Tong's Value Investing Portfolio: Lightening portfolio on rising risks

-A +A

tong%27s_thumbnails

INVESTORS continued to tread lightly last week. A big part of current worries stem from renewed volatility in the forex market, specifically the rapid weakening of the ringgit against the US dollar.

The divergence in economic health between the major developed markets — the US and Japan and the eurozone — will lead to a stronger greenback as capital flows to the former. The world’s largest economy grew at a 3.5% annualised pace in 3Q14 while growth in the eurozone has hovered barely above zero since coming out of recession in 2Q13. Meanwhile, this week’s economic data showed Japan slipping back into recession in the third quarter, hurt by higher consumption tax and sluggish exports.

And in fact, the yen has fallen sharply against the US dollar in recent days, after the Bank of Japan announced additional stimulus measures even as the Federal Reserve ended its quantitative easing.

The weak yen is, in turn, spurring fears that other countries in the region will also move quickly to devalue their own currencies, to maintain export competitiveness.

Amid such concerns, the ringgit has been trending weaker and is now at its lowest against the greenback since early 2010.

Aside from the yen drag, falling commodity prices — including crude oil and crude palm oil — as well as expectations of domestic inflationary pressures (the result of subsidy rationalisation and soon-to-be implemented goods and services tax) will further weigh on our currency.

Having averaged around US$110 per barrel for the past three years, Brent crude oil continues to hover below the US$80 per barrel threshold. Weak crude oil prices and ample supply of oilseeds globally will likely keep a lid on CPO prices.

Expectations for further weakness in the ringgit could be self-perpetuating, if investors start selling out of bonds and equities. I believe there is a more than fair chance our market will come under pressure in the near term.

In view of the rising risks, I have decided to take profit on the best-performing stock in my portfolio. I sold my entire holdings in Oceancash Pacific at 41 sen per share last week.

Whilst the intention of this portfolio has always been to identify value stocks and hold them over the longer-term, Oceancash has fared much better than expectations in a short period of time.

I should note that the decision to sell the stock is in no way a reflection of a change in the company’s underlying fundamentals. Rather, netting a smart 36.7% return on investment in little more than a month is simply a very good proposition.

With the disposal, my cash holdings is now higher at RM65,860. The portfolio is currently 68% invested, down from the previous week’s 78% level.

Should the anticipated market correction materialises, I would certainly look to make more purchases.

My total portfolio return improved slightly this week to 2.6% since inception. The portfolio continues to outperform the FBM KLCI, which has fallen by 1.1% during the same period.

On a separate note, for new readers, my value investing portfolio will only buy stocks featured on Stock of the Day by InsiderAsia — and only after it has been posted on www.theedgemarkets.com.

A quick summary of the business and underlying fundamentals of the featured companies are published in The Edge Financial Daily.

All registered users of www.theedgemarkets.com will receive a digital copy of the Financial Daily— for free — via their email before the start of each trading day.

I have tabulated the list of stocks that were highlighted by InsiderAsia in the past one month. Most of the stocks do well on the day they were featured.

About 40% of the stocks subsequently gave back part of their initial gains. This could be because some investors choose to trade the stocks, on the day they were highlighted, and make a quick buck.

This also means that those with a longer-term horizon could afford to wait for the stocks to retrace — after the initial euphoria — before buying.

What is important to note is that 85% of the stocks on the list are currently making gains compared with prices on the day they were featured — despite the fact that the broader market has been drifting lower.

I believe that most of these stocks, chosen for their underlying worth that is currently not fully reflected in their share prices, will continue outperform the broader market in the long run.

This article first appeared in The Edge Malaysia Weekly, on November 24 - 30, 2014.