Subprime woes raise awareness on resiliency

RESILIENCE has become a buzzword for investors looking to invest in the stock exchange in light of the recent US subprime mortgage crisis. 

SJ Securities head of research Cheah King Yoong believes the US subprime woes have raised concerns about a global recession. “Therefore, investing in resilient companies is quite important,” he said. 

Cheah's definition of a resilient company is one whose earnings are not cyclical in nature. It is in an industry that continues to enjoy strong demand for its products and services even during a recession.  

“These companies would have captured a substantial market share and thus have strong pricing power. This would enable them to pass on any increase in costs to their customers and continue to enjoy healthy profit margins.  

“In addition, strong cashflows and a healthy balance sheet are musts to withstand any economic downturn,” he said. 

ING Funds Bhd head of investment Wu Yah Ning concurs. 

“Normally, the resilient companies are the blue chips and market leaders of their respective sectors, those are well run with strong pricing power and have experienced management,” she said. 

Wu noted that these companies were also involved in sectors that were not susceptible to global economic or financial changes.  

“Thus we generally find these companies in consumer-related industries and concessionaires such as utility firms.  

“They include the gaming companies such as Berjaya Sports Toto Bhd, Resorts World Bhd, Genting Bhd as well as Tanjong plc which has exposure to the power industry.  

“Companies in the consumer product industries include Nestle (M) Bhd and Fraser and Neave Holdings Bhd,” she said. 

Other firms that Wu believes are resilient but may not necessarily fall into these categories are the blue-chip market leaders that have a very strong and experienced management team to manoeuvre the companies through hard times. These include LPI Capital Bhd, Public Bank Bhd and IOI Corp Bhd

“We also like certain real estate investment trusts (depending on their segment of exposure) which will still be able to pay decent yields regardless of market conditions,” she said. 

Cheah highlighted Top Glove Corp Bhd and Supermax Corp Bhd for their ability to pass on higher costs to customers and the continued strong demand for gloves., the leading online recruiter in Malaysia, Singapore and the Philippines, is also on Cheah's list of resilient companies. 

He also cited Sunrise Bhd, as its high-end property development was resilient towards any economic downturn. 

Cheah considers the healthcare and pharmaceutical industries to be resilient and recession-proof industries. He likes TMC Life Sciences Bhd, Hovid Bhd, Pantai Holdings Bhd and KPJ Healthcare Bhd

Another resilient company, he said, is Petronas Gas Bhd, which holds a monopoly in the processing and transmission of natural gas in Peninsular Malaysia. 

TA Securities is recommending high-yielding big-cap stocks with sound fundamentals for defensive plays. 

“For risk-averse investors, defensive low beta (volatility) stocks that yield high dividends could be a better bet, but our advice is to go long on the market as we are still bullish.  

“If the US subprime impact is the major concern, take heart that it has not crept into the real economy.  

“And even if there are any signs of it, the US government and the Federal Reserve still have ample means to manoeuvre by applying various fiscal and monetary measures respectively,” it noted. 

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