Value Investing Portfolios

8 October 2018

Source : The Edge 

Yawning valuation gap between US stocks and the rest of the world

Global markets, save for Wall Street, headed into the last quarter of 2018 with a sense of caution. There are reasons to be wary, seeing that developments in the first nine months have not gone according to script, confounding almost all analyst expectations at the start of the year. 

Narratives on the much-vaunted synchronised global growth have all but disappeared. While the US economy is gaining traction, growth momentum pretty much everywhere else has stalled. 

Instead of a worldwide stock market rally, we witnessed a persistent divergence of fortunes. US stocks are near all-time highs. The Dow Jones Industrial Average rose to consecutive fresh records last week, adding to its year-to-date gains. 

On the other hand, European stocks have stumbled and are among the biggest disappointments, especially given the widely held bullish forecasts heading into 2018. Emerging markets fared little better.The rush of capital outflow was precipitated by flight to safety as the US shrank its balance sheet and raised interest rates, lending strength to the greenback and sending most emerging market currencies lower. Sentiment further soured on potential fallout risks from escalating trade conflicts. 

The US Federal Reserve will continue to tighten. It raised benchmark rates in September and signalled intentions for one more hike in December as well as three rounds of increases in 2019. 

Where do we go from here? 
US corporate earnings should continue to record double-digit earnings growth in 2H2018, thanks to tailwinds from tax reforms, deregulation, low unemployment, improving productivity and robust consumer confidence. All signs are pointing to another upbeat 3Q2018 results season, though it is still very early days. 

The latest employment data showed signs of stronger wage growth, as unemployment remains at a low 3.9%. One of the notable recent headlines was raising the minimum wage for its employees. Consumer confidence is at an 18-year high.

On the other hand, Asian corporates are On the other hand, Asian corporates are expected to suffer some earnings downgrade, owing to tighter liquidity and higher interest rates, weaker currencies, fallout from trade spats and overall slowing growth.The recent sharp rise in oil prices could further weigh on economies.

Crude oil prices are currently hovering near four-year highs, handily beating modest expectations that were the consensus at the start of this year. Prices are being driven by speculations of near-term supply shortfall with the impending US sanctions on Iran. On a more positive note, much of these may already be reflected in share prices. There is a yawing valuation gap between US stocks and the rest of the world. At some point, the divergence must hit an inflection and reverse course.

Perhaps not immediately, but now may not be a bad time for investors to start taking another look at some battered-down stocks. While growth is slowing, China and Asia are still expected to grow faster than developed countries and remain key drivers for the global economy for the foreseeable future.

There are indications that capital outflows from Asian markets may be bottoming out. Capital flows turned positive for South Korea and Taiwan in recent weeks while outflows have slowed in Indonesia and Malaysia. 

Growth story at Dialog 
We recently acquired shares in Dialog Group for the Malaysian Portfolio. This is a company well positioned to benefit from the region's future growth (based on our combined population size, rising per capita income and consumption demand). Its story of growth will continue to unfold for years to come. 

Dialog is an integrated technical services provider for the oil, gas and petrochemical industry. Its biggest transformation started in 2007, when it first mooted a long-term vision to build a regional petrochemical hub in Pengerang, Johor, starting with the blueprint for the first-ever deepwater petroleum terminal in Southeast Asia. 

Work on Phase 1 of the multi-year development, the Pengerang Independent Terminal, began in 2009. Dialog undertook the engineering, procurement, construction and commissioning (EPCC) for the RM5 billion project, which was completed and commissioned in 2014. It berthed the first Very Large Crude Carrier in 2015

Portfolio resilient amid weak regional market

The joint venture with Vopak (the world's largest independent tank storage service provider) and Johor state provides handling, storage (1.3 million cu m capacity), blending and distribution of crude oil and petroleum products. It is in the midst of adding 430,000 cu m of storage capacity, to be completed next year. 

Construction for Pengerang Terminal 2 — a dedicated industrial terminal for the Refinery and Petrochemical Integrated Development (RAPID) project, the heart of Petronas' US$27 billion ($37.3 billion) Pengerang Integrated Complex (PIC) — is ongoing and slated for full completion in 2019. This is a joint venture with Petronas, Vopak and Johor. The EPCC contract is valued at RM5.5 billion ($1.8 billion). 

Within this development is the newly completed Pengerang LNG2 — a joint venture with Petronas Gas— regasification facilities and 400,000 cu m LNG storage tanks. Gas is supplied to RAPID and can be injected into the Peninsular Gas Utilisation Pipeline System. 

Aside from recurring incomes from tank storage and handling, Dialog is eyeing maintenance and services income from PIC once the entire project is up and running by end2019. 

At the same time, the company is deep in negotiations with potential partners to develop Phase 3, which will involve 300 acres of reclaimed land for tankage and deepwater marine facilities for petroleum products.The initial investment is estimated at RM2.5 billion. 

Looking even further ahead, Dialog has over 500 acres of yet-to-be-developed buffer land and industrial estate, excluding the area currently used for its fabrication workshop. It has plans to venture further downstream, to manufacturing and processing petroleum by-products. In keeping with the company's strategy, it is likely to partner up with established players. 

In addition to Pengerang, Dialog owns and operates the Langsat Tank Terminals — with total storage capacity of 647,000 cu m plus another 100,000 cum currently under construction — as well as a 30% stake in the Kertih Centralised Tankage Facilities and a 60% interest in Jubail Supply Base in Saudi Arabia. 

The company also has a portfolio of upstream mature oilfields off the coast of Sarawak that are doing well at prevailing crude oil prices. As mentioned, it provides downstream services such as EPCC, specialist products, plant maintenance, technology solutions and fabrication. 

The Global Portfolio lost ground as negative sentiment persisted in all markets except for the US.Total portfolio returns since inception remained in the red, at -0.8%.This portfolio is still underperforming the MSCI World Return index, which is up 5.4% over the same period. 

I locked in gains totalling 34% on Shanghai Haohai Biological Technology. The sale lifted our cash balance to US$158,715. We will be looking to invest in several new ideas in the coming weeks, in line with the theme of this week's article. 

Stocks in the Malaysian Portfolio held up comparatively well amid cautious sentiment for the broader market. This is in line with weakness in global markets. Bellwether indices in most regional markets ended in the red for the past one-week. 

Total portfolio value ended marginally higher last week, faring better than the benchmark index, FBM KLCI. We added RM750 dividends from Maybank to our cash holdings, which now totals RM36,213 or about 11% of portfolio value. 

Total portfolio returns stood at 62.9% since inception. This portfolio continues to outperform the benchmark index, FBM KLCI, which is down 2.2%, by a long way.