Sentiment for global equities stayed on a positive footing last week. Despite misgivings over the dithering in Greece’s second bailout loan and yet another round of credit ratings downgrades for several European countries, this time by Moody’s Investor Services, investors felt sufficiently confident to keep pushing share prices higher.

As has been the case since the beginning of this year, the primary driver behind the uptrend is upbeat economic data out of the US, which continues to paint a picture of steady recovery, albeit at a modest pace.

Last week, US stocks were boosted by a sharp drop in unemployment benefit claims, to the lowest level since March 2008. That lifted the closely watched bellwether Dow Jones Industrial Index to well within sight of the 13,000 mark, much nearer to its all-time high close of 14,165 in October 2007.

Prior to last week’s data, the US labour market was showing signs of improvement. New job additions hit 243,000 in January while the unemployment rate dipped to 8.3%. Anecdotal evidence suggests that businesses are now more inclined to hire as sales continue to pick up pace.

The brighter outlook has given consumers greater confidence to spend. Last week’s retail sales number for January underscored a sustained growth in consumer spending. This is important given that the segment accounts for about two-thirds of the US economy.

Continued improvement in the world’s largest economy buoyed confidence in riskier assets. Bellwether indices in key Asian markets all ended the week in positive territory — pushing gains for those in Singapore, Hong Kong, Japan, South Korea and Taiwan well into the double digits year to date.

By comparison, trading sentiment on the local bourse was more ambivalent. The FBM KLCI closed in the red, down 4.5 points for the week at 1,557.2. Having outperformed the regional markets in 2011, the local bourse appears to be taking a breather.

Trading activities remained focused on lower liner stocks. The daily on-market volume on Bursa Malaysia averaged more than 2.39 billion shares — down from the average of about 3.68 billion shares traded in the previous week. Nevertheless, we continue to record a fairly healthy level of retail investor interest.

Aside from interest in select lower liner stocks, trading was relatively uneventful on the local bourse. The release of Malaysia’s GDP data for 4Q11, which came in at 5.2% y-o-y, evoked little response from investors. The local economy grew 5.1% for the year, weighed down by slowing external demand. Most market observers expect further slowing in the current year, with growth estimates ranging from about 3% to 5%. Growth in domestic consumption — both private and public pump priming — is expected to offset the fall in manufacturing exports.

Barring any major negative developments, sentiment for global stocks appears likely to remain on an upbeat note this week. The performance of equities so far this year has exceeded expectations for many market observers, with the bar  lowered in the aftermath of last year’s wild swings. Indeed, we suspect the steady gains are beginning to call to investors still sitting on the sidelines, playing on their fears of totally missing out on the rally.

It may still be too early to say decisively that volatility is in the rear view mirror. Indeed, significant risks remain, especially in the eurozone and even with regards to the fragile US economy. Nonetheless, the world economy is in better shape than initially feared and showing more resilience. This itself will support a positive short-term outlook, at least at this point.

Europe is likely to be the focal point this week. Greece is almost out of time to avoid a disorderly default. It has to receive the green light for the second bailout package from eurozone officials in the next few days. The country is also expected to finalise the debt restructuring exercise that includes a significant haircut for private bondholders.

Approval for the bailout has been withheld with the eurozone insisting on written commitments from leaders of Greece’s key political parties that they will adhere to the agreed austerity measures after the election, expected to be held in April. Several rounds of painful austerity programmes have triggered mass street protests and violence as the embattled country struggles with high unemployment. Greece is in a deep recession for the fifth consecutive year. The outlook for this year offers little to cheer, even if it secures the bailout and avoids default.

Portfolio review
Stocks in our model portfolio outperformed the benchmark index last week. Total market value for our basket of 22 stocks was down by 0.1% to RM470,635, compared with the KLCI’s 0.29% decline.

Eight stocks in our portfolio closed higher while 11 ended in the red and three others traded unchanged. Some of our notable gainers include Bonia Corp Bhd (+2.3%), Oldtown Bhd (+2.4%), Al-Aqar KPJ REIT (+1.7%) and Malayan Banking Bhd (+1%). At the other end, DiGi.Com Bhd (-1.1%), Bumi Armada Bhd (-1.2%) and Benalec Holdings Bhd (-3.6%) were among the bigger losers for the week.

Our most recent acquisitions registered mixed results last week. Shares in United Malayan Land Bhd gained 1.9% but prices for Alliance Financial Group Bhd and Benalec fell. We are, however, not unduly worried as most of our investments are made based on longer-term expectations.

Including our cash holdings, for which no interest income is imputed, our total portfolio value was down by a lower 0.07% to RM698,080. Our total profits are very substantial at RM538,080, of which RM404,690 has already been realised from shares sales.

This included RM2,442 profit realised from the disposal of 3,000 shares in CIMB Group Holdings Bhd and 1,000 shares in Bumi Armada, which gave us returns of 10.8% and 8.4% respectively. Proceeds from the sale totalled RM25,850. In their places, we acquired 2,000 shares in Bursa Malaysia Bhd at RM7.36 per share and 5,000 shares in TSH Resources Bhd at RM2.17 per share. The purchases cost RM25,570 combined.

Our realised profit also included RM1,300 dividends received from DiGi last week. Recall that our cost in the investment has been reduced to zero, after netting off all the dividends and capital repayments received over our holding period. Thus, all future dividends are recognised as profit.

We have also adjusted down our cost in Al-Hadharah Boustead REIT (BSDREIT) for the eight sen per unit in income distribution. Our cost in the investment now stands at RM1.30 per unit. That translates into a 30.8% return on the investment to date. We believe the BSDREIT will continue to offer steady yields at relatively low risk given its defensive business model. At the same time, it also offers us a small exposure to potential gains should crude palm oil (CPO) climb higher. The REIT gets a 50% share of income from the sale of CPO above the benchmark price of RM2,000 per tonne under the lease agreements. The benchmark futures on Bursa Derivatives closed well above RM3,200 per tonne last week.

Last week’s losses slightly pared down our model portfolio’s cumulative returns since inception to 336.3% on our initial capital of RM160,000. Nevertheless, we continue to outperform the KLCI, which was up by about 140.7% over the same period, by some distance.

Our cash holdings stood at RM227,725, accounting for 33% of our total portfolio value. The relatively high percentage is primarily for prudence’s sake. Although the global market has been treading steadier, we remain on a slightly defensive stance pending greater clarity.

Most companies will be releasing earnings results for 4QFY11 in the next week and a half, which may provide us with some fresh leads for possible purchases/disposals.


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.

This article appeared in The Edge Financial Daily, February 20, 2012.