What Stocks Not to Own for the Long-Term

A Black List… Of Sorts

Many things have been said about what and how to buy stocks, but not much on what to avoid. In a typical portfolio, there will always be winners and losers. Sometimes these losers overwhelm the gains. Besides judicious cutting of losses before they swell further, avoiding them in the first place would be even better.

We highlight some categories of stocks below which we think are not suitable for long term holdings. The key word being long term. Another point is that this is not a total blacklist of what to avoid, some of them do turn out to be darlings, but the odds are working against you.

Penny Stocks with High Volumes

Look at any old listing of top volume penny stocks. How many have grown to be significant companies? Anecdotal evidence suggests none make it big. This is evidence enough that such positions are not meant to be held for the long term.

One should look at it from a listed company owner’s perspective – if one has genuine interest in growing the business, why would significant chunks of their shares be traded on a daily basis?

One has to question the motivation behind such moves then. Any real desire to grow its business is tenuous at best. There usually is some credible (sometimes incredible) story that goes with such high volume activity.

But, this isn’t strictly a Malaysian phenomenon. Markets across the world have their own versions of high volume penny stocks.

Our perspective of these stocks is that the business behind it is secondary to the current share price trading activity. The high volume is simply not a reflection of the interest of real investors.

The new contract announcement, concession-win, diamond mine or large profit almost never materialises or is sustained, except maybe in the form of a MOU. Quite frequently these companies then come back with high volumes – but with entirely new owners, new business ventures, or a new company name, but still the same disappointing results.

Penny stocks with high volume are perhaps good for high risk trading. But, holding them without a short term exit strategy or cut loss policy is detrimental to portfolios over time.

Owners Who are Not on Your Side

There are some high quality listed businesses in Malaysia, but unfortunately they are controlled by shareholders that make money differently from how you do as an investor (i.e. via share price appreciation and/or dividends).

The Malaysian corporate landscape is strewn with high quality businesses muddled by asset injections or acquisitions – unrelated diversifications, badly valued acquisitions or assets being flipped into the listed company for large profits.

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2017 Market Review and Outlook

2017 – The Return of Growth

With the return of growth, the year 2017 has seen an economic upswing that has lifted both global and regional markets in terms of asset returns and earnings recovery. Accelerating growth, but benign inflation has kept policy tightening at bay, creating the right conditions for risk-assets to perform well under a ‘Goldilocks’ environment.

Marked by global reflation, as well as a recovery in trade and manufacturing PMI – Asia scored top marks and appeared as one the best performers this year.

In Asia, the MSCI Asia ex-Japan Index advanced +37.8% (local currency terms), compared to the MSCI AC World Index which had gained +19.5% YTD (as at 29 Nov 2017).

The MSCI Asia ex-Japan performance was primarily driven by North Asia, with tech emerging as the key outperformer, across China, Korea and Taiwan.

China’s 9M’17 GDP growth has come in ahead of consensus expectations growing by 6.9%, with the MSCI China Index outperforming other Asia ex-Japan country Indices, increasing by almost +50% (USD terms) as at 30 November. The outperformance of China this year was the result of a potent combination of government stimulus, targeted regulation and SOE reforms.

An acceleration in public-private partnership (PPP) projects drove infrastructure spending demand, whilst supply-side and SOE capacity reforms helped reflate raw material and commodity prices which spurred restocking activities.

Whilst, rising household consumption and increased urbanisation through strong wage increases will place the planks for a long growth runway for its new economy sectors.

Although, we now see growth moderating for China in 2018, as it seeks to attain a more balanced economic model, after years of loose monetary policy that left its financial system flushed with liquidity and knee-deep in leverage.

Growth to Broaden in 2018

Going forward, the macro outlook looks promising with growth expected to remain robust and other global economic growth indicators revised upwards in 2018. The global growth cycle could now broaden-out across sectors and countries, aided by a revival in the capex cycle.

Improving business sentiment, a rebound in profits and benign credit conditions are driving new business investments and would lead to a pick-up in capital spending.

We believe the earnings recovery in China, Korea, Taiwan and India would continue to broaden towards South East Asia, which has been a laggard this year. Singapore, Thailand and Indonesia should begin to catch-up in 2018 from a low base effect in 2017.

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India on the Cusp of Reform

Modi’s Three-Year Scorecard

Three-and-a-half year into his tenure, Prime Minister Narendra Modi has embarked on a sweeping reform movement, fulfilling key campaign promises to boost job creation and increase foreign direct investment (FDI) into India.

