Fear or new Covid mutation.

27 Nov 2021

Dear Fellow Investor,

On Friday markets world wide were hit by the fear of a new Covid mutant originating in South Africa. The mass media fear machine went into overdrive.  Dr. Fauci as well  as other health experts, were paraded out to  spread the fear message of possible lockdowns, border restrictions, and the need for more government restrictions and controls.

Fear spread like a forest fire and virtually all markets went into panic mode.  Commodities,  technology and growth shares were hit. The 10 year US Treasury bond saw panic buying as fearful investors rushed to safety.  Gold caught a bid.

Weekly VIX or volatility index traded on the CBOE

Since March 2020 every time the VIX traded above 148, volatility reverted to the mean and stock markets recovered.  The VIX is a fear gage and measures the amount of put options bought mostly by small traders to protect the downside.  It is a sentiment indicator and reflects those small players are usually wrong at tops and bottoms.  Could there be more selling? Of course, but buying dips and managing risk after these spikes is a good strategy. If you are holding quality shares you could add to your positions.

What could turn the market ? If it was announced that infection, transmission  and death rates  drop buyers would return.

Today, I watched a market outlook by  Kong Seh Siang, head of CIMB retail research. He reviewed the budget and the impact of higher taxes on the market.  Large companies earning over 100 million in profits  will  be impacted and the reduction in earnings will have a negative effect. The same goes for the raising of transaction taxes which will impact the short term traders. For investors there is not much impact.

His view on the election in Melaka   in which the BN gained control  was positive as it removes the uncertainty.  Foreign funds have been net buyers in the last 7 weeks as they anticipated a BN win which is good for business. The KLSE is now trading at 1.5 standard deviations below its mean. PE is at 14.1 while the mean is at 17.4. Foreign funds always try to buy value at a discount and that explains their buying. Malaysian shares are on offer.

Going into 2022, he recommends banks including Public Bank and Maybank  due to the likelihood of higher interest rates. He also likes technology and surprisingly rubber gloves due to low valuations. The economy is getting back to normal so he recommends some selected retail counters. If you have an online  CGS CIMB account you can access his picks on the research page.

Weekly continuous chart of Brent Crude trading above its 50 week moving average. The trend is still up despite near term manipulation.  High oil prices signal recovery.

Take care,

Bill.

Diversify our investments to protect our purchasing power.

 20 Nov 2021

Dear Fellow Investor,

Inflation is rising world wide.  In the US prices of virtually all necessities including petrol, food, rents, travel, and automobiles  are rising and reached last month  6.3 % a 30 year inflation high. Here in Malaysia prices are more subdued. This is in part due to Malaysia being a net exporter of  commodities including oil and gas. Fuel subsidies and price controls on essential goods help mitigate the impact of rising global inflation. As investors we need to be mindful of negative interest rates as nominal interest rates are below inflation.

We have several ways to protect ourselves.  Diversification is the key. Quality shares paying dividends is one asset class you should consider.  If the dividend is 4 % and earnings growth is 6 % that gives a total return of 10 % That will allow you to beat inflation and protect the purchasing power of your capital. You should select companies with a history of regular and rising dividends and a trend of earnings growth.  Quality well located REITS should be considered.   When I select a reit I always look at the sponsor. The sponsor should have a long track record of rising distributions and growing ROE (return on equity) . Growing ROE over time shows good management. One such example is Parkway Life Reit who own a chain of nursing homes in Japan as well as hospitals in Singapore and Malaysia. The sponsor is IHH healthcare who have a long track record of good management as evidenced by growing ROE. Another way to protect ourselves is via geographic and currency diversification. Parkway Life benefits from their revenue streams of Yen and Sing Dollars, both strong and well managed currencies.

Our Phillip Global Wrap account allows us to invest in Singapore, Japan, US, Vietnam and  virtually any country with a free market.   I recently bought for a client the Sprott Uranium Physical Trust  which trades on the Toronto Stock Exchange. It is a play on uranium which fits into the green energy theme. Nuclear power  is clean, reliable and does not produce a carbon footprint such as fossil fuels. China is on course to build 150 nuclear plants and that will fuel the demand for uranium.  Other countries are planning to build nuclear plants.

Next week  I do not think the Malacca elections  will have much impact on our share investments. The KLSE is well supported at the 1525 level on both the daily and weekly charts which signal a positive outcome. The technology index closed on Friday at 100.47, a new high.   

