June 2016: Where do we invest now?

I would say this is one of the most exciting yet challenging period for stocks picking in Malaysia. Why are they challenging? I am not expecting Malaysian economy to do well this year and in fact it is expected to underperform to a growth of around 4% or even below. Malaysia registered a 4.2% growth for its first quarter of 2016 but we must not forget that for 2016, we had an extra day in February 2016. Without that, we probably would have a growth of less than 4% for the first quarter.

The results from many companies - large and medium sized does not really show positive trends. As expected, the export counters are starting to slow down (in profits) as their buyers are now getting used to a weaker ringgit and these commodity counters comprising of palm oil, rubber gloves, wood based are back to competing against each other in pricing - because they are commodity based companies.

I was slow in detecting that a weaker ringgit is going to provide opportunities and huge jump for the export counters. That's because I did not expect ringgit to go so weak i.e. above RM4 to a dollar. But yet again, I do not try to predict where the ringgit is heading. Many however, whom were late as well would have been stuck when they bought Top Glove at RM6 and above or WTK at RM1.50 thinking that the weak ringgit would have caused these export companies to be super counters. They are not as in the last article back in December which I have written.

Now RM is back to 4.15 to a dollar. Should we go back to the export counters? I do not know. The thing I know that it is not lasting as these companies whom are competing against each other would compete again on price. What I can say is that if you can find a company that does exports and it is in the sweet spot of not having much competition, that is the winner. Until now, I am yet to be able to find that company as many of those Malaysian companies have competition. Even Wellcall (almost fully exports and does not have that many competition) which I thought would do well is affected by drop in volume sales faced by their industrial clients.

Why is it exciting then? Some of the companies which I think fundamentally remains the same has seen their stock price dropped substantially. They are on the other side of the coin. A strong US dollar affects their performance or that could come from the weaker commodity prices. What are those companies? Many of them, and just that we need to pick the right one. The beauty is that, we have lots of time to pick those companies.

2016 and even back to 2015, is also the period which we see challenges posed to many retail and distribution companies. Among them, AEON, Parkson, some apparel companies including Bonia, DKSH, Harrison Holdings etc. I have two reasons for that - one is due to a slower economy and the other which is much more fundamental i.e. the changing behavior of people's purchasing methods from physical retail shop purchasing to online or e-commerce. The second reason is the one which got me more careful. They could change the landscape of many of these companies in the future.

As for banking, I am careful of the performance registered by some banks. It seems that non-performing loans or provisions for losses may crop up due to the high gearing as experienced by retail loan sector.

Properties would definitely slow down as well, but there are some opportunities as investors have probably priced in that effect.

You would have noticed, in the last 1.5 years, I have been focusing on 2 - 4 stocks (2 main ones and 2 smaller holdings) and I am still sticking to that way. I am on the lookout for 1 more company due to the opportunity provided. Even if that does not happen, I am still happy with the holdings that I have, except perhaps for one.