Aboi's Portfolio Review For June 2015

I am moving market update to a different posting within the coming weeks. This new portfolio review post will be done monthly and offer only [key updates]. Second I would begin to leverage research on [credible] sources based on my experience but my conclusions would still be based on [fundamental] financial figures. Lastly I will explain [briefly] any changes in my rating as well as fair value revisions.

Portfolio target composition. Equities 65%, Bonds 25% and Supplementary 10%.

Targets for returns p.a. Equities 12%, Bonds 5% and Supplementary 3.5%.

Notes

- Affin Hwang Select Income Fund: Income Distribution RM 0.005 per unit (reinvested)

- Kenanga Growth Fund: Income Distribution RM 0.10 per unit (reinvested)

Comments
- Portfolio target for the 5th year @ RM156k for April 2015: Slightly OFF. 
- Portfolio target for the 6th year @ RM171k for April 2016.
- The TWRR (time weighted annual return rate = 7.70% 
- TWRR down by 1.30% from Feb'15 vs portfolio target = 9.40%).

Supermax (Equity Malaysia)

- Changed BUY -> HOLD. Uncertainty in local stock market.

- Lowered fair value (RM 2.45 -> RM 2.30) due to narrower margin from competition.

- Stock crippled due to fire at its Alor Gajah plant but has since recovered.

- Growth in capacity from two new plants in Meru, Klang which will double nitrile gloves production from 6.9b to 12.3b pieces p.a.

- Still has attractive valuations vs peers e.g. PER & Div Yield.

Genting (Equity Malaysia)

- Maintain HOLD. Uncertainty in local stock market.

- Higher fair value (RM 10.50 -> RM 10.69) backed by earnings to grow steadily and stable.

- However most of its current investments will only come to fruition in 2H15/2016 so there is no short term catalyst to prop up share price.

Freight (Equity Malaysia)

- Maintain HOLD. Uncertainty in local stock market.

- Higher fair value (RM 1.09 -> RM 1.65) as it managed to weather temporary setbacks with healthy numbers so far.

- Stock took a beating due to cessation of a 3PL contract and temporary closure of a warehouse for renovation but expected to slowly recover.

- Growth will be supported by its core Sea Freight division and trade within Asia-Australia region.

ICapital (Closed-End Fund Equity Malaysia)
- Maintain BUY.
- Huge discount from current price to NAV (20.62%)

Affin Hwang Select Income Fund (Equity & Bond - Asia)

- Maintain BUY.
- Strong USD will make headwinds for Asia markets as such fund pare down exposure in equities (30% -> 20%). 
- Also doubled cash levels to 7% and continue exposure on Asian credit market pending US Fed's direction in the 2H15.   

Kenanga Growth Fund (Equity Malaysia)

- Maintain HOLD. Uncertainty in local stock market.
- Lack of catalyst in the short term, fund holding high level of cash ~20-25%.

FUND PERFORMANCE (BID TO BID CUMULATIVE RETURNS)

Period 1 wk 1 mth 3 mth 6 mth YTD 1 yr 2 yr 3 yr 5 yr 10 yr Bid to Bid Returns (%) - RM 0.8 0.2 3.9 12.4 14.28 14.4 36.2 73.0 170.4 412.7 Performance figures are absolute returns based on the price of the fund as at June 2, 2015 (Last updated on June 4, 2015),on NAV-to-NAV basis,with dividends being 'reinvested' on the dividend date.

AmDynamic Bond Fund (Bond Malaysia)

- Maintain BUY.
- Mainly invested in local corporate bonds ~80%. Interest rate expected to remain still.
- BNM will likely continue its policy pause and maintain cautious stance with a "wait-and-see" approach on US Fed direction.

FUND PERFORMANCE (BID TO BID CUMULATIVE RETURNS)

Period 1 wk 1 mth 3 mth 6 mth YTD 1 yr 2 yr 3 yr 5 yr 10 yr Bid to Bid Returns (%) - RM 0.4 0.9 1.8 2.8 2.66 7.0 6.3 13.2 36.0 118.8 Performance figures are absolute returns based on the price of the fund as at June 2, 2015 (Last updated on June 4, 2015),on NAV-to-NAV basis,with dividends being 'reinvested' on the dividend date.

Aberdeen Islamic World Equity Fund (Equity Global)

- Maintain BUY.
- Fund has no exposure to China's overheated stock market and slowing economy. Fund also has 18% exposure to the already lofty valuations in US equities so impact is minimized if a correction occurs.
- Fund continues to be very diversified globally; Healthcare (21%), Materials (16%), Energy (15%), Industrial (13%), Consumer Staples (13%).