With the introduction of pro-business policies, the administration hoped to untangle notorious amounts of red tape that has stifled business in the past, as well as revive growth within India’s vapid manufacturing sector.

Under Modi, India’s annual GDP grew from 5.5% in 2013 (before he assumed office in May 2014) to 7.5% in 2015 and 8.0% in 2016. [Source: India Central Statistics Organisation, Bloomberg]

Taking bold measures, Modi enacted India’s first national bankruptcy law in 2016 which would allow enforcement of contracts and a swifter resolution of insolvency cases that has weighed down on its financial system.

More economic reforms followed including a radical banknote demonetisation move last November which saw India scrap its high-value 500 and 1000 rupee currency bills, as part of efforts to stem corruption, curb its shadow economy and flush-out ‘black money’ from its financial circulation.

In July’17, India ushered its boldest economic move yet, rolling-out its first comprehensive Goods and Services Tax (GST) which replaced its prior complex multiple indirect tax structure. The GST Act would subsume more than a dozen state and central levies into one unified tax structure, bringing it under a single market.

The Pain of Reform

These reforms which are unprecedented, constitute important structural transformations that would expand India’s economic potential, bolster growth, and improve macro stability.

Yet, India stands at an important crossroad today – as the painful effects of reform begin to bite and wreak short-term economic havoc to both businesses and citizens across the country, as they adjust to these new changes.

India’s GDP slumped to a three-year low to 5.7% y-o-y for the quarter ended June. Both the World Bank and International Monetary Fund (IMF) have also cut their GDP forecast this year citing lingering effects of India’s sudden demonetisation which took out demand, as well as transition costs related to the new GST regime.

The disruptive effects caused by the implementation of GST was well publicised and can be seen by the fall in its manufacturing PMI which decelerated to 50.3 in October, pointing to a stagnation of activity and curb in inflows of new orders.

However, since then we’ve seen the administration making concessions for small businesses to ease their transition to the new GST regime.

But these are all short term pain for a better future.

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Benefits of Staying Invested

Why It Pays to Stay Invested

Investing is a long-term game. A marathon as opposed to a sprint, where an investor is more likely to achieve their investment goals if they stay invested and avoid making short-term decisions which often spring from emotional or rash decision-making.

This year, we have seen stock markets rally across globally with the FTSE 100, Germany’s Dax and the S&P 500 reaching record highs. Locally, the benchmark FBM KLCI is also charging towards the 1,800 points-level, climbing to a fresh two-year high.

Can this market rally be sustained? Well no one knows for sure. But the only constant in the investment-universe is change, and investors should always be prepared to brace for future volatility, in the event markets come to an unruly end.

Smooth Seas Never Made a Skilled Sailor

Volatility is to be expected in markets. Like waves in an ocean – one would get nowhere otherwise without the ebb and flow in markets that provide buying or selling opportunities.

Can small ripples suddenly turn violent and become sizeable tsunamis? Sure they can.

But what matters more is having a well-diversified portfolio that has the potential to weather against varying degrees of volatility and cyclical change. Feeling queasy about one’s investments when markets swing between highs or lows, is characteristically normal.

It’s how one decides to react, or if they should at all that makes a skilled investor. Determining the source of the volatility is key, especially in filtering out short-term noise from long-term fundamentals & economic realities.

Short-Term Pain Vs. Long-Term Gain

Staying put when everyone is beginning to jump ship can be unsettling for any investor. But sometimes sticking it out to endure short-term pain could mean the difference between recouping back all your losses & reaping higher returns, or missing the boat entirely just as markets begin to rebound

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China Outlook: Beyond the 19th National Party Congress

Test of Power for Xi Jinping

As China gears up for its 19th National Party Congress, President Xi Jinping faces an important leadership transition; that offers Xi an opportunity to potentially strengthen his grip within the Communist Party of China (CPC), by consolidating his power and cementing his leadership for the next five years.

The five-yearly congress is scheduled to take place for a week, starting on the 18th of October. This Congress could see important changes within the top decision-making body of the CPC, otherwise known as the Politburo Standing Committee (PSC).

The PSC has an unofficial retirement age of 68, where if this is strictly adhered to, 5 out of the 7 members are expected to step down having exceeded the stated age. Only President Xi Jinping and the Premier Li Keqiang are below the unofficial retirement age.

