[ small change ]
thesundaytimes Oecember 4, 2011
Betting against analysts' optimism and loading up on cash-rich stocks have turned out not too badly
Stocks to avoid
Price returns
Noble Group
Indofood Agri
Genting
DBS
It is hard to be a stock picker
when markets resemble a syn­
chronised dance of dolphins.
After all', how does one
choose one share over another
when stocks of companies from
diverse industries, such as bank·
ing and casino ·entertainment, as
well as disparate consumer orien­
tation - some serving industrial
customers, others selling beer ­
leap up or dive down ·In lock­
step?
With investors worried that
the euro zone may not retain its
single currency for long, and
amid nervousness about the
United States slipping into anoth­
er recession, It is not unusual
that stock movements have been
highly correlated of late.
That has made it .tough for
money managers to generate
"alpha", or returns in excess of
what an investor could get by
owning an index fund.
Adramatic increase in the syn­
chronicity of price movements is
evident in the Singapore market,
too.
For instance, between early
September and late last month,
the correlation between DBS
shares and the Straits Times
Index was as high as 0.92. In the
same period last year, the correla­
tion was 0.62.
(A correlation of I implies
that two variables move com­
pletely in lockstep in the same
direction; a value of zero signifies
that the moyement of one has
no relationship with how the
other behaves.)
In such a bleak environment
for stock picking, I had suggested
not one but two such strategies
in this column in September.
("Don't get seduced by analysts'
darlings", Sept 4; "In bad times,
nurse a beer, suck a candy, and
call friends", Sept 11.)
i~*:,::, ..·~
. ;::,'h·:;,
Sept 2 - Nov 25
Sept 2 - Oee 1
·32.8%
-8.6%
-9.3%
-8.90/0
~7:~'
-23.6%
·5.0%
-4.6%
·2.2%
->~:~
. ,'
Stocks to own
Price returns
.lM'B
Thai Beverage
~u·FuChl
StarHub
Sept 9 - Nov 25
Sept 9- Dec 1
-4,0%
-3.90/0
+0.5%
+1.4%
-7.7%
-4.0%
-1.9%
+2.2%
+0.7%
-6.5%
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'."_2,~%i.':
Source: Bloomberg
ST GRAPHICS
The first article said that at·
least four Singapore stocks are
"must avoid"
(or investors
because consensus opinion of
equity analysts about their pros­
pects was too optimistic.
The second article recom­
mended five local shares for
Investors to own in preparation
for a global financial crisis. These
stocks were cash cows, which
would be able to ride out any
credit crunch better than compa­
nies that rely heavily on outside
funding.
I screened the stocks based on
rules. with no scope for any bias.
(I have never owned any of them
or sold them short. nor do 1
intend to.)
It is time to revisit the predic·
tions to see how they have
worked out. (See chart)
My "stocks to avoid" recom·
mendations have been successful
for Genting and Indofood Agri.
which have fallen between 1.7
per cent and 2.1 per cent more
than the 2.9 per cent decline in
the in-:lex between Sept 2 and
last Thursday. The fourth stock
on my avoid list was Noble
Group, whose shares fell 24 per
cent.
I did not know then that the
company was on its way to
reporting its first quarterly loss in
almost 14 years. Nor did my crys­
tal ball tell me that chief execu­
tive Ricardo Leiman would quit.
Noble looked like a stock to
avoid in early September because
analysts were still very bullish on
it, eVen though the European
debt crisis was getting worse, and
financial conditions were gelling
restrictive. Noble had plunged
during the 2008 crisis. That was
one big reason it showed up on
my radar.
My "stocks to own" list includ·
ed Asia-Pacific Breweries (APB).
The maker of Tiger beer has
underperformed the index by
about 2 percentage points, while
Thai Beverage, another of my rec­
ommendations, has fallen in line
with the market.
My worst call has been MI,
which lost investors 6.5 per cent
between Sept 9 and last Thurs·
day, a period in which the index
declined 2.2 per cent.
But its rival StarHub, another
of my recommendations, has
paid off. Its shares rose 0,7 per
cent during the review period,
-while those of Chinese candy·
maker Hsu Fu Chi, anol her stock
I identified as a bulwark against
financial turmoil, rose 2.2 per
cent.
Overall, both stocj·picking
strategie~ have produced results,
and they have done so even in a
highly correlated - and confus­
ing - marketplace.
Will these strategies continue
to perform? In the v~ry short
term, they may not. As the chart
shows, last week was a bad one
for defensive strategies of the
type I suggested. They were
much more rewarding until the
end of last month. In general,
December seems to be a month
for risk.taking. It is not a great
environment for those who pre·
fer to take cautious bets.
There may be further bursts of
speculative fervour, sparked by
expectations of a revival in the
US economy or a qUick end to
the European debt crisis. With­
·out an improvement in econom·
ic fundamentals, such bursts
may be short-lived. According to
the Organisation for Economic
Cooperation and Development
(OECD), global growth in the cur­
rent quarter and the next will be
the slowest since the second quar­
ter of 2009,
But the vulnerability of corpo­
rate revenues and profits to a
more muted global growth envi­
ronment may not become appar­
ent until the next earnings sea­
son kicks off next month. Unlil
then, expectations of aggressive
monetary easing by China may
once again lead to a commodi­
ties euphoria. Meanwhile, tech­
nology shares may benefit if
pent-up demand in the US
boosts holiday season demand
for gadgets.
Besides, if the European Cen­
tral Bank agrees to backstop Ital­
ian and Spanish debt after the
meeting of European leaders on
Friday, traders will be on ster·
oids,
While defensive strategies still
make sense over a somewhat
longer timeframe. they may
underperform the index in a mar­
ket itching to run with good
news.
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