A month of turbulence for Straits Times Index

The Straits Times Index (STI) has largely been propped up by local bank stock counters and the technology stocks like Hi-P, Sunningdale, UMS, and Memtech, among others for most of the year, thus revving up to 3,354.71 in late July. However, with the oil and gas (O&G) woes continuing, on top of concerns that the US Federal Reserve might not go for the third and final interest rate hike by end of 2017, the bank stocks are now being focused for much of the flat and declining prices seen lately for the index.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of The Straits Times Index (STI), September 25, 2017)

The technology stocks which largely benefited from strong, and robust local manufacturing data have rallied strongly during the first half of 2017. In fact, the latest economic numbers showed that Singapore’s August 2017 factory output rose by 19.1 per cent, and was led by electronics, and biomedical manufacturing. The latest data also showed that output from the electronics manufacturing rose by 38.7 per cent  compared to last year, as computers and compute peripherals segments grew 55.7 per cent.

In a recent strategy research report published by MayBank Kim Eng, it noted that some of the unrated stocks that investors might want to look at include electronics firms like Valuetronics, AEM Holdings, and UMS Holdings, especially when most of the local economic data is pointing towards a recovery in the manufacturing sector.

Separately, Phillip Securities has also initiated a ‘buy’ call for Micro Mechanics with a target price of $2.00 per share. The report cited strong margins (60 per cent), along with 30 per cent Return on Equity (ROE) consumables business with a 15-year earnings cumulative average growth rate (CAGR) of 20 per cent. The stock price closed on Tuesday, September 26 trading at $1.70 per share, unchanged, with 111,000 shares traded.

A look at the Technology sector through charts

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of FTSE ST Technology Index, September 26, 2017)

The latest upsurge in several technology counters, even till the month of September when all the hype about the release of Samsung Note 8 Galaxy, and new Apple iPhone devices have not boosted up the index by a lot.

Taking a closer look at the charts, one can notice that it is almost flat line at 242, but on the latest sector heat map, the information technology sector rose almost 4 to 4.5 per cent on a month-to-date basis.

Source: SGX (Sector heatmap, September 26, 2017)

A possible explanation for the difference in the two data illustrations shown could be the weightage of electronics stocks that form the information technology sector, or some of the latest additions, namely counters like Venture has provided much of the uplift in the returns for the month.

STI closes high on the final mid-week of September

The Straits Times Index rose 24 points to close the trading day, Wednesday, September 27, 2017 at 3,236.15. It was one of the best showing out of the last few days so far. According to the Singapore Exchange Limited (SGX) website, there are about 1.74 billion shares traded worth around $1.08 billion. This is in contrast to 1.54 billion shares worth $889.9 million traded on the previous day. The ratio of winners/losers is about 237 to 170.

The local market was generally propped by banks like DBS which rose 1.8 per cent to close at S$20.89, followed by OCBC which rose 0.98 per cent to close at S$11.28, and UOB which closed at S$23.84, up 1.4 per cent.

Looking at the one-year daily chart, we noted that there is a slight uptick in the index, but the chart is still hovering around the major moving averages shown in the chart below.

In addition, the moving average convergence and divergence (MACD) chart below is still in the negative territory.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of The Straits Times Index (STI), dated September 27, 2017)

STI closes out on a down note for the September quarter

It was a disappointing finish to the third quarter of 2017 when the Straits Times Index lost about 7 points to end at slightly below 3,220. The major disappointment has been stocks in the transportation and media sector, namely ComfortDelgro and Singapore Press Holdings (SPH) Limited.

ComfortDelgro’s stock has fallen from its peak of S$2.76 at the end of April 2017 to a recent low of S$1.955, before climbing up to end at S$2.08 on Friday with about 26.9 million shares traded. During the month of September, the stock fell below the S$2.00 support level on reports that rival Grab has used various incentives to attract ComfortDelgro’s taxi drivers to switch to private hire car drivers. There was an initial lift to the stock in early September when the company came out to disclose they are engaging in active discussions with rival private car hire services provider and US-based, Uber Technologies Inc. for a possible tie-up. However, those discussions are still ongoing.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of ComfortDelgro, September 29, 2017)

Looking at the chart above, we noted that the stock price of ComfortDelgro has been sliding, but there has been a short upturn lately. This upturn could possibly be the actions of short-sellers covering the stock. Also, two other research reports published recently by UOB Kay Hian, and Maybank Kim Eng which shed some positive light on the stock, including its positive operating cash flows, and oversold conditions.