Xi Jinping who has amassed significant political power in his first 5-year term, is expected to carry out wide-ranging economic as well as political reforms to steer China’s economy which is undergoing rapid changes as it seeks to rebalance its economy.

How the congress unravels would reveal the extent of Xi’s power in the second term through the makeup of the PSC, which would then be responsible for the future direction of the country.

What to Look Out For?

Following the trend from previous party meetings, we can expect scant details to emerge from the Congress, the proceedings of which are largely opaque to the public. However, we can take cues on what to expect based on the outcomes of past party Congresses.

Firstly, we should watch out for amendments to the party’s constitution, to see if Xi Jinping’s thoughts and speeches will be adopted as guidelines or core principles of the party. Specifically if these guidelines will be un-named or attributed to Xi himself.

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Fed Prepares for the Big Unwind

All Eyes on Fed September Policy Meeting

The US Federal Reserve is scheduled to meet for its upcoming policy meeting on September 19 – 20 to discuss the current economic climate and decide on further monetary policy adjustments.

Although there is no expectation for a change in interest rates during this month’s policy meeting, it still holds particular importance to markets.

Central bank watchers are eagerly anticipating the Fed to finally pull the trigger and begin the unwinding process of its US $4.5 trillion balance sheet – a culmination of its massive bond-buying programme which it accumulated following the 2008 GFC.

The Fed has previously said in a recent communique that it will start the unwinding of its balance sheet “relatively soon”.

Most observers have interpreted this statement to mean that an announcement will be forthcoming at its upcoming September policy-meeting or latest by this year-end. The unwinding exercise is then slated to begin in the month subsequent to the announcement.

Impact to Markets – Don’t Hold Your Breath

Whilst some observers are rightfully anxious over this perceived squeezed liquidity and a possible end of the easy-money era which kept the economy afloat since the 2008 GFC – markets aren’t necessarily holding their breath or bracing for any large corrections.

The unwinding exercise will be gradual in nature, in line with the Fed’s mandate to placate markets and ensure that the economy continues to chug along at a moderate pace of growth.

The initial reduction caps of its balance sheet will be gradually unwounded by US $6 billion per month for US Treasuries (UST) and US $4 billion per month for mortgage-backed securities (MBS). Subsequently, it then follows a step-up schedule to increase the cap by US $6 billion for UST and US $4 billion for MBS by every 3 months respectively.

Eventually, after a year from inception, the Fed is then expected to increase to maximum reductions caps to US $30 billion per month for USTs, and US $20 billion per month for MBS.

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When Is a Stock Too Expensive?

Bargain Hunting for Stock

Picking stocks often becomes an arduous affair, replete with decisions and choices. For some, it’s a daily occurrence, akin to second nature.

With the increasing number of platforms made available today, investors can now access various markets & exchanges – thus being easily left spoilt for choice.

But a recurring question investors commonly ask is when a stock becomes too expensive?

Put more simply, we all know when we are overpaying for items like smartphones, clothing, laptops, etc. – we check against the quality of the material, brand recognition, its unique features and utility value.

But how can investors evaluate the same for stocks and determine when you’re overpaying for one?

What do we mean by ‘expensive’?

If one believes the Efficient Market Hypothesis (EMH) which states that the price of assets will factor-in or discount all available information – then the value of a stock should be reflective of its fair value at that point in time.

It does not mean that one cannot make money from stocks trading at their fair value – as long as the underlying business continues to grow, we believe its share price will chart higher to reflect the improved growth.

In other words, the fair value increases over time as its business grows.

Sceptics may argue against EMH, but markets tend to be fairly efficient and react to these positive or negative catalysts accordingly.

Factors like a loss of key management personnel or major customers, adverse regulation, natural disasters, etc. can affect the firm’s fundamentals and its ability to deliver earnings growth.

We think a stock is deemed ‘expensive’ or overvalued when its valuation is not reacting fast enough to these negative changes.

Or the value ascribed runs ahead of its fundamentals & earnings growth potential.

Alternatively, one could also take a different view from what the market thinks due to different interpretation of facts governing the fair value of the stock.

Thus, defining whether a stock is ‘cheap’ or ‘expensive’ is relative and depends on more than just the valuation itself.

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More Compelling Reasons for Malaysia

More Compelling Reasons for Malaysia

Against a benign economic backdrop of moderate growth, gradual interest rate hikes and mild inflation – markets especially in Asia are poised to stage one of their best rally this year.

