Tong’s Value Investing Portfolio: Repositioning portfolio to changing environment

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TRADING on global financial markets was volatile last week, as investors reacted to new developments by the day.

Stocks were pummelled early in the week as the oil rout deepened, hitting currencies of oil-producing countries and energy stocks. But sentiment calmed mid-week, after the US Federal Reserve pledged patience in raising interest rates.

Nevertheless, this is quite likely just a temporary reprieve. Much of the underlying fundamentals that have been driving markets have not changed.

Global economic growth outlook — save for that in the US — is still tepid. Significantly, the slowdown in China will have wide ranging repercussions even as the eurozone and Japan continue to struggle with threats of deflation and barely growing economies.

Even if the oil market rout is over, and this is still arguable, prices are expected to remain low for a considerable time.

Despite sluggish demand, few producers are willing to cut back. The rationale is that once the initial investment is “sunk”, the operating cost to extract is still lower than prevailing oil prices. In fact, they are probably producing more to compensate for lower selling prices. The fall in oil prices now will only affect capital spending decisions on future projects — and crimp supply growth a few years out.

The oil price collapse has already sent Russia’s currency into a tailspin and the country is headed into recession next year. I am not suggesting that things will get that bad here, but it will be foolish to believe that we will escape unscathed.

A weak ringgit, low oil revenue, budget deficit, Goods and Services Tax, high government and household indebtedness — they all culminate to a very challenging year ahead. If you think the low single-digit corporate earnings growth in the last three consecutive years is bad, 2015 will be worse.

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Given the rapidly changing environment, I am repositioning my portfolio.

I disposed of all my shareholdings in Crescendo despite the fact it is one of the best property companies in Malaysia with a strong cash position. I believe that the property market will slow substantially in 2015. Hence, the stock is unlikely to outperform the broader market.

Similarly, I sold my shares in Tasek. Demand for cement will be affected by the property slowdown, though this should be offset, to a certain degree, by infrastructure projects. However, operating conditions will be difficult as key players bring onstream more capacity while operating costs are rising.  

The total value of my portfolio fell by 1.61% last week, mirroring losses in the broader market. This brings cumulative losses since inception to 5.23%.

Nevertheless, my portfolio is still outperforming the benchmark index, which has fallen by an even greater 6.21% over the same period.

Following the disposals, my cash holdings rose to RM108,786. I plan to reinvest these monies into stocks that will fare better under current market conditions — come January 2015.

As usual, these stocks will be selected from InsiderAsia’s Stock of the Day, after they are published on The Edge Markets at www.theedgemarkets.com and in The Edge Financial Daily.

Incidentally, Table 1 shows the share price performances of stocks featured by InsiderAsia since The Edge Markets’ launch on Oct 3.

Of note, every single one of the stocks rose above the opening price on the day they were featured — even as the broader market was collapsing. That is quite a remarkable feat. Look us up. It’s FREE.

Meanwhile, I wish all our readers a blessed holiday.

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This article first appeared in The Edge Malaysia Weekly, on December 22 - 28, 2014.