A blip or a correction for STI

This week, global investors are witnessing some of the worst declines of any year with most global stock indices trading downwards. Taking a look at the benchmark MSCI World Index, and reading from its one-year daily chart, the peak-to-trough decline is about 4.3 per cent in the space of about two months.

Source: Stockcharts.com (One-year daily chart of MSCI World Index, February 05, 2018)

Looking at the details of the one-year daily chart of the MSCI World Index, we noted that the 14-day relative strength index (RSI) is now showing a deep correction towards the downside with the reading of 35.36, and is close to the ‘Oversold’ territory of 30.

Similarly, for the Straits Times Index (STI), we are also seeing some pull backs.

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), February 06, 2018)

Taking a look at the one-year daily chart of STI shown above, we noted that the index has fallen below the 200-day moving average (MA), and is now on a verge of what many investors have termed it as a major ‘correction’. I will disagree with the term major ‘correction’ as the peak to trough with the peak being the 3,611.69 reading, is only about 5.7 per cent decline. It is nowhere close to a 10 to 30 per cent peak-to-trough decline like the one we saw on the morning of September 2008 when there was a massive selloff of the index which turned out to be the Global Financial Crisis (GFC).

Although the 14-day RSI is showing ‘Oversold’ conditions, with the second day of trading, the STI managed to crawl back and ended the trading day with a 76.56-point decline. However, if we were to add both Monday (Feb 05), and Tuesday (Feb 06) declines, the magnitude of the decline is 123.44 points. This took the wind off the STI temporarily.

‘Buy the dip’ strategy for some counters

Some of the listed STI component counters, namely Singtel has seen some interest from those scouring for cheap bargain stocks.

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of Singtel, February 06, 2018)

Looking at the one-year daily chart of Singtel, the stock appears very tempting to scoop as the 14-RSI is in the ‘Oversold’ territory. According to SGX Stockfacts, Singtel currently trades at about 9.92 times historical price-earnings (P/E) multiple, and with a dividend yield of 5.03 per cent. The low valuations, along with the reasonable 5 per cent or so dividend yield looks attractive.

However, like other telecommunication (telco) peers including M1, and Starhub, the industry is facing a lot of competition coming from the upcoming entry of the fourth telco player, TPG Telecom, the up and coming mobile virtual network operators (MVNO) players like Circles.Life and Zero Mobile, and competition for new phones.

DBS was also a key pick for ‘Buy the Dip’ strategy

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of DBS Group Holdings stock, February 08, 2018)

A key favourite among the three banks, DBS Group Holdings stock was highly sought after stock in any market environment. With the three days decline in DBS stock price to a low of S$25.36 as shown on the chart, the stock sprung up to power ahead to close Thursday, February 08 trading session at S$26.71. It was also a day of earnings when DBS reported full year 2017 earnings growth of 3 per cent to S$4.37 billion. Most notably, the non-performing loan (NPL) ratio stabilised at 1.7 per cent, and the bank halved its amount of total allowances to S$225 million, noting that the residual weak oil and gas (O&G) support service exposures have been dealt in 3QFY2017.

More importantly, to reward shareholders, the bank proposed a final dividend of 60 Singapore cents for 2017 and a special dividend of 50 Singapore cents as one-time return of capital buffers that have built up and to mark the bank’s 50th anniversary.

How did markets perform at the close of Friday’s trading

The STI closed Friday’s (February 09) session on a downbeat note with the index ending the day at 3,377.24, down 38.66 points, and STI is now at a slight negative 0.75 per cent for the year. This is as worst as it can be following last year’s 18 per cent full year returns.

On the whole, total share volume traded was around 2.54 billion worth S$1.96 billion. This compares to the 2.02 billion shares traded worth S$2.13 billion on Thursday (February 08).

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of The Straits Times Index (STI), February 10, 2018)

Looking at the daily chart of the Straits Times Index (STI), we noted that the stock’s 14-day relative strength index (STI) is deeply ‘Oversold’, and with the undershoot of the index, it could attract some buying activities. However, it is still early to call the end of the overall volatility in the markets.

On the broader market, there has been active trading in both DBS and Singtel shares in the immediate aftermath of their earnings. Though the stocks traded mixed on Thursday (DBS stock up, but Singtel shares traded down). Both counters fell further on Friday, and they could be ‘victims’ of the latest global sell down. This also includes the so-called ‘risk-off’ assets like gold, US Dollar, and commodities which generally do well in this period where market fear sets in.

