Happy new year to all of you. What a great way to start a new year for me, having a sleepless night once again and what better way of making use of useless sleep time to post the first blog of the new year. Maybe the cause of my insomnia is the constant thinking of what is in store for us in this new year. 2012 is supposed to be a year full of ominous predictions and many people believe this is going to be one bad year for financial markets. Are we really in for a bad year in 2012? How will it compare to 2011? Lets us first look at how 2011 closed out.
The STI index closed 17% lower for the year, that is close to bear market territory. The index closed at 1,257.60 on Friday, the last trading day of the year, compared with its 2010 finish of 1,257.64. But the performance belied the roller-coaster ride that stocks took in 2011 - one of the most volatile years in the market's history. Stock indexes outside the U.S. fared poorly. The Stoxx Europe 600 index lost 11 percent. The MSCI Asia-Pacific Index slid 17 percent this year, and the MSCI All-Country World Index fell 9.4 percent. Each gauge dropped on a yearly basis for the first time since 2008. Making 2011 a year which many of us would like to forget. Chances are 2012 will not be much better.
When I started thinking about 2012, I cannot help but to think of the movie "2012". Armageddon is a word that came to mind too. For those of you who believe in the Mayan prophecy of the end of the world coming in 2012, good for you, but it is very unlikely. On the other hand, the Mayans may be wrong on the world coming to an end with the world exploding into chaos with the tides rising and the earth collapsing below us, but they may be right that the world as we know it will come to an end. 2012 will be a year of many events.
The US elections are at hand and it promises to be an interesting one. It will not be a clear cut re-election for President Obama even though the Republicans are finding it hard to find a credible candidate. The uncertainty over this coming elections will cause the US markets to be a little turbulent towards the end of the year with the elections drawing to a close. Some market watchers believe we will see some sort of QE3 measure implemented in Q12012 as the US economy starts to show the lag effects of a severe slowdown in Europe but there are others that believe the Fed will not implement any QE measures to maintain its independent stance and not look like it is supporting any political agenda for the benefit of this elections. I tend to believe that some sort of QE will be implemented within the first half of the year. But when that is announced, I believe the market will not react well to it because the market has learned that the effects of QE on equities are temporary. So do not be too happy when you hear the Fed implementing QE3.
We will also see the default of Greece in 2012 because they will need plenty of refinancing which they cannot get. The Eurozone will finally see that Greece is beyond help and no matter how much bailout money will given, it will not lead to Greece coming out of the deep recession it is in.
Downgrades of all the shakier Eurozone countries will come hard and fast. The Eurozone will realise that their efforts are futile and the EFSF and the ESM are just stop gap measures. With the downgrades, the collective credit rating of the EFSF will be just go down the drain. Only when that happens, Germany will have to make the decision to make or break the Eurozone.
The EU will have plenty of refinancing needs within the first half of 2012, the question here is, will there be enough demand for their debt or will borrowing costs be pushed up before all of the debt is refinanced. If we see starkly higher borrowing costs, that will cause the negative feedback loops to strengthen and spark off another round of weakness in the market. With regards to the European economies with the exception of Germany, I really do think a deep recession is around the corner. The European markets are already pricing that in, the only question is whether the Eurozone survives this ordeal.
The Euro closed the year at close to year lows and that to me is a bad sign for the things to come for the Eurozone markets. As long as the Euro continues to be weak, European markets will still be jittery. The USD dollar should continue to look strong for at least Q12012 as investors continue to move out of the Euro. Even though gold has done well in 2011, registering 10% gains for the year but that is not reflective of the current sentiment towards the precious metal. If I were a betting man, I would bet against the yellow metal for 2012 as deflationary worries starts to plague the market as a result of the weak global economy.
