Saturday, November 29, 2014

Strategies for 2015

What OPEC decided about 2 days ago is very significant to the market as well as the economy. It has decided to keep the production among OPEC members to 30 million barrels a day. Some say that the decision is to allow it to eliminate the weak players in the shale oil boom. Many players in the shale boom have been borrowing to put themselves at play for the boom. As much as 15% of the junk bonds are being issued to energy companies. Yes, to me that is true, but I also believe that there are economic reasons and as much as political reasons.

Imagine what a $60 per barrel would do to some of the net oil producing countries - Russia, Venezuela, Iran? US does not need to send troops to fight but this war itself would have a very strong impact to US in its international political policies. Putin would not be so bold and confident anymore.

On the local front, low oil prices especially when it is traded below $70 per barrel, it seems would not be good for Malaysia. Petronas came out with all guns blazing saying that it cannot be the one who will be solely helping the government's coffers anymore. So we know that for this year Petronas contributed RM68 billion to the governments budget. That's huge. Oil price at $75 per barrel would drop Petronas payment to the government to RM43 billion i.e. a reduction of RM25 billion. Is it so?

In any case, in Malaysia we are seeing the reduction of subsidies on all front - from sugar to petrol. To me, that is a good thing and it seems that it will be the new normal for Malaysians. For 2015, we are seeing 2 significant things. GST while petrol will go free float. On the international front however, many commodities are dropping like there is no bottom. With that what are the strategies?

Oil and gas - obviously it is already seeing drop such as what happened to Bumi Armada and Sapura Kencana just over the last 1 week. Obviously, I do not foresee this sector to be able to see the light at the end of the tunnel soon. Perhaps few years down the road but not 2015. Imagine Petronas is even contemplating postponing or shelving the Pengerang project. That is significant as Pengerang is supposed to allow Malaysia being as a major player or at least a competitor in the bunkering business.

Consumption business i.e. retailing - unfortunately for Malaysia the drop in oil price is not good for Malaysians as we are actually paying more for petrol or diesel as opposed to many countries we read of. So, this sector will not be showing a rebound soon until we Malaysians are used to higher or floated oil prices. The GST will also do not good to this sector at least in the short term.

Palm oil - Malaysia is lesser of a significant player in this sector now that Indonesia is the largest palm producer and they are running away as the leader. With that, what we have been used to see may not reoccur again. Malaysia may not be the one who will be able to dictate the market. It will now be Indonesia. That has already happened several times as Indonesia has been the one taking the first shot. In chess it is like you have the white pieces and usually that is a slight advantage. In any case, Malaysian palm oil companies will continue to do well despite the prices not enjoying what they used to be. My only problem is that, their share prices are not attractive yet.

There are several sectors whom will benefit from the drop in commodity prices. The first will be the construction sector. Prices of raw material which comprise a large portion of costs to this sector will drop - or already and they will enjoy a better margin in the event these companies have secured the contracts in advance.

Also, probably surprising is that the margin for properties sector may not be that largely impacted as originally thought despite the GST effect. They are just complaining. The bigger factor however will be the Bank Negara's action - i.e. whether will it be loosening up the lending guidelines especially to first time house buyers. A week ago, China did the unexpected - reducing its benchmark lending rate by 40 basis points. That again is huge. It may impact the decisions of many other central bankers in the region - Malaysia included.

For me as compared to 2014, I may have to relook at the portfolio especially for the retail businesses as it seems that e-commerce is making an impact although many of these companies are yet to make profit - but they are definitely a disruptive factor. Jobstreet will be out of the way now as it has already completed its sale of the online business to Seek. With that, I am looking for new opportunities.

The above mention of cost reduction for construction sector may bring positive impact to Keuro. Definitely, Parkson and Padini may be impacted by the GST as it is already, due to stronger competition, this year.

The bad press on Malaysian Airport - I am just hoping that the single sector which benefited from the low oil prices alone - airline would bring positive impact to MAHB, with higher traffic.

All in all, I think 2015 will be better than 2014, despite the pessimism.

1 comment:

ronnie said...

It is sad that analysts are still recommending buys for oil & gas stocks domestically. Their herd mentality led to many investors & speculators losing their pants in the recent collapse in oil & gas stock prices. If it was up to Petronas, many big ticket projects would be shelved.

We do not live in a perfect world. And Petronas will continue with these projects until they are not economically viable.