Watch the Interview with Grantham

 

My thoughts after watching Bloomberg's interview with Grantham.

1. He is very thoughtful, straight-forward and managed to summarize what is the market right now.
2. His quote of "High growth stocks is valued higher and normally is based on DCF model or anticipated dividend in future. However, high growth stocks can be overvalued. And if it's overvalued, it's overvalued anyway."
3. He rightly summarizes that "P/B is low because it's sitting on poor quality asset, Dividend Yield is high because it's waiting for a dividend cuts, P/E is low because of poor future earnings visibility". 
4. He sees that currently lower growth stocks might overperform the high growth stocks not because of high growth stocks is not growing but it's being overvalued at current prices. Lower growth stocks is trading at way cheaper valuations and has the potential to rise in terms of valuation more (in percentage) than overvalued high growth stocks.

I would encourage you to watch the interview as it offers different viewpoints and watch how Jeremy Grantham argues his points. I find it very impressive and downright truthful.

Phillip Futures - 2021 Outlook: Post Covid and Beyond

One of our authors has attended the Phillip Futures Webminar yesterday and they have shared the content via Youtube. Do take note that this is shared by Phillip Futures Sdn Bhd to the public. Ant On The Street  shall not be liable for any reader's actions nor take any credit for the viewpoints shared. 

Views and Projections for 2021 - Equities, Economies etc

As we enter into Year 2021 with lots of hope, various world-class analysts has came up with views and expectations for the Year 2021. What I remember clearly in Q3 and Q4 2020, we were often told that World's GDP will be the greatest at 3+%, which is never seen for the past 10 over years. Malaysian economy was 'expected to grow at 7%!'. Fueled with such optimism, we ended Year 2020 with pretty good returns in the stocks and indexes for almost all major stock markets.

However, as the days continue to pass in 2021, we realized that reality is fundamental will 'rationalize' the stock prices. Those who overshot their fundamental will have a pullback and those undervalued ones will play catch up. The recent political developments, rising COVID19 cases and resumption of Regulated Short Selling does a big impact on Malaysian stocks. 

In this article, I will share my thoughts and views on how 2021 will likely pan out. None of us have a crystal ball hence we are 'guesstimating' and 'forecasting' and after that place 'our bets' in the stocks or financial instruments that we believe will do well.

1. GDP Growth
My personal view is that the world's GDP will not bounce back >3% as per the optimistic economists think. The reason is due to point no. 2 on vaccine. Demand destruction sometimes is harder to recover and it will definitely take time. However, as Year 2020 caused the world's GDP to drop to a level where we were 2 years ago; from the lower base, it's definitely expected that the world's GDP will continue to rise but at a slightly more moderate ~2.8-3% instead of >3% that some economist forecasted. 

The caveat is however if Oil Prices (both Vegetable and Crude) keep increasing, it might cause a higher GDP (as a lot of countries like Saudi, Malaysia, Brunei's GDP as very tied to commodity prices). The more bullish economists of >3% might come true should Crude Oil stayed above USD55bbl and Soy and Palm Oil being the largest vegetable oil stays elevated for a longer period of time. 

2. Vaccine and COVID19
The vaccine roll out will be quicker in more developed countries (it's currently proven that mRNA technology is more effective and it needs colder storage temperature). However, the poorer countries will have difficulties accessing. This will continue to cause more lockdowns, more death and lower productivity as work places will need to shut down, movements of people being restricted to slow the spread of the virus.

I believed that COVID19 vaccines based on mRNA will be more successful than the traditional approach of muted virus and cause less side-effects. The downside is the logistical and storage temperature challenge. It will hence take a longer time and benefits the larger, more advance economies. Due to this, more advanced countries will get to move around earlier (will lead to faster economic recovery) vs poorer and less developed economies. 

3. Political Stability
US Presidential election just ended with Joe Biden set to be next President. There will be some changes to policies but it seems at the moment that US "fight against China" will continue. It is expected that any maneuvers be more predictable and not as chaotic as before (i.e. officials being sacked via Tweets). 

Malaysian Politics will continue to see a lot of changes, volatility and a big potential of GE15. Sarawak election might coincide with GE15 but all depends on the COVID19 cases and vaccination programme. Until a stable political alliances is found between PKR, DAP, PAS, UMNO, Bersatu, GPS etc and proven that the coalition can work, it'll continue to be chaotic and unstable. The results coming from GE15 will lay a foundation on whether the cooperation might continue or not.

