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Monday, February 4, 2019

Tong's Value Investing Portfolio as of January 31, 2019

Quantitative tightening fears overplayed?

Global stock markets have steadied in the first few weeks of trading in 2019 though many investors remain wary that the rebound may not last. The list of worries has been very well narrated and should be very familiar to all by now, one of which is the US Federal Reserve’s quantitative tightening (QT) actions.

Recall that the Fed started QT in October 2017, by allowing a monthly fixed amount of treasuries and mortgage-backed securities on its balance sheet to runoff. The initial amount was US$10 billion a month, which subsequently was increased by US$10 billion every quarter.

Since October 2018, assets totalling up to US$50 billion monthly will mature without being reinvested. The Fed’s balance sheet peaked around US$4.5 trillion and has since been pared down to less than US$4.1 billion at the start of 2019. It will further drop by up to $600 billion this year assuming the US$50 billion monthly runoff rate, though Chairman Powell had recently signalled flexibility should the situation warrants it.

There is widespread consensus that quantitative easing, in the aftermath of the global financial crisis, had the effect of inflating asset prices, including stocks and properties. Concerted efforts by major central banks effectively forced interest rates far below market-driven levels, thereby pushing investors further out the risk spectrum. That is, to take on more risks in the search for yields. (See Chart 1)

Could the reverse, or QT, then have the opposite effect of dampening asset prices? Is it mere coincidence that the increased volatility and market selloff last year came at a time when total assets for major central banks started declining – especially in 4Q2018 when the Fed’s runoff topped out at US$50 billion a month? (See Chart 2) Globally, property prices have also been falling.

Chart 1: Concerted QE actions by major central banks resulted in flush of liquidity

Chart 2: Is the global market selloff in 2018 correlated to QT?

Whilst the question is not unreasonable, we suspect it is more noise than actual impact. The total global market capitalisation peaked at US$87.3 trillion in January 2018 and is currently hovering around US$73 trillion, which translates into a combined loss of US$14.4 trillion.

Meanwhile, market cap for US stocks hit a high of US$32.5 trillion in September 2018 before losing some US$4 trillion to the current US$28.5 trillion or so. By comparison, the Fed’s assets fell by just about US$136 billion in 4Q2018. Indeed, against these numbers, the annual US$600 billion reduction in the Fed’s balance sheet does not appear that significant.

Certainly, there are bigger risk factors at play. The impact of a full-blown trade war on global trade and economies would be substantially larger and with prolonged after effects. Investor worries of recession are not unfounded especially given that economic growth around the world – including in China, which has been the main growth driver for the past three decades – is already slowing.

Gradual normalisation of interest rates, from near zero or negative territory, too is boosting the appeal of cash as a viable alternative asset to stocks and bonds. Case in point, a recent report by the Wall Street Journal indicated that investors are raising their cash holdings in portfolios at the fastest pace in a decade. According to Lipper data, assets in money market funds grew some US$190 billion in the last quarter of 2018.

Since the massive QE actions were unprecedented, we have little guidance of what could happen from a historical perspective. No one knows for sure the impact of QT on financial markets. But the worst of fears may have been overplayed, based on a gradual tapering scenario.

In fact, QT actions may be short-lived. In reality, there are constraints as to how much the Fed can shrink its balance sheet, on the liabilities side. Currency in circulation, in particular, has risen sharply, from about US$800-900 billion pre-crisis to just over US$1.7 trillion at present. That is equivalent to a rise from less than 6% to more than 8% of nominal GDP. (See Chart 3)

Chart 3: Currency in circulation as percentage of GDP on the rise

The Fed also holds reserves from foreign central banks, international agencies, non-bank entities, the US Treasury, etc. – currently totalling about US$733 billion. (See Chart 4) Add these to the required bank reserves, the sum total of its liabilities (and matching assets) could be around $3-3.5 trillion.

Chart 4: Liabilities composition of Fed balance sheet

This would be the size of the Fed’s normalised balance sheet, which is not too far off from where it is now. At the current annual runoff rate of US$600 billion, QT would probably end in 2020.

The Fed has also sought to allay investor worries by signalling that it will hold off on further rate hikes, for now, especially since inflation remains benign. This will boost the appeal of emerging market currencies, which had been battered last year as the US dollar strengthened. Indeed, Asian markets saw relatively strong foreign fund inflows in January.

Stocks in my Global Portfolio ended broadly higher, up 3.76% for the week, buoyed by stronger sentiment. Last week’s gains, which outperformed the benchmark index, pared total portfolio losses to -10.0% since inception. Nevertheless, this portfolio is still under-performing the MSCI World Net Return Index, which is down by a lesser -2.5% over the same period.

Stocks on the Bursa, however, traded flattish. Investors may be bracing for more disappointments in the upcoming quarterly reporting season. Corporate earnings for the first nine months of last year had fallen well short of market expectations.

The FBM KLCI closed marginally lower for the week ended Thursday. Trading volume will likely be thin this week with only half a trading day on Monday before the break for Chinese New Year. Trading will resume on Thursday.

Total returns for my Malaysian Portfolio now stand at 50.6% since inception. This portfolio continues to outperform the benchmark index, FBM KLCI, which is still down 8.0%, by a long way.

I would like to wish all readers good health and fortunes in the Year of the Pig. Gong Xi Fa Cai.

