Tuesday, May 25, 2010

Euro-led slow down, tensions in Korea, can it get any worse?

The STI lost 2.7% today, falling to 2651.19, at the lowest level since early November 2009. Current investor worries (in decreasing order of importance) are:
  1. A Euro-led global slowdown, leading to a double-dip global recession
  2. Issues related to the Euro area: a potential debt default by one of the PIIGs, a break-up of the Euro-zone, uncertainty over European bank balance sheets, systemic meltdown of the global financial system (ie. Lehman's 2008 failure)
  3. War breaking out on the Korean peninsula
  4. Chinese asset bubble/tightening worries
  5. A (largely benign) financial reform bill being passed in the US, and perhaps, the potential impact of Basel III on financial institutions
While stock markets have corrected severely from their April highs, most (if not all) major stock markets have recently broke through their 200-day moving averages, a rather bearish indication from a long-term technical perspective. We would rather not commit more new funds at this juncture, as the technicals are suggesting further downside but post-correction valuations look rather appealing for many stocks we are watching. 

We can hardly think of any potential positive news which may provide the investment community with a shot in the arm at this juncture (especially to alleviate problems 1 & 2), so any impending rebound will largely be the results of technicals (and the technicals hardly look favourable now!). Given that we are currently short on "powder", we want to keep some dry in anticipation of a major capitulation in the stock market. Investor sentiment is largely negative now which means that we may be approaching the point of capitulation, but we probably need to watch for some of the following to occur:
  • Sell-side analysts need to turn very bearish (consensus estimates for most markets are still on the rise)
  • GDP estimates need to be revised downwards (like market earnings estimates, still on the rise)
  • A "haircut" taken by holders of PIIGs debt, possibly beginning with Greek debt
As austerity measures face significant protests, it is increasingly likely that the country's creditors will have to take a hit. When this happens (we think the market is not yet pricing this in, given the euphoria over the ECB/IMF bailout package), the market could suffer an even larger decline. As has been the case in various financial crises, the failure or near-failure of major financial institutions often mark the market bottom. In the current issues with Europe, the marking down of Greek, Portuguese or Irish debt by European financial institutions could mark the climax of a market capitulation, in which we would be very happy buyers of quality companies which are also sold down in the fray of madness (despite their seemingly lack of association with the troubles of the European economy). 

We continue to like and own Wells Fargo, and are well aware that any negative sentiment on the financial sector will undoubtedly hurt the stock. Nonetheless, the company's strong fundamentals, low (and stable) cost of funding, and prudent management render the company an attractive investment, separating it from its peers. 


Friday, May 21, 2010

STI down 11.1% from recent peak, bought some Noble Group shares

The STI was 1.9% lower today, after weakness on Wall Street last night. The Singapore stock market has declined over 10% from the recent peak in early April, a sharp drop in just five weeks. Considering the risks known at present, most of them stem from European debt problems and the collateral damage often simplified in the media as the "Greek contagion". 
While throwing into question the risk-free rate of certain developed European economies is certainly unprecedented, systemic risks have been substantially reduced after the huge bailout package put together by the EU and the IMF. We are investing on the basis that a credit market seizure on the scale following Lehman's collapse in late 2008 will not occur again, which means the risks for Singapore stocks will largely be associated with lower levels of consumer demand. This is yet another indication of the growing disparity between emerging economies and developed ones, and Singapore is fortunate to have companies positioned to benefit from emerging market growth, without the tricky corporate governance issues.

The market correction is painful, yet inevitable and long-awaited. Wilmar was sold down yesterday on fears that the Indonesian government would take legal action to reclaim certain unauthorised tax rebates that the company had received over the past three years. The stock has already corrected more than 20% from its recent peak to levels last seen in July 2009, a worthwhile punt, but we will have to study the company in greater detail before making an investment decision.

In response to the market sell-off, we added $10,000 in new money today to the overall portfolio (the portfolio is almost fully invested). With some of the proceeds, we purchased 1910 shares of Noble Group, (one lot at $1.60, 910 shares  at an average cost of $1.624) at  to top up our holdings to 5000 shares. Noble recently did a 6 for 11 bonus issue, which meant that we held 3090 shares from the original 2000. With the shares falling as much as 9.4% this morning (with no negative company-specific news), we decided to add to our position in the stock.  


Tuesday, May 18, 2010

Sharebuilder additions for May

Bought the following via the Sharebuilder (18 May 2010):

21 shares of Fraser and Neave at $4.75
33 shares of STI ETF at $2.92694

Friday, May 7, 2010

Portfolio gains 4% in April, but May starts in horrible fashion

The portfolio gained 4% in April, as NAV rose to $1.064. On a total return basis, the benchmark STI gained 3.6%. Year-to-date, the portfolio has risen 6.4% and has outperformed the STI's 3.5% (recall that this is after performance fees of 20% of an outperformance of a 6% annual return).

While we would like to focus on what went well in May, that is rather irrelevant at present as the first few days of May has seen markets reverse their gains. The STI is already 1% lower (YTD, as of 6 May 2010), while our portfolio is marginally positive, up 2.4% over the same period. Instead of moping over the poor performance of our holdings, we have re-examined our investment thesis for each stock and have highlighted lower conviction ideas which we will wish to sell in the near future. At the same time, we have also identified stocks which we may want to increase exposure to if the market presents suitable opportunities. We are relatively pleased with our holdings overall (and view the recent market weakness as a temporary condition).

Thus far, our key low-conviction idea is SGX. We dislike the high valuations and the company's growth potential is likely overrated. Latest earnings have been slightly disappointing, and we think that the Exchange is not likely to be successful in the futures market (traders prefer anonymity). Other products like ETFs have shown a bit of promise - volumes have been rising but are a far cry from being a stable source of revenue. Overall, the breadth of products has been expanding, but the actual impact on revenue has not fared quite as well. 

On the other hand, SGX still maintains its monopoly status as a clearing house in Singapore, and a wildly exuberant market could send the stock heading much higher, as market turnover rises. It will likely take more than normalised trading volumes to provide an upward lift to the stock price, something we are not comfortable "speculating" on.

At the same time, Chinese property stocks have displayed considerable weakness as the Chinese government implemented new regulations to cool the property market, and several stocks have been beaten down considerably (names like Yanlord Land spring to mind). We purchased another 1000 shares of Capitaland at $3.57 today (6 May 2010), amid the weak market conditions. The stock trades at just a slight premium to book value (about 1.13X), a far cry from the 2.75X seen in the 2007 bull market. Capitaland has been sold down on concerns over its Chinese property exposure (about 35% of assets), and we think the recent correction provides a good entry point to double our exposure in the stock.  

[on a less fundamental note, the 38.2% retracement from the Apr 2007 decline to the 9 Mar 2009 bottom is $3.55 (adjusted for rights)]