Stretching For Growth

13 January 2018

Dear Fellow Investors,

The world equity rally continues. Will Malaysia follow? From 12 Dec 2017 the KLSE has rallied from 1740 to 1840 reached on 9 Jan 2018.

This in my opinion was a year end window dressing rally pushed by large asset managers   to improve the appearance of a portfolio to be presented to clients.  

Because most of the gains were made by large and highly liquid institutional shares such as Maybank, Tenaga, Maxis, some oil shares etc , I consider this to be as Mr Tong of the edge reported in this weeks stock market column to be “Portfolio Pumping”.

The shares we hold in our Malaysian portfolios did not go up much in this rally but in the preceding correction during October/ November 2017 they did not go down either.

This rally was inspired by the bullish upcoming election news flow by the media.

We purchased HL Bank for our clients to participate in this rally We made some profits but the selection was based on reasonable valuations, solid fundamentals and my anticipation of higher interest rates in the next quarter which will boost net interest margins.  

Since we bought on a break out of accumulation on high volume our risk is low compared to potential return. Our purchase was based on risk/ reward and backed by fundamentals rather than media hype.

If you are holding pumped up media hyped shares with weak balance sheets and shaky management this might be time to take some profit.

You might consider as a replacement  the rubber gloves sector.

The chart below shows increasing demand growth  which translates to profit growth. PEs are elevated but if earnings growth is higher , valuations are justified.

Stretching For Growth

According to data from MARGMA (Malaysia Rubber Gloves Manufacturer Association), demand for rubber gloves around the world has grown consistently over the long term, rising by nearly 6% per year from 103 billion pieces in 2005 to 190 billion pieces in 2016.

Source: MARGMA

Future growth is estimated to be between 6% and 8% per year, which is a reasonable estimate in our view given (1) the historical long run growth rate for the rubber glove market, (2) rubber gloves are an indispensable and consumable item used in the healthcare industry, and (3) a relatively low level of rubber glove consumption outside the US, Japan, and Europe. 

To the third point, the US, Japan, and Europe collectively account for 18% of the global population but 70% of global glove demand; there thus appears to be plenty of room for glove demand to grow in other countries.

The same message of portfolio pumping applies to Singapore/ Hong Kong and world markets as well. We need to be selective and invest base on earnings growth as well as valuation.

Invest well and grow your wealth
Bill

Today’s critters are some flamingos.

We saw quite a few of these on our recent trip to Langkawi.  There is also a good collection of them in Zoo Negara.