Bank earnings elevate STI to new highs

It was a week filled with stock market frenzy among many investors. The three local banks, DBS Group Holdings (DBS) United Overseas Bank Ltd (UOB), and Overseas-Chinese Banking Corporation Ltd (OCBC), together took the entire Straits Times Index (STI) to record highs. Each of the banking counter rose by 4.9 per cent, 1.9 per cent, and 2 percent respectively on an intraday basis. The STI closed up at 26.7 points higher, or 0.8 per cent to end Wednesday’s (May 03, 2017) trading session at 3,237.81.

Looking at the STI (see diagram below), the index has broken through the 100 per cent Fibonacci Retracement level of 3,176.17. It was in end June 2016 that the STI was at its lowest at 2,703.48, and from trough to peak, the STI has climbed by almost 20 per cent in a space of about a year! For the week itself till Thursday, May 04, 2017, the index climbed by almost 1 per cent, while on the year-to-date, STI has climbed by 12.4 per cent.

We noted that there was a slight pullback for STI on Thursday trading session at about 13 to 14 points lower to 3,225.43 as this article is being written. However, we do not think it could go beyond 3,300 as we think that geopolitical issues like North Korea are not expected to resolve soon; President Trump’s tax reform are likely to face more challenges coming from law makers especially from the rival Democrats; the US Federal Reserve might put up more rate hikes resulting higher cost of capital, and strength of the US Dollar might hamper consumer spending as foreign goods and/or services might appear expensive, among others.


Note: One-year daily price chart of Straits Times Index (May 04, 2017)

Banking stocks in the spotlight

The three local banks, DBS, UOB, and OCBC saw their shares jumped on Tuesday and Wednesday. DBS has surpassed the $20 resistance level to end at $20.83 at the close of Thursday’s (May 05) trading, while OCBC went past $10 for the first time in a long while. UOB has also breached the $23.00 mark to close at $23.49 for the first time since July 2015.

The FTSE ST Financial Index has surpassed various technical resistance levels to close at 900.74 points on Thursday (May 05). The momentum is positive at above the zero bound, while the relative strength index (RSI) is at its peak and veering close to the ‘Overbought’ territory at 75.

Note: One-year daily chart of the FTSE ST Financials Index (May 04, 2017)

Reasons why banking stocks are trading higher

Most of the reasons attributed to bank stocks moving higher is the stable non-performing loan (NPL) ratios; higher interest margins; contributions from fee income (more for DBS) coming from wealth management business, and loan loss provisions appeared to be tapering.

DBS earnings results came in at 3.2 billion in net income, and are up 12.9 per cent on a yearly basis. Non – performing assets (NPA) remained stable at $4.8 billion quarterly, along with coverage ratio improving from 97 per cent to 103 per cent quarterly. The decline in new NPA formation in 1QFY2017 was due to vessels used on standard offshore oil and gas (O&G) operations are realising values within expected range, and supported by recoveries from some Indian NPLs which were sold.

For UOB, its net earnings came in at $807 million, and are up 5.4 per cent yearly, and higher than market expectations of $757 million. Although loan loss provisions rose during 1QFY2017 at $186 million as compared to $131 million in previous quarter, its NPL ratio remains stable at 1.5 per cent and is down from the peak of 1.6 per cent in 3QFY2016.

OCBC is scheduled to report its financial results on Tuesday, May 09.

IT-related stocks topped one of April 2017’s sector performers

Source: SGX (Market Capitalisation Weighted)

The ‘heat’ map shown above illustrates some of the sector performers each month, and data by the Singapore Exchange (SGX) showed that the IT sector has consistently topped the heat map since February 2017. It has also been making many successive inroads, and is still one of the beneficiaries for the recent overall manufacturing recovery seen in Singapore.

The latest manufacturing output numbers have also shown the semiconductor and precision space within the IT sector topped the charts for sector outperformance. However, when examining on FTSE ST Technology Index, there appears to be a downtrend trend shown in the index as seen below:

Note: One-year daily chart of FTSE ST Technology Index (May 05, 2017)

We think that there could be a mispricing of the index, and the reality that is present in the IT industry where companies such as Venture, and Elec & Eltek International Co. were singled out in a summary note on SGX website noting their stock outperformances for the month of April. Both Venture and Elec & Eltek topped the charts with a month-to-date (MTD) return of 6.4 per cent and 19.2 per cent respectively.