As at 30 June’17, the MSCI Asia ex-Japan index returned 22.8% becoming one of the best performers in the region so far. For the first time in 5 years, there is also a positive earnings revision for Asia markets, with earnings-per-share (EPS) being revised upwards between 15% – 20% for 2017.

Growth in corporate earnings continue to be underpinned by improving macro-optimism and rebound in the region’s growth with strong exports. Spearheaded by a more outward-looking China, this Asian growth-led renaissance is expected to positively spillover to other markets in the region including Malaysia.

Malaysia Leads Export Race

Locally, the FBMKLCI is charging towards 1,800 points level – lifted by improvements in economic fundamentals with 1Q’17 GDP growing 6.6% y-o-y, despite higher inflation & high household leverage.

Sustained export growth on delayed reaction to the cheap Ringgit is expected to underpin growth. Compared to regional peers in Southeast Asia, Malaysia is leading the export race  with shipments accelerating to a 7-year high of 32.5% in May’17.

Data from Statistics Department also showed that exports to China rose 51.5% y-o-y, its highest increase since on higher demand for electrical and electronic (E&E) goods and petroleum products. The cheaper Ringgit obviously playing a key-role in making exports cheaper, despite strengthening somewhat in the 2Q’17.

Bank Negara Malaysia (BNM) recently maintained its overnight policy rate (OPR) at 3%, whereby it cited receding inflation risks and struck a more sanguine economic outlook at its monetary policy meeting in July – leading most economists to believe BNM will keep the benchmark rate unchanged for the rest of the year, or risk derailing this bourgeoning economic recovery.

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Sea Change in South Korea

Structural Reforms in South Korea

In the wake of President Moon Jae-in’s victory at the South Korea presidential election last month, Moon has positioned himself as a pro-reformist – determined to unite a country torn by bitter divisions after a long-drawn corruption scandal that engulfed a nation.

Former president Park Geun-hye who was impeached and removed from office is now undergoing trial for corruption and for misusing her position to gain personally.

With the scandal now behind the country, South Korea could see a sea change of events which may spell positively for the country in terms of investment opportunities.

Big Test Ahead for Moon Jae-in

Son of North Korean refugees – President Moon campaigned under a pro-reform agenda to clean up corruption and take on the powerful family-run chaebols which traditionally held strong government sway.

The 64-year old, who practiced human rights law before turning to politics, served as chief-of-staff to former president Roh Moo-hyun back in 2004.

A left-leaning Democrat, Moon easily won the election securing 41% of the total votes, beating other conservative and centrist candidates.

Whilst global attention was fixated on mounting tensions between North & South Korea, ultimately it was the economy and concerns of governance that lingered on the minds of South Koreans as they head to the ballot box.

Youth unemployment was a national concern, reaching 11.2% in April which is twice the national unemployment rate.

Rising inequality was another focal point, whereby it was highlighted that the top 20% of income-earners in South Korea made 9.32 times more than those in the bottom 20% as of end-2016.

South Korea’s 1Q’17 GDP reading was revised upwards to 1.1% from 0.9% initially, largely from gains in the construction sector and higher exports.

However, private consumption grew just 0.4 % in the same quarter which was well below overall economic growth.

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Give Yourself a Mid-Year Financial Health Check

Importance of Financial Reflection

It’s hard to believe but we are already midway through 2017. For some, it’s that mid-point where we start reassessing our life goals, careers, and even New Year’s Resolutions to start losing weight and eat healthy.

We start scheduling multiple doctor appointments to complete a myriad of tests, experiment with the latest food fads, start working out in the gym, etc. But, what about our own personal finances and overall financial well-being?

The idea behind a financial health check-up, should not be a concept as alien as paying your own local GP a visit. But sadly, it is something most of us tend to neglect.

Is Your Budget on Track?

There is no better time than to start revisiting your monthly income and expenditure – specifically if they are on track and within what you initially budgeted for the year. If you happen to veer off course, don’t worry – you still have six more months remember?

One of the most crucial aspect of budgeting strategies is periodic monitoring & review – especially to identify why your budget missed its mark. Often, a re-evaluation of your budget may be necessary to cater to new circumstances or changes in one’s lifestyle.

Example, you would definitely need to reconstruct your budget to accommodate a new addition to the family (eg. marriage or birth), a workplace accident, or injury, etc.

The next step is devising a corrective action or control mechanism in your daily spending patterns or saving habits to steer your budget back on course.
It may also be worthwhile to drill into specifics and examine single line-items, to find out where one can cut costs and minimise wasteful expenditure.

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