FUND PERFORMANCE (BID TO BID CUMULATIVE RETURNS)

Period 1 wk 1 mth 3 mth 6 mth YTD 1 yr 2 yr 3 yr 5 yr 10 yr Bid to Bid Returns (%) - RM -0.2 1.1 -0.3 6.4 6.63 9.2 31.5 - - - Performance figures are absolute returns based on the price of the fund as at June 1, 2015 (Last updated on June 4, 2015),on NAV-to-NAV basis,with dividends being 'reinvested' on the dividend date.

CIMB Principal PRS Asia Pacific Ex Japan Equity Fund (Equity Asia)

- Maintain BUY.
- Fund holding exposure to China's overheated stock market is minimal ~10%.
- Positive on Asian Equities but growth will be more scarce moving forward as regional portfolios are fully invested hence earnings will depend highly on stock selection.

FUND PERFORMANCE (BID TO BID CUMULATIVE RETURNS)

Period 1 wk 1 mth 3 mth 6 mth YTD 1 yr 2 yr 3 yr 5 yr 10 yr Bid to Bid Returns (%) - RM -1.5 -1.3 2.0 10.8 10.31 22.2 36.2 - - - Performance figures are absolute returns based on the price of the fund as at June 2, 2015 (Last updated on June 4, 2015),on NAV-to-NAV basis,with dividends being 'reinvested' on the dividend date

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.

Oil Price Is Going Nowhere For A While

The original post is from the Economist :

http://www.economist.com/news/leaders/21647972-thuggish-government-playing-racial-politics-najib-razak-should-be-dressed-down-disconnect

From The Economist

Otherwise digest these points :

• Fall in oil price has not curbed fracking as expected in America.
• Fracking is getting "unconventional" oil out of shale, tar-coated sand.
• New techniques to drill oil (horizontal drilling and hydraulic fracturing).
• High production costs & heavy debts, more vulnerable to price shocks.
• But more flexible, can quickly respond to any price rise.
• Saudi refused to cut output to put American firms out of business.
• 6 months later, little sign of bust in America's shale basins.
• Saudi's plan failed, oil price to remain low.
• Fracking have lead to a boom in oil and gas production recently.
• American oil production is still growing, in March it rose by 120,000 barrels a day.
• Frackers able to cut costs (labor, steel and other inputs has fallen).
• Frackers also improved productivity and drilling efficiency - helped by technology.
• America is replacing Saudi as world's swing producer.
• America drilled lots of well and then plugging them, waiting for price to rise again.
• Potential of 300,000 to 800,000 barrel per day may be started up when needed.
• Unconventional oil gaining increasing share of capital investment.
• Oil price picture - unlikely to rise sharply.
• America will stop importing energy between 2020 and 2030.
• Message from America - finance and technology more than a match for Saudi.
• OPEC says America's oil boom will be over by year-end. Wishful thinking.
• Shale revolution is marching on.

My thoughts : US is no longer dependent on Arab oil anymore. This is clear as we are witnessing a partial withdrawal of the US from the Middle East, hence the chaos. 

Meanwhile in Saudi, they have shown reluctant to cut output in order to maintain market share. In the long run this strategy will probably backfire. Why?

Currently the supply glut is supported by restocking activities (oil being stored in hopes that demand and prices will pick up later). [1] Demand will sap because China is growing at its slowest in 20 years. [2] Prices will likely tumble because storage facilities in Europe and Asia are already 80-85% full. Much more and they will overflow.  

Oil and gas income is still the backbone for the Malaysian economy. It accounts for 30% of government's total revenue. Again we are the spectators, too small to make a difference. Don't expect our budget to be people centrist for the next few years. We need to be prepared for a prolong spell of cheap oil.

Our weakening MYR (due to capital outflows) will more than offset any gains we get from cheaper oil. So yea, I'm not that happy either, I've said that before:

http://aboiwealthpot.blogspot.com/2015/01/ron95-ron97-cheaper-by-35c-why-you.html

GST pre-digestion

Overall
Concluded that GST will have a MAJOR impact on our core inflation figure (will be higher) and prices will NOT go down contrary to state media. There is no such thing as deflation in a country when the interest rate is not even near zero. Take Japan and Europe as an example of deflation.

**My thoughts on the impact is highlighted in Red
**Please let me know if you think I missed something important out?
Other good reading: http://www.theantdaily.com/Main/GST-Does-the-gov-t-really-understand-what-essential-goods-are

1. Fuel
Ron 95, diesel and LPG (natural gas) will be exempted from GST. Only Ron 97 will be subjected to the new 6% GST.
-None, because if you can afford Ron 97 you probably are rich enough that the 6% is negligible otherwise the impact is none to usual consumers, even trucks are spared because they use diesel.