Source: One-year daily chart of Elec & Eltek stock (May 05, 2017)
Note: One-year daily price chart of Venture (May 05, 2017)

Looking at the one-year daily stock price charts of both the Elec & Eltek and Venture, we noted that both counters have surpassed their market tops, with the latter consistently breaking through various resistance lines. It is currently trading at above $13 as this article is being written. We cautioned investors who might have intentions to go into such highs, as there could be a risk of a fall out of the stock prices at current levels if there are signs of any bad news flowing through the news channels.

Venture had recently reported a robust quarter with quarterly net profits rising 36 per cent over last year to $48.6 million in its latest 1QFY2017 financial results. Overall, the Group is in net cash position with $399.6 million as compared to $407.1 million as of end December 2016. According to the SGX note, Venture’s management attributed the profit outperformance to the Group’s ability to diversify its operations to medtech, healthcare, and life science-related industries. It has also more than doubled its customer base and product diversity. It is also able to actively achieve productivity gains through advanced manufacturing system capabilities, and strong product/programme execution.

Hong Kong’s Hang Seng is on a general uptrend mode

Hong Kong’s Hang Seng Index (HSI) closed Friday, May 05, 2017 at 24,476.35, and is down by 0.6 per cent for the week. Stocks fell across the board, with resources shares tumbling the most on sharply weaker oil and commodity prices. It did not help that Mainland Chinese markets were also feeling the impacts of property curbs, corruption crackdowns, and other regulatory impediments.

Looking at the one-year daily HSI prices, we noted that there is a general uptrend with not much a significant downturn after the index crossed below the 50-day moving average (MA) line a few weeks ago. We also noted that the moving average convergence divergence (MACD) diagram is trending upwards, and so does the relative strength index (RSI). The RSI currently stands at 62.36, and is nearing the ‘Overbought’ territory of 70.

Going forward, we think the HSI should be able to maintain the 24,600 to 24,750 levels as markets start to pick up. The overall historical market price-earnings (P/E) multiple is about 14 times, and is hovering the average range since the beginning of this year.

Source: Stockfacts.com (One-year daily prices of Hang Seng Index)

European markets anticipating a Macron victory

The Euro-Stoxx 50 index was on the rise upwards following the first-round victory between newbie Emmanuel Macron, and seasoned politician Marine Le Pen last weekend. The close results during the first round election prompted the electoral department to declare that the top two Presidential candidates, Maron and Le Pean will contest in the second round of EU elections come May 07, 2017.

Source: Stockcharts.com (One-year daily price of Euro Stoxx 50 index)

Based on the technical analysis (TA) of the chart above, we noted that the financial markets tend to leap ahead of the event news, especially with many French people are forecasting a Macron victory in the second round run-off on Sunday, May 07, 2017.

Looking at the one-year daily chart of EuroStoxx 50 market index, we noted that the index is now above the 50-day MA, with the RSI at 76 which is technically at its ‘overbought’ levels. Moreover, the MACD is also showing more exuberance with momentum appearing to rise higher.

One of the questions among investors’ minds might be what will be the negative outcome if rival, Le Pen wins on May 07? It does put the index at risk of severe fallout when there appears to be a huge stake being placed by investors on the outcome of the French Presidential Elections. We think that if a negative result was to occur, the EuroStoxx 50 chart could go back down to close to or below the 50-day MA at 3,464.67 before staging a technical bounce up due to cheapness at those levels. However, the EuroStoxx 50 futures (shown below) appear to have discounted the risk as well.

Source: Bloomberg.com (EuroStoxx 50 Futures Index)

US stock markets onward and forward

With a week full of economic data, including a robust set of US job numbers data where 211,000 new payrolls were created, and an unchanged  Federal Reserve monetary policy meeting right smack in the middle of the week. The good news effect pushed all the major US stock indices to major highs by the close of Friday’s trading.

Source: CNBC.com

Moreover, on the fiscal front, Congress was able to push through the elimination of the so-called ‘Obamacare’ or Affordable Care Act through the House of Representatives by a narrow margin on Thursday. The event represented a major victory for the Trump Administration as it is seen as a major legislative effort that the President managed to get his agenda passed into law.

Looking at the benchmark S&P 500 chart, we noted that there appears to be successive periods of upward moves since last November’s Presidential Elections. There were many questions on whether the current bull run could run of steam by 2H2017. Except for a brief two to three weeks of the index falling below the 50-day MA, the S&P 500 index is as strong as ever, climbing up to higher highs.

