With all the geopolitical tensions, including US President’s maiden speech at the United Nations (UN) General Assembly calling for the massive annihilation of North Korea, it did not do good for local markets. The Straits Times Index (STI) is down consecutively for the last three trading sessions this week. As this article is being written, the index is currently trading at the psychological level of 3,220.75.
Looking at the chart of the STI, we noticed that the index is now trending below the 50-day and 100-day moving averages (MA). Using Fibonacci Retracement (FR) analysis, we are seeing the STI is sitting on or at risk of falling below the 78.60 per cent FR line. Moreover, there are lots of bearish signals including the observation that the daily chart showed a downtrend cross-over of the 50-day and 100-day MA, along with the 200-day MA nearing its convergence of both the 50-day and 100-day MA.
We think that if the current new support level of 3,220 does not hold, the next level to lookout for is the 3,125.89 level on the 61.80 percentile level on the Fibonacci Retracement level.
On the moving average convergence and divergence (MACD) chart shown below, we noted that it is now below 0, and could move lower.
ComfortDelgro shares was heavily sold down
ComfortDelgro (CD) Corporation Ltd was recently in the news when press reports early in the month reported that the company was in continuing talks with US ride hailing firm, Uber Technologies Inc on a possible joint partnership. However, three weeks later today, those talks have been overshadowed by news of rival, Grab, trying to entice CD drivers with various incentives to move away out of the company and become private car drivers.
That news, along with recent reports that SBS Transit Limited, its wholly-owned public bus transportation services company, has lost the bid to SMRT Corp. for the operation of Thomson East-Coast Line (TEL) came as a shocking blow to its chances to grab any sort of firm foothold in being one of the largest transport operators in Singapore.
The stock came below $2.00 during Wednesday, September 20 trading session, and was one of the top volume stocks traded. The total volume of shares traded on September 20 was around 11 to 12 million.
When examining the stock price closer, we noticed that the stock is heavily sold down below the 20-day and 50-day MAs. At $1.98, the stock has broken various records and is at a 52-week low. The MACD indicator below the main chart is deeply below the negative territory. We think that at these downbeat levels, it could be quite challenging for the stock to come back up.
CapitaLand Commercial Trust bought Asia Square Tower 2 for S$2.0 billion
On Thursday, September 21, 2017, CapitaLand Commercial Trust (CCT) announced that they have closed a tentative agreement to acquire Asia Square Tower 2 from Blackrock for S$2.09 billion or S$2,689 per square foot (psf). This transaction amount makes it one of the largest office tower sale in history. The stock was halted with cum-rights at S$1.69 to S$1.695 per share when the announcement was made.
Looking at the chart above, we noted there has been a flattening out of the chart at around S$1.69 to S$1.70 per share, with trading volume of around 1.2 billion shares traded. The share price trades slightly below the 50-day MA at around S$1.67 to S$1.68 per share. The shares closed on Friday, September 22 at S$1.67, down 2.5 cents or 1.5 per cent.
Poh Tiong Choon Got Taken Out, Tat Hong in talks, Cogent Holdings was queried
Some listed companies in the logistics, and crane equipment industries have and reportedly discussing about privatisation. Among the listed corporations that have confirmed to be taken out include Poh Tiong Choon whose owners made an offer price of $1.30 per share.
Poh Tion Choon (PTC) is a long established logistics player in the industry. It announced on Tuesday, September 19, 2017 that it will be making an exit offer of S$1.30 per share for existing shareholders, equivalent to S$275.5 million. The offer was made through its chairman and CEO, Poh Choon Ann. An investment vehicle, Respond Logistics, comprising of Mr. Poh and Tower Capital Logistics L.P, an affiliate of Tower Capital Asia was used in the acquisition exercise. According to The Business Times, the Respond Logistics has obtained irrevocable undertakings from owners holding 66.7 per cent shares to accept the offer. The offerors plan to privatise PTC once they have obtained approvals, and be delisted from Singapore Exchange (SGX).
Tat Hong halted its stock on Thursday, September 21 as it disclosed that they are being approached by certain parties on a potential transaction. The management reiterated that they were in discussions with several parties, and the outcome of a transaction is uncertain. Nevertheless, when the stock resumed trading on Friday, September 22, the stock rose 22 per cent.
Tat Hong is also a long established crane equipment lease company since 1991, and was in the news recently saying that it made a substantial loss primarily due to weaker revenues from Singapore, Hong Kong, and Batam. The company cited competitive market conditions, completion of projects and lower activity levels, respectively. This comes even while increased revenues are expected from operations in Australia and China.
