in the eurozone area and the euro, with growth and bailout capacity largely resting on Germany's shoulders.

Investors are now balancing between growing signs of a more sustainable recovery in the US, vs Europe's growing debt and contagion fears, plus concerns of further credit tightening measures in China. Weighed against that are stock valuations that have risen sharply after the 14 month long rally that started in March 2009, with few major pull-backs in between.



Portfolio review
Our basket of 19 stocks continued to rise last week, but by a smaller margin than the benchmark index. Our basket of stocks rose by 0.27%, compared with the FBM KLCI's 0.72% gain.

Including our large cash reserves (for which no interest is imputed), the total portfolio value increased by 0.23% to RM594,195.

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 RM434,195. Of this amount, RM224,946 has already been realised from earlier sales, and the rest are unrealized.

Since its inception, our model portfolio has registered a hefty return of 271.4% compared with our capital of RM160,000. By comparison, the FBM KLCI was up by 108.2% 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.

Last week, 10 of our stocks rose, eight fell and one was unchanged (Tanjung Offshore).

The week's top gainers were Dijaya Corp (up 8.7%), MyEG Services (up 5.9%) and Tanjong plc (up 2.2%). The major losers include Green Packet (down 6.5%), Ireka Corp (down 3.8%) and Notion VTec (down 3.6%).

Shares of Selangor PROPERTIES [] traded ex for a 10 sen dividend on April 29, 2010, which we have adjusted accordingly. Its shares are now yielding us a total gain of 54.2%.

We are leaving 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.