China will face a conundrum on whether to loosen and face inflationary pressures? Do you think they will structure another RMB depreciation to help their faltering manufacturing sector? I personally think if the Chinese start to lower their reserve ratios and even go to the extent of lowering interest rates, the RMB will probably weaken against the USD and the one directional trade which the world had so much faith in will backfire. Now the key risk here is a hard landing in China. I do not think that a hard landing is very likely. Especially when the Chinese government manipulates their economic numbers blatantly. In reality, there is a good chance of many many manufacturers going down and a hard landing in this sector is very likely. Whether the Chinese will allow the truth to hit the presses, that is another question altogether. The best barometer of the Chinese economy will be to pay attention to the Australian economy. Australia has been a beneficiary of the Chinese miracle decade of growth and should China go into a hard landing the Australian economy will reflect it. Australia has not experienced a recession in the past 12 years and should it face recessionary pressures, it will be a reliable reflection of the true state of China's economy. So if Australia starts to look shaky, that will mean that the Chinese economy is in a hard landing scenario.
Hopes for emerging markets like BRIC countries to help prop up equity markets are not not realistic as they are all looking at their own set of problems and social tensions are expected to affect political stability in these countries. We will be lucky if these emerging market countries weakness does not accentuate the whole problem.
Corporate earnings will probably stagnate. Companies will start to disappoint in their earnings especially the highly cyclical sectors. Valuations will start to rise as companies start to show weakness and that will probably be the next leg down for the market. Avoid highly cyclical sectors like commodities trading, shipping, technology etc. Concentrate on those that are brick and mortar like tobacco, fast food, alcohol, gambling etc. I know what you are thinking, this guy sure loves vices. I have to admit, this is not exactly socially responsible investing but concentrating on sectors where demand elasticity is low and not affected by economic growth. Just look at Cafe De Coral in HK, Macdonalds, Altria, British American Tobacco, Diageo, Las Vegas Sands etc. These companies have been trading close to their highs in spite of all that is happening in Europe and around the world. The reason is these are high margin businesses which have been around for the longest time and are expected to be around for many more years to come.
One thing that makes me concerned is how unified the consensus is on the weakness of stock markets in 2012. Normally, when most analysts believe in something together, it tends to be the opposite. Remember how the Yuan was expected to be a one way trade against the USD this year? What about the sure bet on the USD depreciating against Asian currencies for the year 2011? How did that pan out? This is the only factor which I cannot reconcile with my outlook for 2012. I am bearish but I am really concerned that the rest of the world feels that way too. When bets is overly weighted to one side, the opposite tends to happen. Just ask Manchester United last night, who would have thought that the bottom club can beat the defending champions on their home turf.
The facts of the current situation paints a bleak picture of 2012 and any rational investor would steer clear of risky bets and lay low for some time. Whether the market behaves rationally will be a different thing altogether. Rationality in the market is a rare commodity and the only thing that we can be sure of is human sentiment determines the direction of the markets and when it comes to human emotions, it is never rational. No matter how the market performs this year, we have to bear in mind that there is often a disconnect between the state of economies and performance of markets. So we have to keep an open mind because consensus on a one directional bet often ends up as being a wrong call. The key to navigating 2012 will be to keep an open mind and not be too overly biased towards any direction. There is no doubt that the year starts off on a shaky footing for global markets, but lets do not get too carried away. We can always expect politicians to do more to appease the markets in the short term. Profiting from these situations can be quite rewarding. Long term measures to solve the debt issues for good will not come and muddling through this crisis will be the best scenario for 2012.
Have a great new year everyone! Remember, performance in markets are not the main determinants of whether we have a great year. It just means that we should be more prudent and play it safe for the year.
Best,
SVI
Saturday, December 31, 2011
Sunday, December 18, 2011
Kulim Berhad a beneficiary of the privatization of QSR. RM$3.98
After two weeks of not posting, the market is pretty much where it was when I left. The much awaited Santa Claus rally has not materialized and much to chagrin of investors, things still look like a complete blur. Over the past two weeks, plenty has happened, we had a very nice little EU summit which made David Cameron public enemy number 1 in Europe. He is starting to look a lot like Margaret Thatcher but I have to say that he really made me look at him in a different light. It takes massive balls to do what he did and he showed the world he had enormous ones. The EU summit's proposal for a new treaty was initially well received however as the week went by the conviction behind is started to look a little shaky to say the least.
Global markets have welcomed the new additions of high profile IPOs like Chow Tai Fook (twice the size of Tiffany's!), Chine New Life Insurance, Zynga and Groupon. All ended underwater and it should be seen as a barometer for the weak sentiment in the markets. Volumes have been extremely thin and it looks like only institutional and proprietary players fooling around in the markets. The next two weeks are going to be key to see how the new year will play out. I have a sneaky feeling that things are going to be really volatile before the new year begins.