For example, in the Maybank report, it cited the ComfortDelgro suffered a 12-month price correction of 28 per cent due to the disruption of its taxi business, and the broker thinks that the price correction could have been overdone. With that, Maybank Kim Eng upgraded the stock to ‘Buy’ from ‘Hold’ citing catalyst expected from: 1) its potential tie-up with Under, which could reverse its taxi performance; 2) the opening of Downtown Line 3 in October 2017 which could boost rail ridership; and 3) steady bus earnings and FX normalisation.

On the stock’s stochastic oscillators, the stock price was also trading at below the MACD curve line which showed a slight upturn recently. However, any potential upturn could be short-lived unless a sustainable growth strategy can be worked out for the taxi business.

SPH stock is on a downside, but recovery is seen lately

Source: Phillip POEMS 2.0 Trading Platform (One-year daily price chart of Singapore Press Holdings (SPH) Limited, September 29, 2017)

Looking at the chart above, we noted that the share price is on a down slide for the past year as its print media business suffered from the ongoing declines in readership numbers. The chart has recently shown some bounce up from its 52-week low of S$2.54, with the MACD chart showing a positive turn up lately.

On the stock’s fundamentals, SPH is currently trading at 22 to 23 times historical earnings, with price-to-book (P/B) value of 1.31, according to SGX Stockfacts. Although dividend yield is about 5.1 per cent, revenue and profit growth on a quarterly and yearly basis has been declining. This is not positive sign given that earnings are still not on track for recovery.

Hong Kong’s Hang Seng is still climbing

Source: Stockcharts.com (One-year weekly chart of the Hang Seng Index (HSI), September 30, 2017)

Hong Kong’s Hang Seng Index (HSI) closed out the week with a gain 0.5 per cent to 27,554.30 on Friday. However, according to Reuters, the stock suffered a 1.5 per cent loss, and was said to be first monthly loss in 2017. The entire market is now up by 25 per cent.

With Golden Week festivities currently underway for a week, there could be some uplift from Mainland Chinese stocks, especially in the tourism, leisure, and restaurant stocks come October. October will also be the critical month to look out for, especially with many investors are closely watching any policy announcements coming from the upcoming Communist Party Congress scheduled to begin on October 18. This is a once in every five years meeting where new leaders are appointed, and the government’s key political and economic initiatives are laid out. However, investors would have to wait for exact details which are usually announced much later.

The latest Purchasing Managers’ Index (PMI) released over the past weekend showed great improvements. The details are shown as follows:

Source: TradingEconomics.com

The actual PMI grew by the most at 52.4 level for the month of September 2017. 50 denotes the breakeven of the index where any readings above signal expansion, while any readings below 50 suggests contraction. According to Reuters, the rise marked the 14th straight month of expansion for China’s manufacturing industry and the highest reading since April 2012.

The latest numbers was also welcomed positively, especially when the country’s debt rating was recently downgraded by S&P, citing the government’s slower than expected deleveraging drive, leading to higher economic and financial risks.

Asia-Pacific markets did well during quarter

Source: Barrons.com (September 29, 2017)

We noted on a year-to-date (YTD) performance comparison, the Topix Index in Japan scored the best gains with a rise of 26.6 per cent rise, while Colombo Stock Exchange in Sri Lanka suffered a negative return of 1.5 per cent.

On the whole, there are no many surprises coming from the major Asia-Pacific stock indices. However, it does pay to watch closely how October and the rest of 2017 will fare. We shall be constantly be monitoring.

European markets still rising despite disappointing German elections

Source: Stockcharts.com (One-year weekly chart of the pan-European Euro Stoxx 600 index, September 30, 2017)

We noted that there appears to be a so-called ‘Golden Cross’ moment where the 50-day moving average (MA) (blue line) appears to be on track to cross the 200-day MA on the way upwards. We think that this is a positive sign, and a drastic turnaround after seeing a prolonged downturn which ended at the end of August. Also, with the index standing at 388.16, the MACD chart below is also turning upwards.

The latest positive development of the Euro Stoxx 600 index is also welcomed amidst last weekend’s disappointment victory outcome for Germany’s Angela Merkel and her party, the Christian Democratic Union. The margin of victory has also eroded from 44 per cent in the last general elections to about 31 per cent in the current one.

One of the major setbacks in the election has been the rise of the far-right, pro-Russian, pro-Nazi party which is called Alternative für Deutschland or Afd party. The right-wing party managed to garner more than 13 per cent of the parliament (known as Bundestag) seats. This is quite a significant margin considering the party came out of nowhere and was an underdog during the elections campaigning. The opposition party, the Social Party Democrats led by its leader, Martin Schultz failed to garner any significant victory.