Worldwide wise, it'll continue to see some volatility and changes in political arena. However, with the big brother US and China now seems to have a more stable political footing, it can be seen that policies making and agreements can be expedited or discussed extensively, which is good for world economy.  

4. Defaults/Shocks
There is an inherent risks of continued defaults especially in the SME arena. Also, in industries like Travel, Tourism, Restaurants and Hotels, Airlines which are hit the worst. The trend might continue and the increased in debt (due to debt payment deferment) will continue to 'haunt' the industry as they will have more debts to service going forward. 

Remember that any form of loan moratorium is just to defer your payments but the outstanding amount will increase. This although will bring hard hit companies through the 'winter' but they will spend a bigger amount of profit paying back debt later on.

5. Tourism
Tourism sectors including airlines and restaurants will continue to suffer at least for 1H 2021. Local tourism will resume first, estimated to be from May-June 2021 for more advance countries and year-end for poorer countries due to the slowness in the reach of the vaccines. 

International Travel is expected to restart in Q4 2021 but destination will be the more developed countries where the majority of the population has gone through vaccination. Countries who still have not vaccinate at least 80% of their population might face difficulties in attracting quality tourists and will have to rely on neighbouring countries or domestic tourists.

Stocks: Are Plantation stocks still worth looking at (with the current CPO prices hitting new highs)?

We have seen that there are many people calling for "buys" on the plantation sector due to the rising CPO prices. If you wonder where to find out on the latest CPO prices, they are mainly transacted via futures. FCPO is Malaysia's main platform to trade CPO and take delivery in future months. Hence, FCPO remains a good gauge on what will be the price for the future prices of CPO.

Below is the snippets of FCPO prices as of 28/12/2020

FCPO prices taken on 28 December 2020

So, are Plantation stocks a buy now? Let's look at the facts below before we answer the question:

1. Plantation stocks are normally trading below NTA (P/NTA of 0.3 to 0.8 times - depending on plantation size, location of landbank, productivity/age-profile of trees, lands' proximity to development and production cost per tonne). 

2. Plantation stocks are very cyclical and it normally has an uptrend during the CPO commodity price bull runs (due to a swell in earnings and potential dividend). 

3. Some of the Plantation companies like Genting Plantation, IOICorp has emerged into a developer as well due to their land being very close to "development areas". Places like Kulai and Puchong are being developed by Genting Property and IOI Properties as they were ex-estates. 

4. Production costs of FFB (Fresh Fruits Bunches) are estimated to be ~RM1,800. Due to logistical issue, cost structure of some more rural located plantation companies (especially at Sabah, Sarawak) has a slightly higher cost structure. Labour costs in peninsula Malaysia is slightly higher but at East Malaysia logistical issues often balloon the costs and also caused some FFB to degrade (hence commanding lower prices or even being dumped). 

5. Some of the bigger companies like FGV, TSH has landbanks and operations outside Malaysia (mostly all in Indonesia). Sime Darby Plantation has acquired NBPOL in 2015 hence they now operate and own palm oil plantation in Papua New Guinea. 

6. The fruits from the trees can be harvested, sent to the oil palm mill to produce Palm Oil. That is the priced asset. A young tree (normally defined as <7 years old) will yield very little FFB. Trees with age profile of 7 to 12 years old are normally deemed as young matured trees and I have read and seen some producing up to 18 tonnes/ha. The prime is said to be from 10 years of age until 23 years old where they can produce 18 to 25 tonnes of FFB/ha. This is again depending on the tree species. However, the machineries, mills and land cannot be monetize instantly. Land will take a longer time to be monetized as they need to be rezoned for other developments, divided into smaller plots and sold. The process usually take years to complete.

7. 1 tonne of FFB now sells for RM3,800 vs average production costs of RM1,800. The profit is tremendous as compared 9 months ago the average price is <RM2,500/tonne. 

8. Some of the Plantation companies are very illiquid and thinly traded. 

9. Tree stress will normally cause lower production after several months (6-9 months) of good production. Of course, dry weather is another root cause (while wet weather caused floods and harvesting issues leading to eventual reduction in production). This is one good reason on why CPO production and prices is always cyclical.