Quietly but surely, the Euro has fallen to year lows with the ECB lowering interest rates once again. This is definitely not the end of the Euro's weakness because more easing measures can be expected down the road. More Eurozone countries are going to get downgraded over the next one to two months as Moodys and S&P put the finishing touches of their reviews for those countries. Euro weakness will be a good gauge of how the markets are going to move. Also bear in mind, Gold has lost quite a bit of its luster. In my view, gold is going to go through a tough run because technical charts show that the precious metal is unable to rebound convincing and it has revisited their lows once again. Looks like a lot of unwinding by investors to take profits to cover for losses on other positions.
In this post, I would like to focus more on something that is of great interest to me. The privatization of QSR and KFC which was announced over the past 3 trading days. I believe those who have been following this blog will know that QSR was one of my favourite picks and once again another stock has been taken private amongst my picks. Sigh. The reason why I am sighing is because these are the companies that really have great potential to deliver great returns investors and once they are taken private, investors are not given the opportunity to really benefit from them.
The current offer for QSR from Johor Corp and CVC capital is at an attractive price of $6.80 which values QSR at 17 times p/e. That is not expensive because if we look at the other companies like Jollibee of Philippines, Cafe De Coral and the Little Fat Sheep of Hong Kong, they all trade at more than 20 times p/e. Also these are companies with less brand equity compared to KFC. If I were a shareholder, there is no way in this world I would take this offer but I am pretty sure because of this poor sentiment, the offer will be accepted. Now all we can hope for is for another competing offer to be tabled. This is a possibility but not one that I am too optimistic about.
One thing that still baffles me is how this will affect Kulim. Kulim is a wonderfully managed plantation company that owns more than 50% of QSR. Johor Corp owns more than 50% of Kulim. The question is, now that QSR and KFC will be held under a special investment vehicle in Massive Equity Sdn Bhd, what happens to Kulim's stake? Will Massive Equity be paying cash for the stake or will it be exchanged for other things. I have been looking at Kulim and this is one company that has had a fantastic track record and have extensive businesses outside of their core plantation business. If Johor Corp continues to use Kulim as the holding company for the privatized QSR, Kulim will continue to benefit from the KFC franchise. Which means that this is a good opportunity for investors to switch from their QSR holdings to Kulim.
Currently, there is some speculation that Kulim's stake in QSR will be swapped with Johor Corp for more plantation assets. That is something which I am not too keen on. I would prefer for a cash settlement or a continuation of Kulim as a stakeholder of QSR. Kulim currently trades at 9 times 2011 earnings which is very decent with very strong cashflow. If their QSR stake is bought over in cash, that would mean they would net more than RM1 billion in cash. Which could mean a nice special dividend for shareholders. They do not need the cash and have more than enough to pay off most of their debt. Therefore, a nice dividend of close to 80 cents per share is not out of the question. Throw that in with the normal dividend yield of 4.4%, we are looking at close to 25% yield for the coming year. Of course that is not sustainable but still a very attractive yield that will keep the price stable at least through the next few months.
The key reason for Johor Corp's move to privatize QSR and KFC is because they have a growing debt burden and with this restructuring, they will be able to benefit for KFC's strong cashflow to meet their debt burden. This is one of the key reasons to why I have been very positive on these companies because their predictable and stable cashflows are their key attractions. Remember, in situations like the one we are in today, stable and predictable cashflows are the most important when we are buying companies. Forget growth for the time being as we will be seeing stagnating growth for the next 1 to 2 years.
Well that is all I have to say for this week. Have a great Christmas and will be back with more of my thoughts for next year.
Best,
SVI
Global markets have welcomed the new additions of high profile IPOs like Chow Tai Fook (twice the size of Tiffany's!), Chine New Life Insurance, Zynga and Groupon. All ended underwater and it should be seen as a barometer for the weak sentiment in the markets. Volumes have been extremely thin and it looks like only institutional and proprietary players fooling around in the markets. The next two weeks are going to be key to see how the new year will play out. I have a sneaky feeling that things are going to be really volatile before the new year begins.
