Bank stocks continue their run on the STI

The three local banks, DBS Group Holdings (DBS), Overseas Chinese Banking Corporation Limited (OCBC), and United Overseas Bank Group Limited (UOB) reported generally robust quarter, with low loan provisions, stable non-performing loan (NPL) ratios and impairments, along with high fee income generated from their respective wealth management business. This powered the Straits Times Index (STI) to an all-time high of 3,250.26, before closing on Tuesday, May 09, 2017 at 3,249.97.

Source: One-year daily chart of Straits Times Index (STI) (May 09, 2017)

Looking closely at the latest run-up of the STI, we noted that the index has surpassed the 100 per cent Fibonacci Retracement Line, and has been an uptrend for a couple of months since its low of 2,793.64 in mid-November 2016. We noted that the momentum of the index shown below the main chart is also trending upwards, suggesting that investors are displaying general bullishness of the stock markets. However, despite the uptrend of the index, the 14-day relative strength index (RSI) is still at around 49 to 50 which is considered mid-level of 30 (Oversold) and 70 (Overbought).

Strong correlation between FTSE ST Financials Index and STI

Looking at the overlaps between both FTSE ST Financials Index and the STI, we noted the strong index correlation with the former surpassing the latter by a spread of around 4 to 5 per cent difference. We noted that the three banks alone has a sizeable weightage in the STI, with DBS having around 9 to 10 per cent weightage, followed by OCBC and UOB having around 8 to 9 per cent weightage.

Note: Overlap of FTSE ST Financials Index and STI (May 09, 2017)

How did the bank stocks perform

The three banks, DBS Group closed on May 09 at $20.50 (up $0.20 or 0.99 per cent intraday), followed by OCBC which scored their highest run this week to close on May 09 at $10.46 (up $0.16 or 1.55 per cent intraday), and UOB which closed at $23.55 per share (up $0.11. or 0.5 per cent higher intraday.

OCBC reported its 1QFY2017 earnings on Tuesday, May 09, 2017 with a 14 per cent jump in net profit to S$973 million, The latest results were driven mainly from a 70 per cent rise in wealth management income which includes Great Eastern Holdings Ltd) (GE), and the latest acquisition of  Barclay’s private banking arm. A summary of the three banks’ earnings is as follows:

Source: The Business Times (May 10, 2017)

Most analysts whom The Business Times interviewed were generally upbeat on the latest performances among the three local banks. One of the analysts thought that the mix of factors, including its oil and gas (O&G) exposures may have lessened and turned positive with the latest earnings beat. This might suggest that the worst of the asset quality could be over, along with margin expansion potential from higher rates, prospect of loan recovery. The analyst thinks that the banks are expected to meet their full-year mid-single digit loan growth guidance quite comfortably, if the cyclical recovery in Singapore and the region is sustained.

Hang Seng Index overcomes major resistance to hit new high

Hong Kong’s Hang Seng Index (HSI) looks set to climb higher as it swings to the top to close at 25,125.55 on Thursday, May 13, 2017. The index climbed as high as 25,203.54, and is now 17.3 per cent higher from its major lows at the end of last year. The momentum index below the chart is also heading higher. The index has also surpassed the 100 per cent Fibonacci Retracement level, and has so far not shown any signs of turning back.

Note: One-year daily Hang Seng Index chart (May 11, 2017)

According to a Reuters.com market roundup report, Mainland Chinese investors were thought to be one of the main drivers for the recent uptrends in the HSI. Reuters also reported that on Wednesday, May 10, Chinese investors used up roughly 30 per cent of the daily quota buying Hong Kong stocks under the Shanghai – Hong Kong Stock Connect Scheme.

Incidentally, Bloomberg.com reported that the Mainland Chinese government is planning to prop up the Hong Kong financial markets in preparation for Chinese President Xi Jiping’s visit to the territory on July 01 as part of the celebrations to mark the 20th anniversary of the handover of Hong Kong to China. It was reported that state-backed institutions have been told to set aside funds to ensure stable trading before the event on July 01.