10. Windfall tax will be activated by Malaysian government (>RM3,000/tonne) and this is also a natural curb in profit. It's reported that in Jan 2021 a 8% Windfall tax will be collected.

Let's see how the companies in Bursa are being valued right now?

A truncated list of Bursa listed Plantation companies (filtered based on Market Cap)

Based on the filtered list above, you can see that the biggest players include Sime Darby Plantation, IOI Corporation, KLK, Genting Plantation is trading at P/B value of >1. One can always argued that the land have not been revalued over the years and if revalued now the book value can be higher, hence reducing the P/B value. 

In terms of P/E ratios, it might not be meaningful as months ago CPO prices were low and naturally profit is bad. 

If you observe well, most of the companies have gone up from their 52 weeks low and now trading almost at their 52 weeks high. 

Concerns

1. The share prices of most Plantation companies have risen and almost at their 52 weeks high. There is always a concern that despite the very likelihood in the hike in profits for the listed Plantation companies, it has already factored in all the good news. When the results come out, not all companies will report terrific profits (due to labour shortage factors, some companies' trees are either too young or old, logistical issues due to bad weather in Q4). Those who reports good profits might not experienced a sharp share price increased. 

2. Some plantation companies like JTiasa etc has pretty weak balance sheet. Some of the East Malaysian companies also involved in timber business and that segment of business wasn't doing well. 

3. Normalization of CPO prices. We can say that prices are market driven, so when prices rises it is due to sustained demand of CPO, the hike in price will dampen demand as well. Lower demand and potentially increase in production in coming months (especially after lots of rain from Sept onwards) could drive prices down.

4. Strengthening of Ringgit against US Dollar might put some pressure on CPO prices. The next edible oil which competes neck-to-neck with Palm Oil is Soybean and it's grown mainly in the West. Buyers buy CPO in USD and hence when RM appreciate, we will have to lower the price to compete with Indonesia.

Outlook? Is it still a buy now?

It is a difficult question to answer but our views are as below.

1. It is still possible to earn 10 - 30% profit by buying into Plantation companies. However, hoping for the stocks to double or triple up might be irrational (might happen in irrational market anyway). 

2. CPO Prices are set to come down after March 2021. The highest should be Jan 2021 which is around RM3,750/tonne.

3. Stocks are trading with a 6 months lookahead. Hence, it might be forecasting a reduction in profit going forward already. A good quarterly result might not help much in stock prices. It's the "Greater Fool's theory" in play right now as we also need to ask ourselves who is willing to buy at a higher prices.

4. If you use the "margin of error" methodology, you might not be comfortable. Margin of error might be lower now due to the price hike. 

5. If you want to take a bet, cherry-picking is the right way forward. Do make sure you read up the production of the Plantation companies (from Bursa's website as all plantation companies are required to post their monthly production figures).

Stocks: Why Index keep going up? And why it's not easy to beat it.

Warren Buffett has once mentioned: "In my view, for most people, the best thing to do is to own the S&P 500 index fund". He further believes that it's very difficult for most people to 'beat the index'. All of us were kind of puzzled and myself included has been asking the question on why is this?

An overview of historical KLCI and S&P500 chart:

After some hard thought process and discussions, we believed that the below are the reasons on why Indexes typically is on a long term uptrend (Japan excluded as they are the only one country in the world which faces long term deflation and hence financial products prices drop):

1. Indexes are being reviewed from time-to-time. Those who did not meet the criteria (i.e. free float, market capitalization) will be eliminated. However, when business is better they might be re-admitted again. Wikipedia (https://en.wikipedia.org/wiki/List_of_S%26P_500_companies) maintains a very good list on the current S&P500 component companies and the updates to it. The review process is already like a 'quality' screening of companies where ailing businesses will be removed and new and thriving businesses will be added.

You can see that only the fittest will "survive" being maintained in the index. This means that it's an auto elimination of businesses that were not doing well, either in the sunset industries or they have lost their competitive edge etc. Also, we know that size matters when it comes to businesses. Although the biggest companies may have higher cost structures and unable to grow as fast as a younger and smaller company, but the mid-to-bigger sized companies (that is likely to be included in S&P500) will have a higher chance of success as they already have competitive edge against their competitors (hence they can grow into the mid-to-bigger size) and have sufficient financial capabilities to do R&D (this is key to survival of a company). 

Notably, due to Technology sector's growth, more and more Technology companies are included into the index while old-school brick and mortar businesses and being kicked out.

