Monday, January 14, 2019

Should we be fearful or fearless

Seriously, this is one of the better times to buy Malaysian stocks unless we are very sure that 2019 or early 2020 will be recession year(s). 2 years ago, I was short of stocks to pick, this time around it is a different way round.

World Recession

Let me get to a brief discussion on recession (or will there be one) before identifying whether we should buy and what type of stocks to pick. Will the next 12 to 15 months be recession period? US indicators does not seem so, and in fact there is this "grumble by you know who" about the Fed raising interest rates in December. The Fed will not raise interest rates when the economy is tumbling, and in fact they were worried over inflation - and they have mentioned of normalising interest rates (a number where nobody knows what is the optimal). The 10% drop in US stocks last month were largely due to few reasons - fear that the Fed will continue to raise interest rates, program trading and holiday period.

That fear especially where the Fed is going to be "hawkish" has been laid to rest when Powell, the Fed Chairman mentioned that they will delay their plan to raise rates if there is an indication of economic slowdown or more importantly recession.

Now, if US seems to be pretty safe except that the economy is not going to be as expansionary as 2018, what about other countries - such as China and Europe?

Europe and UK have been facing slowdown  in growth largely similar to the Japan syndrome for a long time now. Its economy while significant in size has sort of cooled and as such it is not a shock anymore if anything untoward happens to Europe. The larger worry is the second largest economy i.e. China.

China, this time is the biggest unknown. There are a lot of indications that China is slowing down - but to how much? Every economic indicators show that it is going below 7% growth, a territory that has not been seen for more than a decade. Well, what is more worrying about China is whether it is facing credit problem among its industries and property sectors.

We know that China has strong reserves but what we do not know is whether there is the "House of Cards" symptoms facing the industrial sector especially when the Trade War is on the doorstep.

Trade War

While the Chinese government has realised that they cannot depend on capital pushed growth since few years ago, they did see the pushback from US coming so soon.

US under Trump in his 2nd year in office has tried to hit China hard and that has sort of shaken the Chinese - at least among its export industries.

The trade war is a term but in effect, what US wanted to reign on China is towards its technology sector which can be worrying for US' dominance in the future. Today, we are already seeing many of Chinese companies have shown their appetite to grow and invest heavily into technologies. US knows this is a threat and what is mentioned as Trade War is more of a Technology War. As such, through the use of tariffs US is trying to slow the Chinese down. The effort then is for US - at its strongest for within the last decade - to pushback the Chinese businesses.

But sometimes when someone is trying to cause ripples, tsunami may happen. That is the one worrying. In many scenarios, we could not see the tsunamis that is being stirred.

While, the worry is plenty, I foresee that both countries may come to some agreement in the short term as they are interdependent on each other. A much weakened China economically will not be good for Trump who is running for his reelection in 2020.

Malaysia's economy, politics and stocks

The Malaysian stock market is an awkward one as we had just went through a massive government change - first time ever in the history of Malaysia. Many counters which have been providing services and where their businesses depended on government budget will continue to see uncertainties.

A theme that I have continuously trump on is look for quality companies that are run by quality management. More often than not, when there is quality, Malaysian government cannot ignore. (This is the reason why I invested into Gamuda, a company where the Penang state government when DAP was the opposition at the federal side was even willing to award a multi billion contract)

I can understand when a new government (especially after claiming that the country is in very weak financial situation when they take over) is trying to work on its finances.

Imagine this. On its first few weeks, a new management - especially after announcing elimination of GST which will reduce its revenue by RM20 - 25 billion, what will they do? CUT for sure. RM25 billion is significant - for someone who cannot imagine, that is about 7% of the government's expenditure.

Only after they have gotten a better hold of the financial situation, the government can look at its development expenditures. This is because, more often than not operating expenditures are the one harder to get the "snips" as it involves the people's rice-bowl.

While the bulk of the "SNIPPING" have been done last year, this year will continue to be the discovery period i.e. who are the cronies and who are the ones really can deliver based on their capabilities. No government in their right frame of mind would want to create downfall to well-managed Malaysian companies, not when as a country we do not have that many to claim for. A government in its right frame of mind will understand that they need the companies to continue to help build the country whether they are from construction, manufacturing or even plantations.

As a country, we will still need to grow through careful "development initiatives". And that means spending on development. While operating is the one keeping the engine running, development is the one pushing us forward.

For stocks, my take is that while the government is still at discovery mode and learning, we should continue to put money into companies that have delivered and have put effort to learn and grow. Many of these companies are great companies but because of investors' fear their stock price have suffered. We should however know whether some of these companies can be caught by "disruptive" trends.

What about the stocks in which they are not so related to government contracts?

At the same time, due to global economic pressures as well as internal trends, several companies have seen years low. These companies have very little to do with the government - whether it is governed by PH or BN. I could name a few i.e. DKSH, Bumi Armada, Freight Management, Hibiscus, P.I.E. These are companies as we know have dropped because they are part of the "fear factor" in the latest global economic trend. Some of them are more defensive than others but what I noticed is that the 2017 or 2016 stories did not differ much from the 2018 and 2019 stories.

Then why did they drop?

A big part of it is because of us, human being - we are inconsistent in our feeling.

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