AFTER a one-week reprieve, stock markets around the world were badly hammered again last week, with steep declines on Wall Street and global bourses. Fears grew that the EU bailout package would not be enough to stem the European debt crisis or a potential contagion effect.  

The week started on a weak note, but there was no respite from the poor external environment. As a result, the local bourse chalked up losses every trading day as global markets slumped. For the week, the benchmark FBM KLCI lost a total of 53 points, or 4%, to end at 1,285.7 points.

Relief from the previous week's massive €750 billion (RM3 trillion) rescue fund from the European Union and the International Monetary Fund quickly fizzled out on the weight of the eurozone's problems. The euro currency resumed its slide against major currencies, and hit four-year lows against the US dollar before rebounding slightly towards the weekend.

Last Wednesday, investor confidence was buffeted by Germany's unexpected, and solitary, move to ban naked short selling of shares in ten leading financial institutions, euro-denominated government bonds and credit default swaps based on those bonds.

The decision, which could have been viewed positively in "normal" times, served to raise more suspicions and speculations given prevailing debt woes and uncertainties in the eurozone.

Last Thursday, the Dow Jones Industrial Average index suffered its biggest single-day point drop since February 2009, plunging 3.6% on concerns that Europe's debt crisis may cause a contagion effect and affect the ongoing global economic recovery.

Investors were also unnerved by weaker reports on the labour market and a 0.1% drop in a gauge of leading economic indicators. They contradicted the recent spate of economic reports which started to show more sustainable signs of recovery in the US.

Unfortunately, the problems were not confined to Europe or the US.

The Shanghai Composite index plunged 5.1% last Monday. Chinese stocks have come under heavy selling pressure in recent months as investors become increasingly worried over the government's tightening measures. Premier Wen Jiabao's most recent statements indicate more measures are imminent in order to contain runaway property prices and overcapacity in select industries, which would eventually cool China's fast paced economic growth.

Elsewhere, the economic data from Asia remains positive, signifying the economic recovery in the region continues to gather momentum. However, investors are now more concerned over growth going forward, especially in light of the unfolding fiscal consolidation in the eurozone.

Singapore revised up its 1Q10 gross domestic product (GDP) growth to 15.5% year-on-year (y-o-y) and an annualised 38.6% quarter-on-quarter(q-o-q), the fastest clip since quarterly tally began in 1975. Japan also unveiled robust growth in the first quarter, its economy expanding by an annualised 4.9% from the preceding quarter on the back of the strong rebound in exports.

Commodity prices also came under pressure on concerns of slowing global economic growth. Crude oil futures traded on the New York Mercantile Exchange was hovering around US$70 (RM232.40) per barrel, down from as high as US$87 per barrel in early April 2010.

Portfolio review
Our basket of 19 stocks performed squarely in line with the FBM KLCI last week, declining by 3.94% compared with the benchmark index' 3.96% fall.

Including our large cash reserves (for which no interest is imputed), the total portfolio value fell by a smaller margin of 3.32% to RM558,165. Our total profits are very substantial at RM398,165.

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.

Since its inception, our model portfolio has registered a hefty return of 248.9% compared with our capital of RM160,000. By comparison, the FBM KLCI was up by 98.8% 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's sake.

Reflecting the broader market's severe sell-off, all but one of our stocks fell last week. The only gainer was MyEG Services, which rose 3.5% for the week after Goldman Sachs emerged as a substantial shareholder.  

The week's top losers were Notion VTec (down 9.7%), Green Packet (down 8%), 3A Resources and Dufu Technology (both down 7.8%), and Faber Group (down 7.5%).  

Some share disposals
Given the increasingly uncertain outlook for global bourses in the near term, we have decided to lock in some profits and reduce our equity exposure. Please note that they not necessarily reflect a change in our view of the companies' underlying operations or outlook.

It is important to note that our model portfolio is severely handicapped by the basic and fundamental assumption — for transparency purposes — that all transactions are deemed to be done at only one point in time each week, ie at each Friday's closing price.

Thus, we are not able to obtain the best possible prices — and cannot "sell" when markets were declining throughout the week. Despite this handicap, we are happy to note the portfolio has done well.

We are disposing of the following shares.

MyEG Services: We are selling 15,000 shares of our 25,000 share stake, at Friday's closing price of 59 sen, for a total of RM8,850. Compared with our cost of 43.5 sen per share, we will make a gain of 35.5%, or RM2,318 from the sale. After this, we still have 10,000 shares left.

Muhibbah Engineering: We are selling our entire 20,000 share stake, at Friday's closing price of 91 sen, for a total of RM18,200. Compared with our cost of 24.2 sen, we will make a hefty gain of 276%, or RM13,360 from the sale.

Dijaya Corp: We are selling our entire 8,000 share stake, at Friday's closing price of RM1.03, for a total of RM8,240. Compared with our cost of RM1.03, we will make a small loss of 4.5%, or RM390 from the sale.

Tanjung Offshore: We are selling 5,000 shares of our 15,000 share stake, at Friday's closing price of RM1.02, for a total of RM5,100. Compared with our cost of RM1.065, we will make a small loss of 4.2%, or RM223 from the sale.

Ireka Corp: We are selling 6,000 shares of our 12,000 share stake, at Friday's closing price of 72 sen, for a total of RM4,320. Compared with our cost of 87 sen, we will make a loss of 17.2%, or RM900 from the sale. After this, we still have 6,000 shares left.

The above disposals will raise a total of RM44,710 in cash, and increase our cash balance from RM91,180 to RM135,890.

We will realise additional profits of RM14,166, which will increase our pool of realised profits from RM224,946 to RM239,112. Another RM159,053 in profits are unrealised. Our equity weighting will decline from 84% to 76%, which will be more comfortable in the current environment.

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.