Moreover, the RSI is hovering at close to the ‘Overbought’ levels at 70, but there appears to be no visible challenge to break the upward cycle as seen in the chart below:

Source: Stockcharts.com (One-year daily price chart of S&P 500 stock index, May 05, 2017)

Overall, we think that if the index could ‘break’ above 2,400 resistance level, the near-term target to look at is 2,450 to 2,600 levels. However, if it fails to move up higher, we think that the index could move back down to close to 2,350 to 2,366 levels. This would mean a break below the 50-day MA. There could be additional data that might be critical to look out for including the next monetary policy meeting in June, and President Trump’s tax reforms.

We noted that based on data from the CME Group which tracks the Federal Funds Rate Futures contracts, the expectations for a rate hike of about 100 to 125 basis points (bps) going into the June 14, 2017 meeting is currently standing at 78.5 per cent as of May 05, 2017. This is higher than a week earlier on April 28, 2017 where the probability of the target rate of a similar magnitude is expected at around 67.5 per cent.

Source: CME Group (FedWatch Tool) (May 05, 2017)

On the earnings front, Facebook (FB) reported revenues of US$8.03 billion in 1QFY2017 as compared to US$7.84 billion expected by Thomson Reuters estimates. Earnings per share came in at $1.04 per diluted share, as compared to estimates of US$0.87 per diluted share. However, the stock fell during after-market hours due to concerns of slowing advertising revenue growth.

Source: CNBC.com, Facebook Investor Relations

However, despite the slowing advertising revenue per user, analysts and investors are still convinced about its continued growth, and efforts in tackling the so-called ‘fake’ news. The stock ended Friday’s trading day at $150.24, or 0.4 per cent down on an intraday basis.

How did our investment model portfolio perform

Note: My investment model portfolio (May 07, 2017)

Since the inception of our investment model portfolio as of the end of November 30, our combined stock picks is currently up by 8.9 per cent (including dividends) as compared to the benchmark Straits Times Index (STI) return of 11.1 per cent during the same period. Our top performers in the portfolio are Dairy Farm and Venture Corporation Limited, each returning 25 per cent to 27 per cent respectively. A sole laggard stock, ISOTeam Limited, which we added at the end of March 2017 underperformed mildly at 2.5 per cent. Overall, we are satisfied about our total investment portfolio, though it still has ways to go in order to beat the STI returns.

We are also keeping a lookout for new oil and gas (O&G) sector stocks to be added in our watchlist including Keppel Corporation, Ezion, Boustead, Mermaid Maritime, Hiap Seng Engineering, PEC Ltd, and Nordic Group. Although Brent oil prices declined massively on Friday to close below US$50 per barrel, we are positive of the sector’s eventual recovery. We are also deliberately picking O&G stocks with positive free cash flows in their financial statements, sound and resilient management who can outline plans on how to manage the slow growth in the industry.

What to watch out for next week

The next week is also expected to be a short work week with the closely watched 1QFY2017 OCBC Bank earnings report, followed by SIA Enginnering and Wilmar on Thursday (May 11). ComfortDelgro and ST Engineering are reporting on Friday (May 12).

In a research note put out by CIMB Securities in late April, analysts are expected its 1QFY2017 fee income to be bolstered by a full quarter of contributions from their recently acquired Barclays private wealth management entity, offset by property disposal gains. The analysts felt that provisions could still remain high for the similar O&G accounts as collateral values continue to be written down, though they expect to be easing a quarterly basis.

On the local economic front, investors would be eyeing on the latest release of the foreign exchange reserves, followed by March 2017 retail sales figures where the forecast calls for a 2.1 per cent increase on a yearly basis. The February 2017 retail sales came in weaker at 2.5 per cent decline.

In the United States, investors would also be tuning into more Federal Reserve officials speaking at several public events. The Producers Price Index (PPI) and Consumers Price Index (CPI) would also be released.

Disclaimer: The views/analyses expressed by the author in this article are based on public information sources, and individual analyses. These views do not necessarily represent the views shared by my principal firm. Investors seeking to trade in the stocks mentioned in this article are advised to seek the opinions from licensed financial advisers.

This article is written by Tay Hock Meng (Peak Hour), a licensed financial advisory consultant. For a free financial health check/discussion, please contact taysg76@gmail.com, or +(65)9721 3987.

 

 

 

 

Subscribe to our mailing list to get monthly market updates and stocks to watch by Peak Hour!

 

About Peak Hour 46 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