Germany’s DAX stock index barely reacted and is still on an overall uptrend as shown below:

Source: Stockcharts.com (One-year weekly chart of Germany’s DAX index, September 30, 2017)

Overall, we think that European stock markets could be signalling more positive recoveries given its markets has not shown any significant decline from the latest setback at the German elections. There is at least a continuity under Chancellor Angela Merkel, except that she needs to pull a coalition of parties together.

The European-region markets have also generally done well. We note some Eastern European stock indices Hungary’s BUX, and Poland’s WIG stock markets did well to score a 34.8 per cent and 36.5 per cent return on a year-to-date (YTD) basis respectively.

Source: Barron’s.com (September 30, 2017)

US markets fared better as well, though gains could be severely tested in the coming months

Source: Stockcharts.com (One-year weekly change in the S&P 500 stock index, September 29, 2017)

Despite being at ‘Overbought’ ranges, the S&P 500 large cap stock index is still on the upmove with its latest close at 2,519.36, up 4 per cent for the quarter, and also the eighth straight quarter of gains.

Looking at the weekly S&P 500 charts, we note that both the 14-day relative strength index (RSI), and the MACD showed bullish trends. There have been no look backs for the index as the current bull run is close to its tenth year. According to CNBC.com, the information technology (IT) sector was the best performing stock sector during the third quarter, and is up 8.3 per cent on a quarterly basis.

The Russell 2000 small-cap stock index has also demonstrated its best showing especially there was market talk about the successful passing on the tax reforms which could benefit small firms especially with tax bills remaining a huge burden on their operating abilities.

Source: Stockcharts.com (One-year weekly chart of the Russell 2000 small-cap stock index, September 28, 2017)

Looking at the weekly chart above, we note that there is a mini technical breakout to 1,490.86. This is not the first time it experienced a technical breakout. The first one was in November 2016 following President Trump’s election victory. This could be part of the expectations that Trump’s campaign promises on tax reforms could be unleashed once he assumed office in January 2017.

How did the major US stock indices perform

Source: Stockcharts.com (Volatility Index, September 30, 2017)

Volatility has also declined

Source: Stockcharts.com (Volatility Index, September 30, 2017)

We note that volatility measured by the VIX index has fallen from the high of 11.41 during the height of the war rhetoric between North Korean President Kim Jong Un, and US President Trump to the current 9.41.

With the stock markets roaring, we think that heading to the month of October could be challenged by company’s earnings sustainability, especially when Trump’s policies like healthcare reforms, and infrastructure spending initiatives remain question marks.

How did our model portfolio perform

Note: Model equity portfolio performance as of September 29, 2017. 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 80.7 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 39.3 per cent since November 2016); followed by Nordic Group (up 35.5 per cent since June 2017), and Mapletree Logistics Trust (up 22.2 per cent since November 2016).

The model equity portfolio did experienced a shortfall coming from Hai Leck (down 7.8 per cent since June 2017); Sheng Siong (down 7.1 per cent since June 2017); and Sembcorp Industries (shortfall of 6 per cent since January 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 actively monitor the model portfolio till end of December 2017.

Upcoming Economic Data Releases

Singapore

Source: TradingEconomics.com

The new start to the last quarter and October month will kick off with the flash estimates of the latest URA Private Property Price Index, and local manufacturing PMIs. There have been various news and analyst research reports that point to possible recovery in the upcoming 3Q2017 private property price index (PPI).

China

With the golden week holidays, all Mainland stock exchanges will be closed, while Hong Kong market is scheduled to close on Monday, October 02.

United States

There are some key US economic data releases to look out for including the Institute of Supply Management (ISM) manufacturing and service indices, followed by the ADP Employment report.

Finally, the US government’s monthly employment report from the Bureau of Labour and Statistics will provide some picture on how the nation’s employment outlook has fared. Economists have generally forecasted total non-farm payrolls are likely to come in at 156,000 as compared to 100,000 previously, while the unemployment rate is kept unchanged at 1.4 per cent.

In summary, with October around the corner, it will be critical for investors to maintain a close eye of their investment portfolios, always ensuring that they are rebalanced regularly, and minimise some of their portfolio’s exposures to the sectors that appear to be over leveraged, and are subjected to various interest-rate sensitive investments.

Here’s to the best quarter of 2017 to end the year.

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About Peak Hour 55 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