Performance Comparison Since Inception (%)
  • Tong's Value Investing Portfolio
SCGM BHD11,0661.73219,218.41.26013,943.2(5,275.2)(27.4%)
AJINOMOTO (M) BHD1,50011.81317,720.018.70028,050.010,330.058.3%
PANASONIC MANUFACTURING MSIA60026.15717,182.038.00022,800.05,618.032.7%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.41325,340.02.72028,560.03,220.012.7%
FORMOSA PROSONIC INDUSTRIES18,0001.54027,720.01.83032,940.05,220.018.8%
HONG LEONG INDUSTRIES BHD2,0009.12618,251.09.14018,
WILLOWGLEN MSC BHD19,9000.5009,950.00.4709,353.0(597.0)(6.0%)
MALAYAN BANKING BHD3,00010.25030,750.09.54028,620.0(2,130.0)(6.9%)
ECO WORLD DEVELOPMENT GROUP BERHAD15,2001.23518,772.00.92013,984.0(4,788.0)(25.5%)
DIALOG GROUP BHD5,7003.45219,676.43.00017,100.0(2,576.4)(13.1%)
SAM ENGINEERING & EQUIPMENT3,0007.38022,140.07.34022,020.0(120.0)(0.5%)
POH HUAT RESOURCES HOLDINGS13,0001.49019,370.01.51019,630.0260.01.3%
Total  246,089.8 255,280.29,190.43.7%
Shares bought       
No transaction.       
Total shares held  246,089.8 255,280.29,190.43.7%
Shares sold       
No transaction.       
Cash Balance    45,954.3  
Realised Profits / (Losses)    92,044.0  
Change since last update Jan 24, 2019       
Portfolio      (0.2%)
FBMKLCI      (0.6%)
Portfolio Returns Since Inception  200,000.00 301,234.4101,234.450.6%
Portfolio Returns (Annualised)      11.7%
Portfolio Beta      0.634
Risk Adjusted Returns Since Inception      79.8%
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,683.5(8.0%)58.6%
FBM Emas12,700.411,660.6(8.2%)58.8%
*Current price is as at January 31, 2019. 
*Portfolio started on Oct 10, 2014 with MYR200,000. 
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.

CLASSIC SCENIC BHD01-Dec-1627-Jul-174,0001.4135,651.31.7907,160.01,508.826.7%
PANASONIC MANUFACTURING MSIA21-Jan-1627-Jul-1740026.12510,450.037.10014,840.04,390.042.0%
ELSOFT RESEARCH BHD30-Mar-1724-Aug-178,0001.84414,750.02.65021,200.06,450.043.7%
JOHORE TIN BERHAD - WA 12/1704-May-1724-Aug-1717,0000.65511,135.00.68011,560.0425.03.8%
FOCUS LUMBER BERHAD03-May-1730-Aug-176,0001.6609,960.01.5309,180.0(780.0)(7.8%)
WILLOWGLEN MSC BHD23-Nov-1630-Aug-177,0000.7685,377.01.43010,010.04,633.086.2%
WILLOWGLEN MSC BHD23-Nov-1628-Sep-177,0000.7705,377.01.1808,260.02,883.053.6%
LII HEN INDUSTRIES BHD14-Dec-1628-Sep-175,0002.82014,100.03.72018,600.04,500.031.9%
COMFORT GLOVES BERHAD28-Aug-1708-Dec-1725,0000.96024,000.00.93023,250.0(750.0)(3.1%)
JOHORE TIN BHD08-May-1708-Dec-179,0001.60014,400.01.18010,620.0(3,780.0)(26.3%)
THONG GUAN INDUSTRIES BHD12-Dec-1608-Dec-175,0004.24321,215.04.10020,500.0(715.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD12-Jan-1715-Mar-1811,0001.02511,280.01.54016,940.05,660.050.2%
KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/202308-Mar-1815-Mar-183,0000.0000.00.330990.0990.0-
LUXCHEM CORPORATION BHD30-Aug-1715-Mar-1816,5000.73212,072.50.72011,880.0(192.5)(1.6%)
WILLOWGLEN MSC BHD14-Dec-1722-Mar-1820,0001.01020,200.01.26025,200.05,000.024.8%
MUAR BAN LEE GROUP BERHAD26-Oct-1722-Mar-1813,5001.24016,740.01.17015,795.0(945.0)(5.6%)
CHOO BEE METAL INDUSTRIES BHD07-Sep-1716-May-188,0002.19017,520.02.44019,520.02,000.011.4%
CHOO BEE METAL INDUSTRIES BHD07-Sep-1721-May-188,0002.19017,520.02.30018,400.0880.05.0%
SUPERLON HOLDINGS BHD01-Dec-1721-May-186,0001.1757,050.01.5509,300.02,250.031.9%
OKA CORPORATION BHD14-Dec-1728-Jun-1812,0001.54118,488.01.27015,240.0(3,248.0)(17.6%)
SUPERLON HOLDINGS BHD01-Dec-1728-Jun-186,0001.1757,050.01.2107,260.0210.03.0%
WILLOWGLEN MSC BHD14-Dec-1728-Jun-181000.50050.00.54054.04.08.0%
PANTECH GROUP HOLDINGS BHD17-May-1802-Aug-1843,0000.58024,940.00.56024,080.0(860.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD10-Jan-1706-Sep-1811,0001.02011,225.01.40015,400.04,175.037.2%
LUXCHEM CORPORATION BHD25-Aug-1706-Sep-1816,5000.71711,825.00.65510,807.5(1,017.5)(8.6%)
HOCK SENG LEE BHD19-Apr-1806-Sep-1814,5001.52022,033.01.37019,865.0(2,168.0)(9.8%)
GENTING MALAYSIA BERHAD06-Sep-1828-Nov-183,8005.07019,266.03.06011,628.0(7,638.0)(39.6%)
TOP GLOVE CORPORATION BHD06-Sep-1806-Dec-183,6005.50019,800.06.03021,708.01,908.09.6%
MAH SING GROUP BHD28-Jun-1814-Jan-1919,0001.00519,095.00.93017,670.0(1,425.0)(7.5%)

A Note to Readers

It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.

Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.

Tong Kooi Ong

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