Take care,

Bill

The below cartoon reflects my view that as long as Joe Biden  runs the show in the US, inflation is on the way up world wide and we must diversify our investments to protect our purchasing power.

 

 16 Nov 2021

Dear Fellow Investor,

Today I reviewed the indexes in the KLSE. Two sectors stand out: Technology and transportation/ logistics.  The consumer products and services index is also showing signs of support as the Malaysian economy  recovers.   Investing in these sectors has the wind in our back. The financial services index is up over 25 % from its January 2020 lows which is positive. For Malaysia to have a robust recovery banks and financial services companies must lead the way.

In the Edge today was an insightful article by Dr Sivapalin about the hits and misses in the budget. The hits included funds and support for the technology sector including RM 200 million for the SME digitalization grant scheme. This could explain the strength in the KLSE technology index. The miss could be that not enough funds were allocated to technology.  

The article by Mr Tong in today’s Edge was also insightful. It explained how to value technology companies and why some are spectacularly successful while others fail.   His case studies included Microsoft and Apple. How these companies are so profitable is a model for choosing technology investments. Our holdings in Inari an Apple supplier  is an example of these dynamics.

As I read the financial news, the inflation topic is a major concern.  It is not so bad in Malaysia/ Singapore averaging less than 2 % while in the US the latest Producer Price Index  was up 6.2 % a 30 year high.  After the PPI was announced last week gold took a 6 % jump. Silver and Bitcoin also advanced.  

The reasons for accelerating inflation in the developed markets and the US are simple. Massive increases in money supply and Biden’s policy of shutting down the fossil fuel industry to favour alternative energy. It has driven up the price of gasoline over 50 % in the last year.

American multinational investment bank Goldman Sachs has issued a warning that soaring inflation in Democrat Joe Biden's economy is the greatest threat facing the United States and the global economy.

According to a new analysis from the bank, inflation will eclipse anything else, such as pandemic-induced lockdowns, as the primary threat to economic growth.

Americans are being hit hard by inflation in Joe Biden's economy

The report from Goldman Sachs states that the Federal Reserve will soon start hiking up interest rates as inflation continues to throttle America.

The below cartoon sums up the problem.

Biden wishes to shutdown a major oil pipeline between Canada and Michigan which will cost thousands of high paying jobs and drive up energy prices and inflation even more.  He is doing so in the name of climate change which is bizarre as they still have to ship the fuel by road which leaves a bigger carbon footprint.

Take care

Bill

Sentiment dampened due to the uncertainty.

6 Nov 2021

Dear Fellow Investor,

Last week  the local technology index tested an all time high as technology shares diverged from the broad market as uncertainty caused by the prosperity tax and raising of stamp duty dampened sentiment.  Our holdings in Inari, Penta  and Frontkin were up. KGB, Dialog, Genting Malaysia and United Plantation consolidated in narrow ranges and were not much affected. 

Foreign funds according to CIMB research have been net buyers for the 3 months up to October buying a net RM 1.6 billion of Malaysian equities in October.  There were no major foreign fund outflows after the budget announcement as these funds buy value when the market is depressed and sentiment is negative.

Moving forward what will drive the market are earnings. The companies we hold all show positive earnings growth. They also have pricing power and are able to raise prices with inflation. Heim and Carlsburg are examples as they benefit from strong brands.

They will also benefit from year end demand and economic and pandemic recovery. Pubs are open again.   Regional peers are more expensive . Thailand,  Philippines and Indonesia are at an average PE of 16.1 while Malaysia is 14.7.  We are undervalued and this attracts professional buyers.

Weekly CRB Index representing a basket of important commodities.

For the last year commodities have been up trending. Malaysia is benefitting from the rise of CPO, crude oil and natural gas and with the massive money printing by most central banks the trend is likely to continue. Joe Biden just got his USD 1.2 Trillion infrastructure bill passed through congress and this will add more inflation fuel to the fire. His build back better bill is still uncertain as the opposition is objecting to the high tax increases necessary to cover the costs.  The build back better  and infrastructure bills include USD 500 billion for clean energy and that will support solar and wind power companies as well as a broad cross section of commodities including copper, aluminium, steel and uranium.   Silver and gold may catch a bid.

Take care
Bill

The bigger pig is the Build Back Better bill Biden is trying to pass. That is why it is prudent to prepare for inflation.