Friday, December 28, 2018

TRADE is the THEME

During a period when we have terms such as "Trade WAR", "Trade Friction", "Trade Skirmish", "Trade Scuttle" - it just means that we are living in a world where we cannot do without TRADE. With trade, it also means more people, goods, food are transported. With trade means more roads, bigger ports, more flights, more containers, oil are traded. Think about it. In the context of business, transportation and trade, in several aspects there are big winners - Alibaba, Amazon, Airasia, Maersk, Hutchison, Keppel Port, Grab - but trade also create ecosystems where the middle size players, small players are able to survive and some consequently thrive.

Over the past few decades, there have been massive growth in movement of goods, people between the Pacific, Europe to Asia to American continent. And that growth will not stop. Will a friction between China and US on trade ever reduce that? It will slow it down a little - but over the long run, this will not reduce - unless there is a real war!

Some of things that the US government is pushing for example, i.e. more electronics being manufactured in US will not happen in a big way. Today, China, perhaps is contributing 80% to 90% of the world's electronics manufacturing.  That percentage will not grow anymore as China has over the last few years been rethinking its economy model from largely producing to more consumption based - but it will take time but eventually they will succeed. While the percentage will not grow, the total will continue to grow - for the next decade at least.

So what does it means? Some other countries such as Vietnam, Malaysia, Indonesia, even India will slowly take over the small role of producing for the world. (With that, Malaysia for example will even experience bigger trade volume.) Unfortunately, Malaysia has stagnated to some extent, and we are still being considered as an alternative place for large medium and large manufacturers. With that though, Malaysia will ever need bigger ports, more and bigger roads, IT systems, logistics companies.

Today, it is inconceivable that US will be growing its manufacturing base in a big way, as its economic base has passed that. It will not be manufacturing textiles, furniture, phones, shoes in a large way but what will happen is that high end products such as planes, machines, may still be from there.

Many commentaries I find have also said that the so-called Trade War seems more like a "Technology War". It is not surprising considering the attention given to one of China's more respected company, Huawei - as the world is moving towards usage of technology and electronics.

Looking back into Malaysia. What will the Trade War bring to us? Malaysia still has a strong manufacturing base. We do have talent, infrastructure for that - although it is never enough - no country has enough. Both US, China and some of the large companies that are in between i.e. from Germany, UK, Japan - will always look for alternatives. It has been proven that Vietnam has been the main beneficiary. Malaysia, is another alternative. Hence, while the world will trade a little less, Malaysia may not be that affected when comes to physical goods trade as goods may be manufactured and traded off from here. The hike in oil price will be curtailed as demand may soften. But our logistics companies, transportation related companies, toll roads especially such as PLUS will not be that affected. In fact, these sectors' fundamentals will improve.

I have hoped that our government sees through this. We need more technology companies, talents. MESTECC has to look at how to encourage more creation of tech companies rather than focusing on plastics (i.e. what harms it brings), solar, LYNAS. MITI has to look at making Malaysian companies ready for this change. Which is, more Malaysian companies taking opportunities rather than solely dependent on foreign investments. From this part, I still do not see the light.

However, with the last 7 months uncertainties - I think there will still be uncertainties riding through 2019 - coming from Malaysia and the world. Like someone whom I know said, she is still uncertain over what will happen to toll businesses as it seems the government is allocating RM1 billion to pay the concessionaires next year while in the past they claimed that it could have easily been solved through buying out of these concessions. (If you read my previous articles, one will understand that it is not that easy - as these businesses, financing have already been intertwined - if one is taken away, the other will collapse - just like playing Jenga and in a situation where there are only very few pieces to hold one another. Many whom are hoping for toll elimination or even simple reduction just do not see the complexities although it has been made into simplified context during the election period.)

The massive drop in the market has also created opportunities - one has to continue to look for well-run, good companies and hopefully those that are less dependent on government and their "flippings and floppings". (In a way, I can understand as they are still in learning mode - many newbies, although it is hopeful that the learning can be much faster.)

I have hence decided to buy 7000 units of Freight Management. Why? Because it is a company that has dropped in its price but not value, lesser affected by some drastic change in where the world has moved into in terms of e-commerce and trade and less affected by government's action.


For Freight, if we understand what caused its stagnation in the past 3 years and looking at its growth trend for the longer term i.e. revenue (micro), macro economy situation, I think it is cheap as it is currently at 5.5x PE and having about 6% dividend yield.

With that Happy New Year to all readers!



4 comments:

reyes430 said...

Dear Felicity

thank you so much for the write-ups. would like to seek for your opinion

1. logistic industry is a leading economic indicator as perceived, the recent cut on projected earning by Fedex would it be a sign for economic slowdown?
https://www.cnbc.com/2018/12/19/fedex-shares-fall-7percent-after-ceo-blames-bad-political-choices.html

2. PMI index for china cross below 50 and gdp projection is lower down

3. a lot of EMS companies been affected by the trade war, one can see it not merely on malaysia stock, but also in hk stock with the like of vtech or taiwan hong hai.

as i see that the impact of trade war is coming out and pointing to a slow down in global economy, not to mention that malaysia will have to face serious budget deficit issue with current low oil price.

what do you think will happen to klci index specifically in year 2019.

thank you so much

felicity said...

Thanks Reyes430

There is an economic slowdown for sure. But that is from a high growth seen between 2H17 to 1H18. The bigger question is whether there is a recession. A recession is one that is not be forecasted right now, but some of the stocks price we seen are like preparing for that.

Fedex is a much more global company and note that it will be affected by its acquisition of TNT. Fedex will also be affected by the volume downtrend seen between China and US.

This time around, It is China that is the precarious one. There are a lot of unknowns (as usual) about China's economy. Its one main strong point is its reserves and the government is trying to put the country's economy on additional fuel knowing that any pull back can be very dangerous.

As for Malaysia, it is double edge. The low oil price will be good for transportation and some logistics companies but trading volume may drop. having said that, I do not see negative trend - what was seen in some of the stocks is that there is a fear where we see negativity. It all depends on each company preparing themselves for slowdown.

As in the past few years, I have talked about defensive stocks but even "toll" is not defensive to a big surprise today.

I see EMS companies the long run to turnaround positive - why? Trade war will provide some opportunities for Malaysian companies. Hence, look for the EMS that do various products for many clients. They are more agile.

Today, we see downtrend of Inari and Globetronics. I think Inari is more affected because they do RF where as Globetronics is much more diversified.

I think KLCI will be KLCI and they may even drop as they are only comprising of 30 stocks which the bulk of it controlled by EPF. A new government will not do the same thing as in the past, hence we will see new entrees of companies which will be closer or maybe winning contracts on a fair manner. Hence, the traditional companies which have been supported may not be as successful as they were in the past. We already see in Gamuda, TM, YTL etc. Those are in 30 composite I think although TM is already out since last November.

This year, we will see more corporate exercise while the government is getting warmed up.

reyes430 said...

thank you so much Felicity. i have learnt a lot from you throughout all these years.

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