A Santa Claus Rally that never came for STI

With two weeks to the end of 2017, and Christmas around the corner, the Straits Times Index (STI) is entering to a low trading volume period as most traders are out of office enjoying the holiday season. Investors might be wondering where is the Santa Claus Rally, and it is a valid reason for many.

However, trading still goes on as readers might notice Monday’s trading action where Rowsley, a conglomerate with various interests in entertainment, hotels, hospitality, and now health care with the formal acquisition of Thomson Medical’s business for S$1.6 billion.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Rowsley stock, December 18, 2017)

The chart shows a small sharp spike on the extreme right-hand side showed the amount of pent-up interest. Indeed, the total trading volume came in at 305.81 million shares as the details of the deal starts to show up. The stock went to a trading halt before lunch break, but resumed trading after the lunch break which saw the pre-announcement price spiked up from 11.1 Singapore cents pre-announcement price to close Monday’s trading session at 13.6 Singapore cents.

The deal also involves the acquisition of a 70.36 per cent stake in Malaysian-listed TMC Life Sciences (TMCLS). Rowsley, which is controlled by tycoon, Peter Lim, will fund the purchase with the issuance of 21.3 billion new shares at S$0.075 per share. Rowsley will also acquire 597 million TMCLS warrants in cash. After the new shares are issued, Lim will own 90.07 per cent of Rowsley, up from 45.36 per cent.

The deal also rewards existing Rowsley shareholders will an offering of two bonus warrants at an exercise price of nine Singapore cents for each existing share. For every bonus warrant exercised, a piggyback warrant can be exercised on a one-for-one basis. Each additional warrant has an exercise price of 12 Singapore cents per share.

The deal was said to be accretive from the viewpoint of Rowsley shareholder as it provides them with an opportunity to gain exposure to the healthcare space and the expansion opportunities in Malaysia, and overseas markets like the South-East Asian region.

Singtel share price drop presents opportunistic buys

Another widely followed STI component counter, Singtel was also featured prominently among the various local market headlines with 11 to 12 Singapore cents drop to close on Tuesday, December 19 at S$3.62 per share. The drop in the share price was a result of the impact of the ex-dividend date where existing shareholders are entitled to the ordinary and special dividends.

Despite the drop in share price, the stock is still rated favourably even though most analysts have a neutral rating due to the onset of more competition posed by potential entrant, TPG Telecom in 201

Singtel shares look ‘Oversold’

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Singtel stock price, Dec 20, 2017)

Looking at the one-year daily chart, we noted that the 21-day relative strength index (RSI) looks ‘Oversold’ as it breaches below the breakpoint of 30 mark. The share price of Singtel closed at S$3.58 on December 20, and is seen as one of the lowest level reached since December 2016 when the stock price was around S$3.60 before rebounding higher in January this year.

Likewise, if history holds, the stock could stage a similar uptrend pattern shown earlier in this year. However, we are only using technical analysis (TA) to forecast, and most investors, including yourself, might be aware that past performance is not indicative of expected future performance. So, I urge you to first understand the fundamentals before plunging into the Singtel stock or any other investments.

How did the STI end the week

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of the Straits Times Index (STI), December 22, 2017)

The Straits Times Index (STI) closed the week on a relatively low trading volume week with not much to howl about. The index closed on Friday at 3,385.71, up 3.18 points. However, for the week, the STI traded down 1.1 per cent. The latest reading brings the overall year-to-date (YTD) performance of the STI to about 17 to 18 per cent.

Going forward, we think that the index might end the year at close to 3,450 to 3,500, though what is more important is 2018 where most analysts are gunning for the index to hit possibly 3,700 to 3,800. However, with much of the year dominated by banks, real estate, and manufacturing industries, including the electronics industry, we are contrarians to the dominant views as these sectors, and instead holding a view that these sectors might be entering into the consolidation phase. We think that the limits of growth will be severely tested due to huge run-up in 2017, and high valuations which might result in some investor caution.

Looking at the weekly chart above, we noted for the past three weeks, the index is trading with negative red candles, but the overall trend is still upward sloping as noted by the three exponential moving averages (MAs) (20-, 50-, and 100-day MAs).

The relative strength index (RSI) is also starting to taper off from the ‘Overbought’ levels of 70, and the momentum index showed flat line trend. This could be a sign that the selling/profit taking is still not done, and could spill over till 2018.

Hong Kong’s Hang Seng seen bottoming out

Source: Stockcharts.com (One-year daily chart of the Hang Seng Index (HSI), December 20, 2017)

Hong Kong’s Hang Seng Index (HSI) closed up 132.97 points to end at 29,367.06 on Thursday, December 21. The rise in the benchmark index came after the Reuters reported that the Chinese government issued statement reaffirming its commitment to deepen structural reforms and curb risks to its financial system while maintaining a steady economic growth in 2018. The statement from the Chinese government came just as when Chinese leaders gathered in Beijing for the annual economic conference. During the annual conference, policy makers will chart its growth for next year and beyond. It is also a conference that is expected to be widely followed by investors seeking for insights on reforms that will sustain China’s economic growth going forward.

The World Bank has also issued a report this week noting that the forecast for China’s economic growth in 2017 is expected to rise from its earlier prediction of 6.7 per cent to 6.8 per cent and is supported by personal consumption, and foreign trade. However, for 2018, and 2019, the forecast remains unchanged at 6.4 per cent and 6.3 per cent respectively. The unchanged forecasts for both years were due to less accommodative monetary policy and the government’s rein in credit and high leverage borrowers.