One asset class which has received some attention is the Volatility Index (VIX). This is perhaps one of those rare occasions since the 2008 global financial crisis that volatility is able to dominate over the major stock indices.

Source: Stockcharts.com (One-year daily chart of the Volatility Index (VIX), February 09, 2017)

Looking at the one-year daily chart of the Volatility Index (VIX), the past week saw it soared to 50 before ending the week on an elevated scale of 29.06.

With complacency that is deeply immersed in the minds of investors, the latest week’s sudden jump in volatility caught many investors off guard, including those who placed their short bets on the inverse index fund known as VelocityShares Daily Inverse VIX Short Term ETN, thinking that volatility is expected to stay low for an extended period.

Source: Stockcharts.com (One-year daily chart of the VelocityShares Daily Inverse VIX Short-Term ETN, February 09, 2018)

As one might notice, the sharp decline from the index reading of about 100 to 5.38 is the consequences of complacency and perhaps those investors who have been overconfident in the past, and are starting to sell their ‘long’ positions with the hope of limiting further losses.

The mechanics of the exchange traded note (ETN) is essentially the inverse of the VIX index. This means if one were to long the ETN, this means that the investors is betting that the VIX index is going to decline for an extended period, and vice versa. However, this week, we had witnessed the near collapse of the XIV as the fund is now closed to new investors.

Panic selling across the board

Asia-Pacific Index funds quotes fell hard

Source: Stockcharts.com (One-year daily chart of the iShares MSCI Asia ex-Japan Minimum Volatility ETF (AXJV))

The volatility and confusion has also caught on among several Asian investors, including those who placed their investments with index funds that attempt to limit the volatility impacts like the iShares MSCI Asia ex-Japan Minimum Volatility ETF (AXJV). There is no let up even though in general, the entire Asia-Pacific economy is doing reasonably well.

According to the World Bank’s forecasts made in October 2017, it expects developing East Asia and the Pacific (EAP) region, including China, to grow by 6.2 per cent this year. However, it did warn that growth is not expected to be a straightforward outcome as there is the potential market volatility that would likely hamper economic growth in the region, and there could also be a “flight to safety” that spurs capital outflows.

European indices were also impacted severely

Source: Stockcharts.com (One-year daily chart of the Stoxx Euro 600 index, February 09, 2018)

The flight to quality has also impacted the pan-European index known as the Stoxx Euro 600 index where the steep decline from a peak of 402.5 to a low of 368.61 has caught many by surprise. While the European economy is generally doing well especially on the unemployment and production output front, investors appeared to care disregard the general good economic performance, and would rather hit the ‘sell’ button.

According to a Reuters.com report, the European Central Bank (ECB) chief Mario Draghi commented that the bank is increasingly confident that inflation will rise on the back of rapid economic growth, but currency market volatility is a potential obstacle. Draghi went on to say that the Euro’s exchange rate and its effects would be closely monitored by ECB.

Source: Stockcharts.com (One-year daily chart of the Euro currency vs. US Dollar (EUR/USD), February 09, 2018)

As one might notice that this past week has brought down the Euro against the US Dollar to close the week at 1.224 to one US Dollar. However, on a long-term trend as shown by the one-year chart, the common currency is expected to outperform the US Dollar as Europe turns more outward, seeking to open its trade doors to foreign direct investments (FDI), and European multinational companies (MNCs) expanding abroad, its exchange rate is expected to continue outperform the US dollar.

US stock indices took the major pounding

The centrestage of the global sell-off this week, United States, has suffered one of its worst week of declines since the global financial crisis in 2008. The performance of the major US stock indices is as follows:

Source: CNBC.com (February 09, 2018)

Taking a look at the one-year chart of the S&P 500 index, the index has already pierced below the 50-day moving average (MA) line, and is now heading towards the 200-day MA at 2, and it could be within hit the bottom of the 200-day MA line within a few days.

Source: Stockcharts.com (One-year daily chart of S&P 500 index, February 09, 2018)

With the S&P 500 ended a new low of 2,619.55, the 14-day RSI is now in the Oversold’ mode below 30. There was also a shift towards safe haven currencies like the Japanese Yen as shown below:

Source: Stockcharts.com (One-year daily chart of the USD/JPY exchange rate, February 09, 2018)

Interest rates and inflation fears set in

Source: Stockcharts.com (One-year daily chart of the US 10-year Treasury Yield Rates)

One of the main sources of fear is uncertainty, and investor uncertainties over the direction of the US interest rates after repeated warnings from government officials, including the latest by departing former US Federal Reserve Chair, Janet Yellen, who was reportedly quoted that the central bank is concerned over the impacts of inflation this year.

