This article first appeared in The Edge Malaysia Weekly, on November 2 - November 8, 2015.
AFTER declining steadily for several months, local stocks went through a major gyration over the course of October. After bottoming out at the end of August, a series of external leads prompted regional markets and currencies to rally strongly. However, these gains could not be sustained and much of them were pared by month’s end.
During the month, the FBM KLCI rallied from a low of 1628.8 to as high as 1718.2. It later fell back to end at 1665.7 by end-October, closing the month up 2.0%, but still down 5.4% year-to-date. The ringgit also recovered slightly to RM4.30 by month’s end, after falling to as low as RM4.48 versus the greenback.
Much of the earlier rally was predicated on the scenario that “bad news is good news”, as a string of weaker than expected US economic data raised hopes that the US Federal Reserve will put interest rate hikes on hold.
But by month’s end though, these hopes were dashed as the US Federal Reserve reaffirmed that interest rates may still be raised at the next meeting in December. Emerging markets, including Malaysia, fell sharply in response.
While China’s economic growth is decelerating sharply, there are signs that the US economy was also losing momentum in the face of slowing global growth and a strong dollar. Job growth has stalled sharply in the past two months, while production and consumer confidence indices are declining.
For optimists, these fuelled hopes that US interest rates will stay low and further monetary easing will allow liquidity to continue sloshing its way around, and perhaps return to emerging markets. Meanwhile, the European Central Bank raised expectations for more quantitative easing while China cut interest rates for the sixth time in a year. But alas, these hopes have since been dashed by the Federal Reserve.
The volatility in October highlights the difficult macro-economic picture we are facing globally, with the many headwinds from China and increasingly, the US. Many regional countries are already flirting with recession as the implications of China is stalling is very telling on the region.
When the US and Europe suffered major recessions since 2008, China had been anchoring global economic growth, and emerging markets were the prime beneficiary. China’s insatiable demand for commodities and intermediate products fuelled emerging markets, including Malaysia, leading to above-average economic growth amid rising commodity prices and exports.
With low global interest rates, investors were attracted by the region’s high growth rates, fuelling capital inflows from developed countries. Unfortunately, that story is no more. Growth in China is stalling. With it, emerging economies are battling with falling commodity prices, exports and currencies.
And if US interest rates are on track to resume rising — perhaps now only delayed by a quarter or two — then the structural downtrend in emerging markets’ currencies and equities will likely be intact, albeit at a slower rate.
On the local front, there are also few fresh positive leads from the 2016 Budget, while the ongoing political issues are not helping sentiment. There are concerns the 2016 Budget deficit forecasts may be too optimistic, and that may continue to pose a drag on the ringgit.
Going forward, there is really no clear driver of economic growth in Malaysia, with slowing export growth, low commodity prices and falling consumption confidence.
Both the MIER Consumer Sentiments and Business Conditions indices point to deteriorating local sentiment. The Consumer Sentiment Index is now at a record low of 70.2 in 3Q2015, down 28% y-o-y. Notably, this reading is even lower than during the Global Financial Crisis and Asian Financial Crisis.
In this environment, finding high growth companies will be challenging. Cash is king.
It is for these reasons we started this InsiderAsia Income portfolio in May this year, to focus on dividend yielding stocks that can weather the economic downturn better. These companies must have sound business models with good brand names or market positioning, and strong balance sheets. This is a defensive portfolio where we adopt a very selective stance in stock picking.
Our income portfolio is modelled to be fully invested at all times. Hence, cashing out is not an option. That said, we are confident that our basket of stocks will continue to hold up comparatively well. Dividends are boring but provide steady income stream. Most of the companies in our portfolio have strong balance sheets and are sitting on cash, which should sustain their higher-than-market average yields, even if short-term earnings fall short – which probably will for the market as a whole.
Income portfolio gains 5.0% in October
The InsiderAsia Income portfolio outperformed the market benchmark FBM KLCI last month, despite increased volatility. For the month of October, total value for our portfolio was up 5.0% compared to the 2.0% gain for the benchmark index.
Last month’s gains boosted our total returns since inception (29 May 2015) to 10.0% — far better than the benchmark index’s 4.7% decline. This means our portfolio has outperformed the FBM KLCI by a hefty 14.7% over the five-month period.
On a monthly basis, all except three of our 15 stocks gained last month, led by Cocoaland, up 16.9%. This was followed by Perstima (up 12.0%) and Focus Lumber (up 10.3%). The biggest loser was Star Publications (down 1.6%).
Since the portfolio’s inception five months ago, the best performer to-date is Focus Lumber, which is up a hefty 70.4%. This was followed by Hong Leong Industries (up 39.3%), Cocoaland (up 20.3%) and Perstima (up 18.8%).
Several stocks in our portfolio were adjusted for dividends last month. This includes Maybank (24 sen per share), Kim Loong (7 sen), YTL e-Solutions (4 sen) and Crescendo (2 sen). As usual, we adjusted our shares held in these companies assuming the dividends are wholly reinvested.
We kept our portfolio unchanged.
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