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Friday, May 3, 2019

Tong's Value Investing Portfolio as of May 2, 2019

Tong Kooi Ong

The stock market is a market for stocks

We know that the world’s stock markets are correlated and move in lockstep, especially during periods of heightened volatility and uncertainties. For instance, if the US market suffers a massive selloff overnight, you can almost be certain that Asian markets will open sharply lower and vice versa.

This positive correlation has only strengthened with globalisation and technological advancement, where now information is disseminated widely and instantly. Financial markets are more closely integrated than ever before in history.

Chart 1 tracks the historical movements for the FBM KLCI, ST Index and S&P 500 Index, which highlight their increasingly positive correlations.

Chart 1: Stock markets have history of positive correlation

Chart 2: Tracking the FBM KLCI and S&P 500 Index

Chart 3: Tracking the ST Index and S&P 500 Index

Chart 4: US market outperforming as economic recovery gains traction

That said, we do see periods where one market outperforms another – even when they move in a similar direction. (See Charts 2 and 3) For some periods, there could be specific reasons that hurt one market more than the rest, such as the subprime mortgage crisis in the US in 2008-2010. In the immediate aftermath, US stocks underperformed both the Singapore and Malaysia markets.

However, as economic recovery in the US gained traction, its market has gradually outperformed the FBM KLCI and STI (see Chart 4). And that gap has been widening. I believe this is due to a combination of factors.

For starters, the Federal Reserve reduced short-term rates to near zero and undertook three rounds of massive quantitative easing programmes, which flooded the stock market with liquidity. Investors took on more risks in equities in order to earn higher yields.

Also, the US economy recovered at a steady, if not exciting, pace even as other regions notably Europe and more recently, China and Asia struggled to maintain momentum.

But the overriding reason is more fundamental – earnings growth. Charts 5-7 show the close correlations between earnings and stock prices over time for the US, Malaysia and Singapore.

Chart 5: S&P 500 index vs. earnings

Chart 6: FBM KLCI vs. earnings

Chart 7: STI vs. earnings

Corporate earnings for companies listed on the Bursa Malaysia peaked around 2012 and have since been on a broad downtrend. In fact, earnings contraction accelerated in the past year. Against this backdrop, Malaysian stock prices are actually holding up surprisingly well – as reflected in the current big gap between the two lines in Chart 6.

Similarly, earnings in Singapore too have not improved since 2010 – which is reflected in the flattish performance for the benchmark market index. (Note that the dataset is relatively limited for Singapore)

Clearly, Malaysia as well as Singapore companies are having difficulty in growing earnings in recent years, despite both countries reporting steady GDP growth. Why? I will elaborate further on this next week.

By contrast, US stocks are outperforming for a very good reason – earnings have been rising steadily and are now far above pre-financial crisis levels. In other words, the widening performance gap between the three markets (in Chart 4) is well justified by their differential earnings growth.

All of the above underscore the hypothesis that markets are generally efficient. And that share prices roughly reflect the underlying fundamentals (earnings) of companies over the long-term.

That said, market valuations (price-to-earnings ratio, PER) do trade in bands – higher or lower – at different periods of time. (See Chart 8)

Chart 8: PER for the US, Malaysia and Singapore markets

Chart 9: Difference in earnings yields and risk-free rates

Why is this so? Because the stock market is ultimately a market for stocks. What I mean to say is that stock prices are driven by the dynamics of demand and supply – just like any other market, for oil, fish, houses and all other goods and services.

Stocks are but one of many investment products available to investors, that include bonds, gold, commodities, property, etc. Money flows into the investment product with the most attractive returns after taking into account the difference in risks amongst asset classes.

For example, when earnings yield is significantly higher than the risk free return, there will naturally be more demand for stocks, which is, in turn, supportive of higher PER valuations.

The opposite happens when earnings yield drops relative to the risk-free rate, thereby making bonds more attractive. Lesser demand for stocks translates to lower PER. Between stock markets – and individual stocks – there are differential earnings yields that will drive relative under/over-performance. (See Chart 9)

There are many factors that affect demand and supply. Suppose the number of listed stocks on an exchange falls by half tomorrow. I would bet that PER multiples would surge – simply because the same amount of money (demand) will now be invested in a smaller pool of companies (supply), all else being equal.

The Global Portfolio continued to do well in the week ended Thursday, gaining another 3.3%. Notably, shares for Ausnutria Dairy performed strongly, up 15.3% for the week and 57.9% from my average acquisition cost.

Last week’s gains lifted total portfolio returns to 5.4%, since inception. We are only slightly under-performing the benchmark MSCI World Net Return Index, which is up 5.9%, over the same period

Sentiment on the Bursa Malaysia was somewhat ambivalent in the absence of fresh leads. Stocks mostly drifted sideways. Both the Malaysian Portfolio and the benchmark index ended the week flattish.

Total portfolio returns now stand at 49.9% since inception. This portfolio continues to outperform the benchmark index, FBM KLCI, which is still down 11.3% over the same period, by a long way.

Performance Comparison Since Inception (%)
  • Tong's Value Investing Portfolio
SCGM BHD11,0661.72919,190.70.99010,955.3(8,235.4)(42.9%)
AJINOMOTO (M) BHD1,50011.81317,720.017.54026,310.08,590.048.5%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.41325,340.02.78029,190.03,850.015.2%
FORMOSA PROSONIC INDUSTRIES18,0001.44025,920.01.76031,680.05,760.022.2%
POH HUAT RESOURCES HOLDINGS13,0001.49019,370.01.54020,020.0650.03.4%
SUPERLON HOLDINGS BHD15,0001.28919,327.51.05015,750.0(3,577.5)(18.5%)
Total  126,868.2 133,905.37,037.15.5%
Shares bought       
No transaction.       
Total shares held  126,868.2 133,905.37,037.15.5%
Shares sold       
No transaction.       
Cash Balance    166,033.4  
Realised Profits / (Losses)    92,901.6  
Change since last update Apr 25, 2019       
Portfolio      (0.6%)
FBMKLCI      (0.8%)
Portfolio Returns Since Inception  200,000.00 299,938.899,938.850.0%
Portfolio Returns (Annualised)      10.9%
Portfolio Beta      0.730
Risk Adjusted Returns Since Inception      68.5%
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,623.2(11.3%)61.3%
FBM Emas12,700.411,573.7(8.9%)58.8%
*Current price is as at May 2, 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.

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%)
WILLOWGLEN MSC BHD14-Dec-1714-Feb-1919,9000.5009,900.00.4649,236.0(714.0)(7.2%)
SAM ENGINEERING & EQUIPMENT14-Jan-1914-Mar-193,0007.38022,140.07.90023,700.01,560.07.0%
PANASONIC MANUFACTURING MSIA16-May-1818-Apr-1960026.15717,182.037.87022,722.05,540.032.2%
HONG LEONG INDUSTRIES BHD14-Dec-1718-Apr-192,0009.12618,251.010.64021,280.03,029.016.6%
MALAYAN BANKING BHD16-May-1818-Apr-193,00010.25030,750.09.13027,390.0(3,360.0)(10.9%)
ECO WORLD DEVELOPMENT GROUP BERHAD28-Jun-1818-Apr-1915,2001.23518,772.00.92013,984.0(4,788.0)(25.5%)
DIALOG GROUP BHD06-Sep-1818-Apr-195,7003.45219,676.43.11017,727.0(1,949.4)(9.9%)
HARTALEGA HOLDINGS BHD28-Mar-1818-Apr-1911,0004.61050,710.04.75052,250.01,540.03.0%

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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