2. Companies which are part of indexes are typically 'valued higher', including having higher P/E ratios, P/NTA etc. As index funds these days are gaining momentum, index fund managers have to buy stocks in order for the fund to 'mimic' the index. Hence, there is always demand for index-linked stocks.

3. Index-link stocks and companies does give business partners, investors more confident. Better investors' confidence will lead to point 2 as above while better business partners' confidence will mean that the ability to take loans at a cheaper costs, having slightly longer credit period and better consumers' confidence would also means better sales. 

Tesla, during the early days suffer in brand image and now that it has been included in S&P500 would bring better consumer confidence. The perception will be that it has to be a stable company to be included in S&P500. Similarly, stock prices will take a heavy beating should the stock be removed from the index. Don't be surprised that business might suffer as well post removal from index as customers' perception might be negative towards the company. After all, business is all about 'marketing and image' isn't it?

4. Other than Point 1, most importantly, these big and stable companies keep growing sales and profits, hence their share price keep rising to reflect that. Think of US companies (Google, Amazon, Microsoft, Intel, AMD, Qualcomm, Apple) and Malaysian companies (PB Bank, Maybank, Tenaga, TM, Hong Leong Bank), these companies still manage to grow decently despite their size. 20 years ago we are all talking about Intel Pentium III processor based computers with CRT monitors but today we talked about iPad, Laptops etc. However, companies like Microsoft keep evolving and they have Ms Surface, yearly subscription service of their Office products (Office 365) and offer cloud storage which wasn't in existence 20 years ago. 

For those "old-school" technology companies, they reinvent themselves and came out stronger. For example, Google, Microsoft and Apple reported that "Cloud Computing" is the segment that grows 'double-digit' consistently for the past 3 years. While Google is a newbie but Microsoft and Apple were in computer business since 1970s (the era of Wintel vs Apple). If you look at Microsoft (1986 @ USD21) and Apple (1980 @USD29/share) share price, you will definitely slam the table hard for not putting your money in. After many splits, the USD21 you paid for Microsoft is USD0.10 and at current share price of USD222, it means that a USD1,000 would turn into a hefty USD 2.2mil!

5. The world economy is growing, with exception of Japan where they experienced 20 years of deflation. This will link to the points above that coupled with inflation, profits of companies will keep increasing.

Conclusion
Index investing has not only becoming a trend but for the lazy and less-skilled investor, it become a natural choice. Beating the index is one of the harder things to do as index provides sufficient diversification, 'quality' selection done from time-to-time (i.e. every 3-6 monthly). 

Stocks: How is Hang Seng Index Calculated?

We always know that Index is a weighted approach to represent some movements in the financial markets. Yet, as always we will say: HSI went up 1% today, which is not an ordinary day for the markets. However, do we really know how indexes is calculated? Here we are going to explore how HSI is calculated and the component stocks that it's made up of (accurate as of 18th Dec 2020).

Some facts as below:
1. The Hang Seng Index (“HSI”) serves as a market benchmark that reflects the overall performance of the Hong Kong stock market. 
2. The HSI is a free float-adjusted market capitalization weighted index with a cap on individual constituent weightings.
3. The number of constituents is fixed at 50.
4. The formula of the HSI is set out below.

5. The HSI is a price index without adjustments for cash dividends or warrant bonuses.
6. As for the weightage, the below snapshot of their November fact sheet shows the sensitivity of it.

HSI Constituent Stocks (accurate as of 18th December 2020)

7. Resources:
a. For the latest list of Hang Seng Index Constituents, we can always refer to: http://www.aastocks.com/en/stocks/market/index/hk-index-con.aspx
b. Hang Seng Indexes website provide a monthly factsheet updates etc. Head on to https://www.hsi.com.hk/eng/indexes/all-indexes/hsi

Observation:
From the above table, you can see that collectively, Tencent (10%), Alibaba (4.4%), AIA (10.1%), Ping Ann (5.6%), Xiaomi (4.3%), HSBC (8.9%) and HKEX (4.8%) forms 48% of HSI. For those who trades HSI futures, you may put more focus on the 7 companies as mentioned in order to know where the index will end or move. By harnessing target prices (views from fund houses like JP Morgan, Morgan Stanley etc), there is a good bet that we know in 3-6 months' time where the index will be.