THE local stock market recovered some ground last week, following the preceding week's heavy losses.

For the week, the KLCI gained a total of 16.3 points, or 1.54%, to end at 1,075.8 points. It recouped about half of the previous week's 31-point loss. The bulk of gains came on Wednesday and Thursday, where the index rose a total of 29 points.

Investors stepped in to bargain hunt as the KLCI appeared to find strong support at the 1,050 level. As we had earlier noted, most had pegged the index's "fair value" for the year at around the 1,050 level, predicated on the historical long-term price-to-earnings (P/E) average of around 15 times.

There was also likely some buying ahead of the mid-year book closing season for institutional funds, as well as anticipation of more market-friendly measures to be announced at the upcoming InvestMalaysia conference later this week.

However, investors are still cautious. Most of last week's gains were limited to blue chips and were less broad based. Earlier in the week, confidence was also dampened by the World Bank's downward revision for its global growth forecast — to a 2.9% contraction from 1.7% contraction in March. It also lowered growth estimate for 2010 to 2%, down from 2.3% previously.

The relatively lacklustre performance in markets worldwide over the past few weeks is likely to have tempered optimism for equities for the moment, as investors are unsure how long the current correction phase will last.

The three-month long global rally had been running out of steam in recent weeks, as investors look for new leads. Investors are unsure whether the intermittent rallies are just technical in nature during a correction phase, or if they are related to the mid-year book closing exercise. New leads are needed and expectations are much higher now after the rally.  

Sentiment has also been dampened in the last month by higher bond yields due to inflation expectations. On Wednesday, the Federal Reserve opted to keep US interest rates unchanged near zero — as expected — but did not address the prospects of future inflation or interest rate increases.  Nonetheless, Wall Street rallied strongly on Thursday with sentiment boosted by strong demand for the US Treasury's US$27 billion (RM95.3 billion) 7-year note auction, which sent bond yields lower.

Demand for US treasury notes is now keenly watched as a sign of appetite of investors to fund the US stimulus programmes and its impact on bond yields. Investors were increasingly worried about the prospect of future inflation and interest rates, and how central banks will eventually withdraw the excess liquidity created by the various stimulus programmes.

Another key to watch is US consumer spending, which accounts for two-thirds of the US economy and drives exports for much of Asia.

US consumer spending remains weak, rising a modest 0.3% in May 2009 — the first time in three months. This was despite a surge in personal incomes boosted by stimulus programmes. However, the US savings rate shot up to a 15-year high as incomes increased and consumers continued to save more to provide buffers against unemployment and rebuild their balance sheets.

While the global recession may be nearing the tail-end, that is also already mostly factored into stock prices. However, the road to recovery is not smooth and post-recovery growth will likely be slow. Thus, investors will continue to look for more economic evidence to assess the strength of the recovery, in order to sustain the momentum.

Portfolio review
Our model portfolio rose last week, but less than the KLCI as the market's gains were mostly led by blue chips.

Our basket of 16 stocks rose 0.4% last week, compared with the KLCI's 1.5% rise. Including our large cash reserves (totalling RM142,256, for which no interest is imputed), the total portfolio value rose by a smaller margin of 0.3% to RM470,353.

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 RM310,353, of which RM216,650 have already been realised. This represents a hefty return of 194% compared with our capital of RM160,000. We continue to outperform the KLCI significantly, which is up by 66.3% in the same period.

Reflecting the mixed broader market performance, six of our stocks rose, six fell and four were unchanged.

The biggest gainers were blue chips like Genting Malaysia (formerly known as Resorts World), Tanjong plc and DiGi (up 1.8% to 3.8% each), and a few smaller caps like Dufu and Ireka (up 2.6% and 2.1%, respectively). The biggest losers were Tanjung Offshore and its warrants (down 2.1% and 4.8%, respectively).

On June 26, 2009, shares of Dufu and Genting Malaysia traded ex for dividends of one sen and five sen, respectively, which we have adjusted accordingly in our portfolio.

Our portfolio's equity weighting currently stands at 70%, which we are comfortable with. We are leaving it unchanged this week.

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.