THE local stock market took a breather last week, following a solid six-week run, due to fears of the swine flu outbreak. However, optimism over a US economic recovery helped temper earlier losses, and most bourses recovered smartly towards the end of the week.

With the KLCI nearing the psychologically important 1,000-point level and having gained 149.3 points in the preceding six weeks, some intermittent profit-taking was to be expected. For the week, the KLCI lost just 1.9 points or 0.2% to end at 990.7 points.

Stock markets in Asia traded lower at the start of the new week. Investor confidence in the less than two-month old rally was shaken by news of the swine flu outbreak, which started in Mexico and quickly swept across North America and other parts of the world.

The influenza virus travels with extreme ease, fuelling concerns that the outbreak could morph into a global pandemic. Asia, in particular, has experienced first-hand the crippling economic damage that can be inflicted during the SARS outbreak in 2003. The World Health Organisation (WHO) raised its pandemic alert to level 4 from level 3.

Positively, the outbreak has been fairly well contained so far. While more suspected cases are being reported around the world, most of the deaths have been in Mexico. The virus is also easily treatable with common influenza remedies such as Tamiflu and Relenza, although there are concerns the virus could mutate into a more virulent strain.

Investors were also spooked by the soon-to-be-released stress test results for US banks, due today. US regulators have indicated that some major financial institutions, including Citigroup and Bank of America, will require fresh capital injection.

To be fair, these uncertainties were likely used by investors as excuses to lock in some profits, especially on the heels of recent gains. Indeed, most bourses started to recover nicely from the earlier flu scare by the middle of the week, led by better-than-expected US economic data.

Equity markets got a shot in the arm from the latest reading on US consumer confidence. The index rose far more than expected - to 39.2 points in April, the highest level since November 2008. This raised hopes that consumer consumption, which accounts for more than two-thirds of the US economy, is set to recover after falling sharply in the last few months of 2008.

Home prices in major US cities fell again in February but at a lesser pace and at the slowest declining rate since 2007, fuelling hopes that the moribund housing market may be nearing a bottom. The S&P/Case-Shiller index fell 18.6% year-on-year (y-o-y). These latest data, together with earlier clutch of economic numbers, do appear to suggest that the recession is abating.
 
On the local front, the Prime Minister announced further liberalisation of the economy, this time focusing on the financial sector. This includes granting new licences for banks, Islamic banks and Islamic insurance companies, and raising the foreign shareholding limit in local Islamic banks, investment banks, insurance and takaful operators from 49% to 70%.

This follows on the heels of the earlier decision to liberalise ownership limits on 27 services sub-sectors, which will help attract more investments and create a competitive business environment. Meanwhile, Bank Negara Malaysia left the key overnight policy rate unchanged at 2%.

Portfolio review
Our model portfolio has had several consecutive weeks of very strong outperformance now. Our selection of stocks rose over 5% per week and beat the KLCI squarely for three weeks running. Last week, we succumbed to the inevitable and performed worse than the KLCI.

Our basket of 18 stocks declined by 2% last week, compared with the KLCI's 0.2% fall. Including our large cash reserves (for which no interest is imputed), the total portfolio value decreased by a smaller margin of 1.3% to RM439,633.

The 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 RM279,633, of which RM206,221 have already been realised earlier. 

This represents a hefty return of 174.8% compared with our capital of RM160,000. We continue to outperform the KLCI significantly, which is up by 53.2% in the same period.

Last week, seven of our stocks rose, ten fell and one was unchanged (Tanjong plc).

Our major gainers were EON Capital, Tanjung Offshore warrant-B and Dufu Technology, which gained 4.1%-4.5% each. The major losers were, not surprisingly, those that rose substantially earlier, including Notion VTec  (down 13.8%), Masteel and Muhibbah (down 7.5% and 7.1%, respectively).

Buying more Pantech Group shares
We are increasing our stake in Pantech Group, and are buying 12,500 more shares at Thursday's closing price of RM0.59 each. This will double our stake on the company to 25,000 shares, and our average cost will fall from RM0.79 to RM0.69 per share for 25,000 shares. With this, our equity weighting now stands at 66%.  

Pantech's latest earnings results for the financial year ended February 2009 showed strong growth momentum - despite significant uncertainties triggered by the global economic downturn. Net profit was up 74.4% to RM59.6 million, a record high for the company.
 
To be sure, most customers are still cautious, buying just enough for their immediate consumption. But demand for the company's pipes, fittings and flow control products remains solid, especially from the domestic oil and gas sector. The sector accounts for roughly 70% of Pantech's sales.
 
Pantech has orders in hand, estimated at over RM180 million, which should keep the company busy until the third quarter of 2009 (3Q09). Earnings in FY Feb 2010 are expected to contract from last year's level, which were exceptional due to record steel demand and prices, but should resume the double-digit pace of growth in FY11.

At RM0.59, Pantech shares are trading at very attractive price-to-earnings (P/E) of only 5.2 times for FY2010. Dividend yields are estimated to net 3.4% this year.

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.