2. Utilities
Water is exempted. A household will only have 6% GST charged to the electricity bill for usage above 300 units. This means the first RM77 has not GST. Any amount after that is subjected to 6%.
-Moderate, this is a monthly expense. Assuming a RM250/month bill, you are looking at RM10 tax per month and about RM120-RM150 tax a year.

From Tenaga's webpage

3. Insurance
All insurance policies except for life insurance will be charged 6% GST. GST would also impact all traditional and investment-linked policies which had medical, critical illness or personal accident benefits attached. For traditional policies, the GST is imposed on the premium, while for investment-linked policies, it is charged on the insurance charges. For investment-linked policies, insurance charges will escalate with age because of higher insurance charges.
-Major, this is one of the worse because it impacts everyone regardless of age and gets increasingly more taxing as you age due to insurance charges. It is very difficult to estimate the cost because it varies according to age and what you have insured. I am looking at a RM500 impact on my yearly expense for having a traditional policy, two investment-linked policies and PA at age 29.

4. Credit Card
RM50 government tax is now abolished. However 6% GST is applied on the card's annual fee. It is said that this separate charge will clearly be reflected in your credit card statement.
-Minimal as it is once per year, cost can be reduced if you have fewer cards and if you manage to hold the bank hostage by asking the bank to waive the fee. RM24/year impact assuming you have two cards with RM200 annual fee each.

5. Books and e-books.
6% GST applies to all publications except the following: dictionaries, encyclopedias, newspapers, texts, references, works and religious books. And yes GST will be imposed on magazines.
-Minimal but actually it depends on what you buy, assuming half of the tax rebate of RM1000 goes to magazine you are looking at a RM30 cost per year. 

6. Housing
Basic construction materials are taxed: cement, bricks and sand. These make up 44% of construction cost and since GST will be charged cost will go up. Residential property including SoHo (small office/home office) will be exempted but not commercial properties.
-Minimal, some would argue with me that's ok we can debate over bf/lunch/dinner. Property companies expect GST to result in a maximum of 2.6% increase in house prices. However with the housing boom and asset peak already over, it is more likely than not likely that house prices will remain stagnant except for really prime locations. Why would BNM not use interest rate to defend the MYR? Because it knows that such a repeat would make us go back to 1999 crisis where house prices collapsed.

7. Automobiles
First, new vehicles will incur GST on the FINAL selling price of car (see pic). Please note that this includes margins, handling/inspection fees and accessories therefore the tax will be on a much HIGHER base than before. Second, used vehicles are not subjected to the current sales service tax but is also NOT under a GST zero rated item either therefore I suspect used cars are going to get big shock later once GST is implemented. Third running costs like motor insurance and servicing are subjected to GST. Only Ron95 petrol and diesel are off and so is license renewal and road tax but these are not high cost to begin with.
-Major, as mentioned almost every aspect of owning a vehicle is GST-able. Like insurance this is difficult to estimate and is based on the car that you own. You are probably looking at the thousands for a new car/used car and several hundreds for yearly running cost.

From Paultan.org, Malaysia's #1 source for auto news 

8. Banking
The RM1 MEPS fee charged when we withdraw from another bank’s ATM will increase to RM1.06. No GST will be charged if you make a withdrawal from your own bank’s ATM. Similarly, other services offered by the bank, such as money transfers (e.g. cashier’s order and demand draft), telegraphic transfers, money exchange, loan, cheque, credit card, and debit card will see 6% GST charged to its service, commission or subscription fee.
-Minimal, unless you do very very frequent transactions. Please note that this is GST on the FEE not the amount of the transfer/loan/credit/debit and etc.

9. Other Services
6% GST will be imposed on tuition fees, as tuition centres are not categorised under educational institutions. The price of beauty services like manicure, and hair and facial treatments will be subjected to 6% GST too. Massage services are also chargeable with the GST if the annual turnover for such businesses is RM500,000 and above. Aside from beauty services, cosmetics and other products for skin, hair and body care will also be charged GST. Beauty products sold at airports as duty-free items will NOT be subjected to GST.
-Major, the tuition fee is a big ouch as it is a monthly expense. For RM400/month, you are looking at almost RM300 tax a year. Beauty services and products will hurt ladies a lot. Depending on your monthly cost but it's going to probably be a few hundreds tax impact per year.

10. Restaurant
If you look at restaurant bills, you are already paying 6% government tax and 10% service charge. GST will replace the government tax and since both are taxed at 6% there is no difference. However because of the new tax regime, the GST is applicable on the service charge (service charge is collected by restaurants for services rendered and is traditionally set at 10%). Assuming a bill of RM100, currently you will pay RM6 govt tax and RM10 service charge for a total of RM116. With GST you will pay RM10 service charge and RM6.60 govt tax (110*6%).
-Minimal as this is a daily expense. If you frequent restaurants in shopping malls and spend roughly RM500, you are looking at an additional RM3 per month.