Revisiting portfolio strategy for 2020

Confidence and consistency: Liverpool’s Egyptian striker Mohamed Salah (right) controls the ball during a EPL match at Anfield. Liverpool’s sustained winning streak is not only based on its three ‘D’ approach but also on confidence as well as consistency. — AFP

Exactly a year ago, this column advised readers to embrace the “D” word for a tough year ahead.

The analogy adopted then was taking the cue from Liverpool’s numero uno position in the English Premier League (EPL) at the end of 2018 with seven points clear of its nearest rival, Manchester City.

The view taken at the time was that “only a disaster could prevent Liverpool from claiming its first EPL title ever!” We all know what happened thereafter and as against the odds, Liverpool failed to win the title despite collecting 97 points as Manchester City pipped them to the title by just a point! Although Liverpool still went on to win the UEFA’s Champion’s League – a consolation of sort or perhaps can be seen as an even bigger achievement within the European football context.

Fast forward to today. Liverpool is again at the top spot of the EPL and sitting pretty with not only a handsome 13 points lead but with a game in hand.

Liverpool has been one of the strongest team the EPL has ever seen in a long time, having collected a staggering 98 pts from 37 games it played in the whole of 2019. That’s an average of 2.65 pts a game. For this 2019/2020 season, Liverpool has played 20 games, and failed to collect full three points in just one game when it drew with Manchester United in an away fixture. Liverpool’s average points collected per game for this season is now at 2.9 pts – indeed a record that is hard to beat by any team. Will Liverpool emerge as not only an unbeaten team for the entire season but with the most points for a single season? Only time will tell but it does look that Liverpool is destined to break the Manchester City’s record of 100 points just two seasons ago.

In last year’s advisory, this column envisaged investors to adopt the three “D” approach to investing – i.e. to be defensive, diversified and dangerous in investing strategy as it was then expected that investors would be going through a turbulent time due to various factors.

What about this year? This column had a listed out the three key external factors and five main elements that will dictate market’s direction in 2020 a fortnight ago. Hence, strategy wise, these factors must be taken into account in designing the investment strategy for the year.

What should investors do? As it is the start of the year, it’s a good time to revisit your current portfolio and ask yourself is your portfolio design to capture and extract the best of market’s expected path.

Firstly, the Malaysian market, as measured by the FBM KLCI in 2019 was indeed disappointing as the main index closed the year lower by 6%.

Nevertheless, selected other indices performed extremely well last year among them were the Bursa Malaysia Energy Index’s 51.3% gain as well as Bursa Malaysia Construction Index’s impressive 34.3% rise and some extraordinary performance among selected mid to small caps stocks. Outside the Malaysian equity market, the other strong outperformance in 2019 was in all asset classes led by key global equity indices, commodities, bitcoin, fixed income market and even selected currencies.

The year 2020 is starting out on a very firm footing and with full of market enthusiasm. Some called it “melt-up” – the reverse of melt down as easy Fed’s money flows into the system, driving asset prices and optimism. This “feel good” factor is likely to continue into the first half of this year as there is indeed a strong correlation on Fed’s money printing machine and equity market’s performance. While overseas bourses will likely see greater fortunes in the coming year, while the US-China trade war is expected to be more market friendly, the same can’t be said of the local bourse.

While the FRBM KLCI closed the year at 1,588.76 points as at end of 2019, the current consensus fair value of 1,672 points leaves only some 5.2% upside as far as the collective 30-stock index is concerned. Hence, for an outperformance, investors got to dig deep into analysing individual sectors and stocks that could potentially benefit from 2020 positive market factors.

While this column is not able to recommend individual stocks to readers it is safe to say that stock picks should reflect investors confidence in the company’s fortunes this year, either driven by relatively cheap valuations, respectable dividend yield and growth.

This column’s last year’s top ten pick closed the year with a capital gain of 6.5% based on equal weight basis, and total returns of about 11.5%, far outpacing the KLCI’s loss of 6%.

For this year, this column has picked the top two of the index-linked banking stocks, the largest power company, Malaysia’s largest gaming company and the fifth choice is the largest construction company by market capitalisation as a proxy to the sector.

The remaining five picks are from the property sector, which happens to be the largest market capitalised stock in the sector, an upcoming O&M player, a mini conglomerate with an overseas concession and construction exposure, one of the largest auto distributors and the last on the list is an upcoming mid-range retail mall operator via its listed REITs. These 10 stocks have a collective forward PER of about 11.9x financial year 2020 earnings, a decent dividend yield of 4.9% and trading at a price to book ratio of about 1.1x. The portfolio constructed has a potential upside, based on consensus estimates of fair value over the next one year, of 12.8%.

As we usher in the New Year, it is always welcome with new expectations, new hope and new reality. It is hoped that 2020 will be a blessed year for all of us. Liverpool’s sustained winning streak is not only based on its three “D” approach but also based on confidence as well as consistency. Just like investing in the stock market, there are times we stick to the winning strategy as over time it will show results. Happy New Year 2020 and happy investing.

The views expressed here are the writer’s own.

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