Quietly but surely, the Euro has fallen to year lows with the ECB lowering interest rates once again. This is definitely not the end of the Euro's weakness because more easing measures can be expected down the road. More Eurozone countries are going to get downgraded over the next one to two months as Moodys and S&P put the finishing touches of their reviews for those countries. Euro weakness will be a good gauge of how the markets are going to move. Also bear in mind, Gold has lost quite a bit of its luster. In my view, gold is going to go through a tough run because technical charts show that the precious metal is unable to rebound convincing and it has revisited their lows once again. Looks like a lot of unwinding by investors to take profits to cover for losses on other positions.
In this post, I would like to focus more on something that is of great interest to me. The privatization of QSR and KFC which was announced over the past 3 trading days. I believe those who have been following this blog will know that QSR was one of my favourite picks and once again another stock has been taken private amongst my picks. Sigh. The reason why I am sighing is because these are the companies that really have great potential to deliver great returns investors and once they are taken private, investors are not given the opportunity to really benefit from them.
The current offer for QSR from Johor Corp and CVC capital is at an attractive price of $6.80 which values QSR at 17 times p/e. That is not expensive because if we look at the other companies like Jollibee of Philippines, Cafe De Coral and the Little Fat Sheep of Hong Kong, they all trade at more than 20 times p/e. Also these are companies with less brand equity compared to KFC. If I were a shareholder, there is no way in this world I would take this offer but I am pretty sure because of this poor sentiment, the offer will be accepted. Now all we can hope for is for another competing offer to be tabled. This is a possibility but not one that I am too optimistic about.
One thing that still baffles me is how this will affect Kulim. Kulim is a wonderfully managed plantation company that owns more than 50% of QSR. Johor Corp owns more than 50% of Kulim. The question is, now that QSR and KFC will be held under a special investment vehicle in Massive Equity Sdn Bhd, what happens to Kulim's stake? Will Massive Equity be paying cash for the stake or will it be exchanged for other things. I have been looking at Kulim and this is one company that has had a fantastic track record and have extensive businesses outside of their core plantation business. If Johor Corp continues to use Kulim as the holding company for the privatized QSR, Kulim will continue to benefit from the KFC franchise. Which means that this is a good opportunity for investors to switch from their QSR holdings to Kulim.
Currently, there is some speculation that Kulim's stake in QSR will be swapped with Johor Corp for more plantation assets. That is something which I am not too keen on. I would prefer for a cash settlement or a continuation of Kulim as a stakeholder of QSR. Kulim currently trades at 9 times 2011 earnings which is very decent with very strong cashflow. If their QSR stake is bought over in cash, that would mean they would net more than RM1 billion in cash. Which could mean a nice special dividend for shareholders. They do not need the cash and have more than enough to pay off most of their debt. Therefore, a nice dividend of close to 80 cents per share is not out of the question. Throw that in with the normal dividend yield of 4.4%, we are looking at close to 25% yield for the coming year. Of course that is not sustainable but still a very attractive yield that will keep the price stable at least through the next few months.
The key reason for Johor Corp's move to privatize QSR and KFC is because they have a growing debt burden and with this restructuring, they will be able to benefit for KFC's strong cashflow to meet their debt burden. This is one of the key reasons to why I have been very positive on these companies because their predictable and stable cashflows are their key attractions. Remember, in situations like the one we are in today, stable and predictable cashflows are the most important when we are buying companies. Forget growth for the time being as we will be seeing stagnating growth for the next 1 to 2 years.
Well that is all I have to say for this week. Have a great Christmas and will be back with more of my thoughts for next year.
Best,
SVI
Tuesday, December 13, 2011
This slump won’t end until 2031? An interesting article which I read.
Had no time to write anything the past 2 weeks because I was travelling. Read a good article which was pretty interesting. Do take a read. Will be back soon.
Best,
SVI
http://www.marketwatch.com/story/this-slump-wont-end-until-2031-2011-12-14?link=MW_home_latest_news
Best,
SVI
http://www.marketwatch.com/story/this-slump-wont-end-until-2031-2011-12-14?link=MW_home_latest_news
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