Looking at the one-year daily chart of the HSI above, we noted that there was a technical rebound after the index hit a new low of close to 28,000. Since then, the index has recovered and is now trading above the 50-day MA line to close at 29,234.09 on December 20, 2017. The drop in the index till its recent recovery barely last a month, and it might signal a record ending year for HSI since it started to trend higher from the lows of almost 25,000 in July 2017.

Moving onto the 14-day RSI, it continues to remain unchanged and hovering around 53 to 54 level, the mid-point between the ‘Oversold’ levels of 30, and ‘Overbought’ levels of 70. This momentum measure, along with the moving average convergence and divergence (MACD) diagram below showed mild to positive runup. It also indicates that the worst seems to have passed. However, there will be some investors who appeared to be unconvinced by the rise given the rising interest rate environment, and possible scepticism that reforms undertaken by China might actually help small-and-medium sized enterprises (SMEs) thrive. Many undoubtedly believe that reforms will still benefit state-owned enterprises (SOEs) the most.

European markets stall on passing of US tax reforms

Source: Stockcharts.com (One-year daily chart of the Stoxx Euro 600 index, December 20, 2017)

The pan-European Stoxx Euro 600 index fell 0.68 per cent to close Wednesday (December 20) trading at 388.37. The price is now trending just slightly below the 50-day moving average (MA) line of 389.41, and it does not seem to suggest any significant drops from those levels given the general uptrend of the index.

However, with the ongoing European Union talks with United Kingdom over ‘Brexit’, along with ongoing issues with Catalonia, Spain, and political disunity in the largest EU member, Germany, investors, and businesses are feeling a bit tense, and are starting to hesitate. This includes committing significant investments in Europe in favour of other countries like those in the Asia-Pacific region, and some emerging economies.

Looking in detail in the chart, we also noticed that the 14-day RSI remains mildly positive at about the mid-level of 50. This might suggest some hope that might still be available, but it will likely to susceptible to external political and economic events like ‘Brexit’ and most recently, the successful passing of the US tax reforms will be closely watched come 2018.

US markets soared on passing of US tax reforms

The debate over US tax reforms has finally ended with the final bill agreed and endorsed by both the House of Representatives, and the Senate after a tumultuous year of political wrangling, debates, and unhappiness among the middle-class Americans who think that the set of tax reforms unfairly benefit the corporations and wealthy individuals like President Trump, and Tennessee senator Bob Corker who owned several real estate developments. As usual, no Democrats voted for the reforms.

One of the main features in the tax reforms package is the lowering of the corporate tax from the top rate of 35 per cent to 21 per cent. This is significant as one of the main ideas out of the tax reduction was to spur capital spending. It was also reported that big US corporations like AT&T has agreed to pay each employees US$1,000 as part of their holiday bonus.

How did US markets react to the news

On the last trading day before Christmas 2017, all the major US stock indices fell, but for the week, the indices rose by 0.3 to 0.5 per cent.

Source: CNBC.com (December 22, 2017)

How is the weekly trend line of S&P 500 look like

Source: Stockcharts.com (December 22, 2017)

Looking at the weekly chart of the S&P 500 stock index, we noted at the reading of 2,683.34 as of December 22, 2017, the index is on an ‘expansionary’ growth with no major pullbacks of say 10 to 20 per cent. This is a record considering that many naysayers are still punting the index to drop through options, futures, or just outright shorting the index through its exchange traded fund (ETF), ‘SPY’.

If we were to also look at the 14-day RSI, the pattern is also similar with the indicator showing massive ‘Overbought’ situation. However, despite the warning signs, we think it could be a case of ‘Fear of Missing Out’ (FOMO) syndrome.

Going forward, with a week left for Year 2017, we think that the S&P 500 index will close at 2,700 and above. We think there is momentum to drive the index upwards given the successful passing of the corporate tax reforms. The uptrend might also continue into January 2018 where most of the corporate earnings results will be released, and it could be a good time to hear what management has to comment about the tax reforms. Investors will also be interested to know how will it spur them to make additional investments at home and abroad.

How did our model investment portfolio perform

Note: Model equity portfolio performance as of December 22, 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 86.6 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 17.6 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 46.1 per cent since end June 2017); followed by Cogent Holdings Limited (up 44.3 per cent since January 2017), and Mapletree Logistics Trust (up 29.1 per cent since November 2016).

The model equity portfolio did experience a shortfall coming from Sheng Siong (down 8.1 per cent since June 2017); followed by Straits Trading Company  (down 6.9 per cent since end June 2017), and Singtel (down 5.0 per cent since December 2016).

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 December 2017.

Economic Reports to look out for in the coming week

 Singapore

Source: Tradingeconomics.com

With the year 2017 about to close off soon, a keenly watched statistic to monitor for local investors are figures for industrial production, and inflation numbers. The former is tracked closely as manufacturing activities in Singapore have been showing consistent, if not bullish growth. For the latter, the inflation numbers are expected to be low, yet firm, and is expected to influence the monetary policy officials when they meet in April 2018 to discuss about policy actions.

China

Source: TradingEconomics.com

China’s economic data for next week is also relatively high, but the Sunday’s data on non-manufacturing purchasing managers’ index (PMI) which could be impacted by the ongoing environmental regulations that discourage the establishment of new smokes stack, highly pollutive industries like coal-fired power plans.

However, China is still a developing country, and relies heavily on coal imports for domestic production. The crackdown could hamper the manufacturing PMI, but is unlikely to hamper China’s overall growth by a lot as they are in the process of building the infrastructure needed to support the various industries.

United States

Next week’s key economic data in the United States will comprise of home sales numbers (S&P/Case-Shiller Home Price, and Pending Home Sales), consumer confidence figures for December, and wholesale inventories, among others.

Have a Merry Christmas everyone. Thank you all.

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About Peak Hour 81 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