Looking back, 2015 was a volatile year filled with both pessimism and optimism, Historically, when the consensus is either one, the opposite takes place. That being said, 2016 is starting off the same as 2015 due to all current happenings: China slowdown, currency rout, U.S rate hike(s), ISIS terror and others.
That was exactly what was written in JANUARY 2015;
The only differences are the current happenings.
Fast forward to 2016, China is slowing down, consuming less commodities, creating an excess global commodity supply scenario; glut in places like Australia (i.e. mining), not to mention lower oil prices which were supposedly good for consumers but not fully reflected in improved retail sales in the U.S. when considering ex-transport or if you minus vehicle sales. China’s retail sales on the other hand is still growing >10% as of Dec 2015. Currencies are being devalued globally affecting countries’ balance sheets and international trade.
A continued global slowdown is medium-probable but it is suggested in 2016, an anticipation of a recession is what might stir a bear market, causing stock prices to continue their fall. However, we are positive on the prospects of specific individual great businesses regardless of global sentiment.
As a reminder;
American business and industrial stocks rose from 1914-1918 which historically included World War 1 (WW1).
For an extensive reading on 2016 Market Outlook by famous investors;
Barron’s Roundtable discussion featuring Mario Gabelli among others;
CLICK ON THE SEARCH RESULT THAT READS:
“Barron’s 2016 Roundtable, Part 1: A World of Opportunities”
The theme at JR Capital is recurring. Stick to long term value businesses. Not all stocks fall in a bear market though majority do. Money globally still has to find a shelter be it stocks, bonds or in alternative investments. Should you find businesses previously recommended as such IBM; cheap and have long term prospects, keep them.
Credit/loans that have been given out to Oil and Gas (O&G) companies in particular would be a concern for O&G stock investors. Bank stock investors should be wary should their company have high exposure to this sector. For a general business and loans outlook in Malaysia have look for those with access to CIMB Equity Research, statistics found in issue January 14, 2016 entitling “Banks:A testing time for asset quality”.
We believe Malaysian banks have done proper capital raising activities to weather in bad Non-Performing Loans (NPL) unless credit were extended to businesses that are highly levered, affected by global slowdown and that are currently being mismanaged, & loans start to default affecting overall domestic banking liquidity. We still are not invested in any local banks as it is not yet within our investment forte. In particular this is because the nature of banks is such that assets managed always exceed invested equity(by shareholders) thus typically raising cheap additional funds from investors i.e. via Rights issues should liquidity issues arise. Further, buybacks are less substantial compared to their American peers and the local major shareholders are rather dominant in corporate exercises.
O&G businesses,
will continue to suffer unless they are supported (contract based etc) by larger more liquid O&G businesses (with downstream operations). Contracts as previously mentioned are most likely subjected to alterable provisions: in other words, contract awards may not guarantee full payments.
Overall, 2016 has started off with a market correction.
See how often corrections typically occur:
Looking forward, it will continue to be a bumpy year. It is more likely a U.S. presidential year (2016) ends on a positive note (U.S. stock market). There is a possibility due to severe uncertainty that stocks may trend sideways. Stick with fundamentals and buy stocks that are great for the next 5 years that are currently cheap. That said, most investors at the Barron’s 2016 Roundtable are rather sceptical looking at Emerging Markets. Therefore, for new funds, U.S. stocks should provide some stability though there will be a >20% increased cost on a MYR/USD currency-translation basis (consider price-depressed stocks/companies that have global sales affected by lower sales due to currency-translations i.e. IBM).
Lastly,
Cutting Losses is nonsense, UNLESS you are assured the business/stock you own will never improve looking forward. Further, should you have sufficient reasons to believe certain stocks will outperform other investments for the next 5 years and beyond, invest in those beaten down stocks with good fundamentals. If not, have patience as should the current global slowdown persist, good businesses may be selling at even more bargain prices. A 20% cash buffer is recommended once again for those with weaker stomachs and gloomy outlooks. Then again, there are always hidden bargains to be found.
Stocks in View
Parkson Retail Group Ltd (3368.HK), Parkson Holdings Berhad (5657.KL)
- Morningstar fair value RM1.55 (06/01/2016)
http://quotes.morningstar.com/stock/analysis-report?t=XKLS:5657®ion=mys&culture=en-US&productcode=MLE&cur= - Research report by Societe Generale (26/11/2015)
https://www.privatebanking.societegenerale.com/fileadmin/user_upload/bonds-library/credit-report/CORPORATES/Asia/Parkson_Retail_2015_11_26_9M15_Rating.pdf - Buybacks in January 2016 at a 5 year low: hedges risk of major share purchases at low prices by interested parties and promotes shareholder value i.e. shareholder’s percentage of ownership in company increases upon share dividend/share cancellations: in other words, the shareholder grows his/her share of the company without additional investment. Further, Parkson is spending ~50% less of shareholder’s cash from 1year ago (from RM2.00-RM1.00) for buybacks. High paper losses for long term shareholders will be circumvented should profits start to resurface from all ongoing business revamps. Company is sufficiently liquid and has relatively fat gross profit margins.
IBM
- Prospects in cognitive computing (Watson) and hybrid cloud.
- High buybacks, stable dividend, strong customer base.
- Note: earnings 4Q 2015 to be released on 19/01/2016. Quarterly revenue have been on a decline for 14 quarters as of 19/10/2015 as management's strategy is to divest subsidiary businesses with lower profit margins (some with high revenues) and to focus at higher margin business opportunities rather than only high revenue opportunities.
Happy value investing.
[DISCLOSURE: The writer currently owns minority stake in Parkson Retail Group Ltd, Parkson Holdings Bhd, among the mentioned stocks as of 18/01/2016 under his personal account. JR Capital LLP has interest in mentioned stock IBM as of mentioned date.]
[DISCLAIMER: Everything stated in this blog is purely the opinion of the writer and any decision taken should be based on sound judgement with risks fully born by the decision maker. The writer shall bear no responsibility for any losses due to adherence of advices blogged by the writer or any commenters. Informational discrepancies are possible and will be corrected if any.]