Cogent Holdings was also in the news, probably on market talk of a buyout. The stock was also queried by SGX following a sharp rise in the stock price.
The company is in the logistics industry specialising in providing heavy industry transportation services. It also provides integrated container depot services, consisting of storage, handling, washing, and repair of empty containers It also built and operates The Grandstand (former turf club) in Bukit Timah Road. Coincidentally, the stock is in our model portfolio. The stock closed on Friday, September 22 at $0.945, down 2 cents on trading volume of 164,500 shares.
Looking at the stock chart, the stock went as high as close to a buck from an average of $0.75 to $0.80 per share a month ago. The company responded to the query saying that from time to time, they have been approached by various parties, and there is no certainty that any transaction will materialise. Apart from that, they are not aware any other possible explanation of the unusual price movements of the stock.
STI closed out the week on a quiet note
On the weekly chart showing the STI above, we noted that the chart has fallen below the 50-day MA, and could fall further. With the closing level of 3,220.25, we think that the next key support line of 3,144 on the 61.80 percentile level of the Fibonacci Retracement (FR) line could be tested. Incidentally, the 3,144 level is also the level where the 100-day MA just barely touched the line.
We expect next week’s trading session would be dominated by position squaring in preparation for month and quarter-end. It was largely quite a lacklustre trading week 1.4 billion shares in total volume worth S$1.02 billion traded on Friday. This compares to 1.79 billion shares traded on the previous day and was worth S$1.12 billion.
Hang Seng Index continues to trade high despite drop on Friday
The Hang Seng Index (HSI) in Hong Kong closed lower by 229.8 points at 27,880.53 as investors scampered for cover after China’s credit rating was downgraded by one notch to A plus from AA minus. We noted on Barrons.com that China’s Ministry of Finance dismissed the concerns saying that, “The Chinese government has pushed supply-side reforms in recent years, steadying its growth fundamentals while improving the quality of growth.” The ministry added, “It is mind-boggling for S&P to lower China’s sovereign rating in such a situation.”
The implication of the downgrade is expected to hurt Hong Kong’s sovereign credit rating as it is still part of China.
However, it one were to look at the weekly chart above, the trend is still at an upward trajectory with no sign of a correction. Although at 27,880.53 is a less than one per cent decline from the all-time high of 28,248.12, it appears to be a bit too much froth in the market.
There are also lingering geopolitical concerns namely North Korea missile standoff. However, it will still be an ongoing issue that might take months to overcome.
On a price-earnings and other fundamentals, Hong Kong’s HSI is still relatively cheaper if we were to use data from May 2016.
Though it has been a year since the data was published, the chart above did present with us the relatively inexpensive nature of Hong Kong’s HSI as compared to regional and international exchanges.
European markets are starting to see some light at the end of the tunnel
European markets, in general, as measured by the pan-European Stoxx Europe 600 stock index appeared to revert towards a rising trend from its major lows last November. The index closed flat on Friday, up just 0.05 per cent. However, for the week, the index is up by 0.64 per cent.
Most of the European stock gains recently have been driven by optimism over the outcome of the upcoming German elections which Chancellor Angela Merkel is expected to win overwhelmingly over her political rivals. Apart from an expected overwhelming victory, the Chancellor is not resting on her laurels, but is relentless trying to maintain her electorate support among voters,
Also, there is an ongoing ‘Brexit ‘ discussions, which British Prime Minister, Theresa May decided to allow a two-year transition period following the actual ‘Brexit’ event in two years’ time. Most of the investors are welcoming the move citing freedom of movement, goods and services from European markets.
On the mergers and acquisition (M&A) front, a couple of market chatters that appeared to point towards Nestle SA from Switzerland and European combination are expected , though the company came out to deny or it. We learnt from CNBC.com that the 94-year patriarch of L’Oreal has recently passed away, prompting other outside investors to start planning for a takeover.
On the topic of interest rate normalisation, European Central Bank President Mario Draghi has repeatedly hinted that any interest rate normalisation steps is expected to take place next year. The inflation levels, especially the core inflation rate is still below 2 per cent, but unemployment rate is still relatively high at 9.1 per cent in its most recent data in July. However, on a historical trend, it has been coming down as shown below:
With the favourable factors stacking around European economies, potential negative factors include a freak result at the upcoming German polls, sudden fund withdrawals, a messy fallout from the ongoing ‘Brexit’ talks, terrorism, and mass resistance over French economic reforms by Prime Minister Macron, resulting in inertia, and government breakdowns, among others.
Barring any unusual circumstances, we think that there is room for European economies, and stock markets in Europe to rise in the next few months as it tries to climb out of the major lows since 2011 – 2012 as a result of the European debt crisis.