The remark has apparently caught on by many investors who are now expecting to increasing the frequency of the rate hikes to four times this year, and is up from three times. However, with no comments or reassurance from the incoming new US Federal Reserve chairperson, Jerome Powell, the financial markets continue to remain in doubts over the direction of the interest rates.

Increase US government spending might exacerbate inflationary expectations

As President Trump makes his signature across the dotted line that authorises the almost US$1.5 trillion in spending increases, investors are also concerned about the potential consequences resulting from the misalignment of policies, namely the US Government’s increased fiscal spending, and the US Federal Reserve’s resolve to gradually reduce its balance sheet.

A much-reduced US Federal Reserve Balance Sheet

Source: TradingEconomics.com

A higher US government debt that seems to be out of control

Source: TradingEconomics.com

How should investors cope with the latest week’s market sell down

To be very frank, as a financial adviser, there is no better day or week to witness such a ‘bloodshed’ taking place in the global financial markets where almost every asset class appear to face massive sell offs. Investors who are reading market headlines or news are advised to take a step back, and not panic in such moments.

One of the first things to ask is the global economy undergoing a crisis of credit squeezes, and are you still maintaining the same lifestyle. If the answer is yes, then are there reasons to be panicky and clean out the wardrobe.

It is true that there has been a deep market correction, but investors should have anticipated that this day or week could come anytime as global financial markets cannot be breaking new records each day or week going forward. There has to be a period of time to catch one’s breath before moving on. So, it would be reasonable to say that the latest market correction is healthy.

As an investor, one should take self-responsibility over their own investment portfolio. This means to regularly rebalance at least once per quarter, and to adopt risk management techniques. One should not use leverage if you are unfamiliar of its mechanics, and to constantly review the financial health of the portfolio. As long as one adopt strict investment discipline, one should not be too worried upon market volatilities, as they are generally market noises that will distract your investment objectives. It is true that to say in words is easy, but the difficult thing is when should you start. In fact, it is not too late to start, and there is no better time to start now!

How did our model investment portfolio perform

Note: Model equity portfolio performance as of February 09, 2018. For illustration purposes only, and information is not verified by third party. Past performance is not necessarily indicative of future performance. Please seek the advice of your qualified licensed financial adviser before any investments are undertaken.

Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio return this week has shown a major outperformance of 85.42 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on December 31, 2017. This compares to the total return of 20.1 per cent for the Straits Times Index (STI) during the same time period.

The top three holdings in total return terms (dividends plus capital gains) include Nordic (up 47.4 per cent since end June 2017); followed by Ascendas Reit (up 9.4 per cent since November 2016), and SATS Ltd (up 8.1 per cent since December 2016).

The model equity portfolio did experience a shortfall coming from Singtel (down 10.6 per cent since December 2016); followed by Sheng Siong  (down 8.1 per cent since end June 2017), and Straits Trading Company (7.8 per cent since end June 2017).

For now, we are not planning to make any changes or do any rebalancing for the portfolio. We shall actively monitor the model portfolio till end of March 2018.

Upcoming Earnings News next week

Source: Phillip Securities Pte Ltd, SGX

The upcoming week will see important STI counters reporting their earnings results incuding CapitaLand, ComfortDelgro, OCBC, UOB, and Starhub.

Upcoming Economic Data Releases

Singapore

Source: TradingEconomics.com

With a shortened Lunar New Year holiday trading week, some key Singapore economic data releases include the latest gross domestic product (GDP) report for 4Q2017, and the monthly URA new home sales data which is scheduled to be released on February 14, 2018.

China

Source: TradingEconomics.com

United States

Some of the key economic data releases in US include inflation rate, retail sales, and the University of Michigan Consumer Sentiment Index. It is perhaps all the more important with inflation rates being taken seriously by investors. The data is expected to be released on February 14, 2018.

Have a safe trading week ahead!

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About Peak Hour 87 Articles
Hock Meng has 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. Hock Meng is a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. Hock Meng is licensed to provide investment advisory services in the area of unit trusts, dividend portfolio construction, securities wrap services, and life insurance planning