2009 in review

Most major indices ended 2009 on a strong note (see table above) and have shrugged off a crisis which was deemed in early 2009 as the next great depression.  This was possible through massive Central Bank and Government intervention on a Global co-ordinated scale with huge amounts of pump priming, Government’s guaranteeing bank loans (to unlock credit markets) and keeping interest rates and near zero levels.   All that liquidity had to go some where and it has found its way into stocks, commodities (especially gold) and property.  There is however a cost to this and that is that most OCED economies now have huge national debts in particular the EU which now has national debt to GDP of 80% compared to its charter of 60%.  A number of countries there have also had their national credit ratings downgraded.

Asia was more resilient in this crisis with many countries having strengthened their national balance sheets post the Asian financial crisis.  Asia also benefitted from the commodity boom and had very few bank failures with exposure to toxic sub-prime assets kept to a minimum.  Asia however did suffer from a contraction in global demand from the US and EU as their economies contracted with many Asian economies recording declines in exports of 20-30%.  There was a strong recovery in Q3-2009 as inventories which had been drawn down were replenished.  Growth moderated into Q4-2009.  A main feature in corporate performance of manufacturers in 2009 was that revenue was down 20-30% but profits were higher from cost cutting.   Asia and in particular China and India are now poised to be the main engines of global growth as their domestic consumption demand starts to expand.

2010 should see further gains in stock markets but not at the pace seen in 2009

The effort of Governments and Central Banks in March 2009 has paid off and in hind sight was necessary as it prevented another “Global depression”. The “million dollar” question is when will inflation start to creep in and when will Central Banks have to start tightening.  After all, it has been argued by some that the Global financial crisis of 2008/2009 was started by Alan Greenspan when the US adopted a very low interest rate policy coupled with a lack of regulation of US financial intermediaries.  China may also tighten up on its very aggressive liquidity policy on concerns of a possible asset bubble especially after the problems in Dubai.  All these may reduce the liquidity premium that stocks in particular blue chips currently enjoy.

Singapore outlook

Stock markets are also not that cheap with many investors pricing in a strong recovery in the economies and companies.   Our own STI Index is trading on historic PERs of 26 and perspective PERs of 18 according to Bloomberg. Its rise is among the highest among stock markets but is matched by one of the strongest expected growth in corporate profit – very similar to Shanghai.   

Much of the next move in 2010 will depend on the Q4-2009 and 2009 full year reporting season.  Investors should pay special attention on corporate forward guidance.  If the 48.6% earnings growth for the STI Index is achieved with further positive guidance for 2010….the Singapore market is likely to move further ahead with gains probably keeping pace with corporate earnings growth.

My stock picks/model portfolio has managed a return of about 74% compared to 60.2% for the STI Index since I started it in October 2008.  Its performance was dragged down by the low volumes which impacted the midcaps more than the blue chips.  In particular,  three stocks – Ellipsiz, Armstrong and Aei Corp.which recorded returns of 0-5%.

Current Price as at 29 December 2009

For 2010, I am still adopting a value approach and be focusing on under-valued mid-caps.  The valuation gap between blue chips and midcaps has widened to a 50% discount and I expect more money to flow into the midcaps in 2010 if their guidance is positive.  Pay particular attention to top line growth because a lot of the 2009 growth came from cost cutting and also a low base in 2008 when most companies used the crisis to clean up their balance sheets.   The lower valuations of the midcaps will also protect investors from an eventual rise in global interest rates.

I will be reviewing the portfolio into the 2009 reporting season especially for the three under-performers highlighted above to evaluate whether there has been any change in their outlook.  

Watch list - existing

 a)      Ellipsiz has seen a management change with the previous Chairman taking on a non-executive role.  This could have an impact on strategy and direction.

b)      AEI Corp – supported by cash and the expectation of an attractive dividend yield but I have had some difficulty meeting the major shareholder – so my comfort level is a little lower than those companies where I have met the major shareholder/management

c)      Armstrong – has so far delivered in terms of quarterly profit in 2009.  Positive guidance for Q4-2009 and 2010 and expectations of a decent dividend could see the stock start to perform in 2010.

Potential targets for inclusion into the portfolio in 2010