FANG stocks dominate the run-up in US markets
As the heading of this section illustrates most of the following content, the so-called ‘FANG’ stocks including Facebook (FB), Apple (AAPL), Amazon (AMZN), and Google (GOOGL) powered much of the US stock market gains for most of this year. Taking a look at the one-year weekly chart of the S&P 500 Large Cap Index, we noted that the 14-day relative strength index (RSI) at 67 is close to the ‘Overbought’ level of 70. Moreover, the index is on a rising path without any signs of a significant pullback.
A summary of the key US market indices closing prices:
Technology and healthcare stocks dominate much of the trading action on Wall Street on Friday with key FANG stock, Apple being traded downwards on perhaps profit taking as we approached month and quarter-end next Friday, September 29..
The healthcare stocks were also one of the main highlights of the trading day on Friday. Though, it is said to be a defensive industry, it is not cheap by any means given that valuations are rising. The underperformance shown for health care stocks was also underpin after Arizona senator John McCain voted ‘No’ on the Graham-Cassidy bill which would have set up a block-grant system to allot money to US states.
The vote down to the bill sent the key healthcare sector ETF, the Health Care Select Sector SPDR ETF (XLV) down a bit. However, on an one-year trend basis, the index is still trending upwards as shown.
US Fed’s US$4.5 trillion balance sheet starts to wind down in October 2017
Perhaps the most important economic event in the US this past week was the US Federal Reserve announcement that it will start to start its winding down of the US$4.5 trillion balance sheet in October. In her remarks following the US Fed announcement that interest rates are kept unchanged at 1 to 1.25 per cent, and the recent weather events, namely Hurricane Harvey, Irma, and Maria are not likely to materially alter overall US economic fundamentals.
On the winding down process of the US$4.5 trillion balance sheet, the Fed will allow US$10 billion to wind down first, with increasing quarterly increments of US$10 billion until the totals hit US$50 billion.
Based on the targeted probabilities for the December 13, 2017 meeting, the rate is now set at 71.4 per cent as of Friday’s trading close.
The so-called US Fed ‘Dot Plot’ is now projecting two more rate hikes next year in 2018 to 2.0 – 2.5 per cent, and in 2019 with 2.75 per cent being targeted for the Fed Funds rate.
With a week to go before the month and quarter-end, we expect global markets to be quite volatile, as investors, individual and institutional, start to ponder how to manage their stock portfolios in the last quarter of 2017.
We do recognise a lot of investors will be concerned about what lies ahead over the next three months. However, we think that investors need to keep their portfolios as diversified, and rebalance regularly. As long as their long-term investment objectives are intact, and do the necessary portfolio diversification tasks, there should not be any undue concerns.
How did our model investment portfolio perform
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 80.5 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on July 01, 2017. This compares to the total return of 11.1 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 Cogent Holdings Limited (up 35.0 per cent since November 2016); followed by Nordic Group (up 26.3 per cent since June 2017), and Mapletree Logistics Trust (up 18.2 per cent since November 2016).
The model equity portfolio did experienced a shortfall coming from Hai Leck (down 8.7 per cent since June 2017); Sembcorp Industries (down 6.3 per cent since January 2017); and Sheng Siong (shortfall of 6.1 per cent since June 2017).
Given the portfolio is at its month-end, we are not planning to make any changes or do any rebalancing for the portfolio. We shall review the overall portfolio at the end of September 2017.
Upcoming Economic Data Releases
We think that the key economic data release to look out for next week is the August industrial production figures which could give a sense of the overall health and continuation of the overall manufacturing sector.
Also, the inflation rate figures will also be one of the key data as we enter into the month of October when the semi-annual interest rate meeting by Monetary Authority of Singapore (MAS) will be keenly watched for any changes in the direction of the Singapore Dollar. While we do not expect any major decision changes coming from MAS next month, the ongoing strength of the Singapore Dollar against the US Dollar and other regional currencies will likely be one of the key topics to discuss during the two-day meeting next month.
One of the key China economic data next week will be the official and the private sector (Caixin) manufacturing purchasing managers’ index (PMI) figures. Although we do not expect any drastic changes in the manufacturing indices, there could be some disruptions following Typhoon Hato which swept southern China in late August. That might cause some production disruptions, but we don’t expect any drastic impacts to the PMI readings.
For the US, new home sales data, durable goods orders, final 2Q GDP reading, and consumer sentiment data from the University of Michigan will be some of the key economic data to watch for.
Have a good trading week ahead. Thank you Clients.
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