European markets are up on the tear after Macron’s election victory

The European stock markets continued to climb following the successful outcome of France’s Presidential Elections in which candidate, Emmanuel Macron managed to beat his fellow candidate, Marine Le Pen by a wide margin to clinch the second round election victory last Sunday. The benchmark EuroStoxx 50 climbed higher to close at 3,623.55. It is now 20.8 per cent from its major lows at the end of last year, and about 4.1 per cent from the 50-day moving average (MA) line of 3,480.15. As of now, there appears to be no obstacles ahead as the EuroStoxx 50 index climbs.

Source: Stockcharts.com (One-year daily chart of EuroStoxx 50 as of May 12, 2017)

The 14-day relative strength index (RSI) stands at around 65, and is not far away from the ‘Overbought’ region of 70, and the moving average convergence divergence (MACD) diagram below is also showing momentum upwards. We noted that the EuroStoxx 50 has been climbing higher since the start of this year on the expectations of continued monetary easing policies from the European Central Bank (ECB), and the smooth outcome of several major European elections starting with the Netherlands, then France.

However, we are mindful of the risks as there has been a lot of capital pouring into the European markets. The amount of liquidity and other idiosyncratic risks do cause investors to be concerned about the protection against severe volatilities.

On the economic front, inflation has also been picking up, and was last recorded at 1.9 per cent for the month of April. The government debt as a percentage of Gross Domestic Product (GDP) stands at high at 89.2 per cent as of December 2016, and is close to 100 per cent. Moreover, the GDP annual growth rate is about 1.7 per cent and is still quite low in comparison with the US annual GDP growth rate of 2 per cent. These economic numbers, along with the sharp pickup of the European stock markets do give some cause for concern and questions on whether the stock markets have ran a bit faster than what the economic fundamentals have shown.

US stock markets taking some minor hits lately

A week filled with the sacking of FBI Director, James Comey, along with rising rhetoric of a potential rate hike this coming Fed Meeting in June, risks and volatility have somehow returned back. A breakdown of the closing US market numbers on Thursday, May 11, 2017 is shown below:

Source: CNBC.com

It also appears that the S&P 500 index has now consolidated itself at around the 2390 to 2,400 levels as shown below. However, the average price-earnings ratio of 22 to 23 times could pose a potential concern about the continued viability of the sustained uptrends we have seen last November when President Trump got elected into the office.

We are also concerned about the sustainability of the US consumers’ purchasing power, and with Macys (M) reported a larger than expected decline in earnings, it leaves a lot of question marks about the sustainability of the consumer buying behaviours. As this article is written, pre-market US futures are mostly in the red. The country’s business inventories, Consumer Price Index (CPI), retail sales, and consumer sentiment would also be released on Friday, May 12, 2017. If the consumer centric economic figures like CPI, retail sales, and consumer sentiments do show weaker than expected growth, it could pose some questions on how would the US economy be performing and whether the US Federal Reserve would be aggressive in implementing more rate hikes this year.

Source: Stockcharts.com (One-year daily chart, May 11, 2017)

We also noted that with all the market hype and exuberance, the volatility index (VIX) (shown below) has also fallen to its lows and was last recorded at 10.40 as of May 12, 2017. The historical low was 9.90 to about 10. With the VIX being a so-called ‘fear gauge’, and at the current low volatility levels, it may imply that there is an immense sense of market confidence among investors. We think that it might not necessarily be healthy, as this could lead of complacency, and perhaps arrogance among some investors in terms of their investment bets.

Source: Stockcharts.com (One-year daily chart as of May 13, 2017)

Apple is the largest market cap stock

Apple (AAPL) recently came out as one of the major business news headlines this week when it received an analyst from Goldman Sachs upgraded its 12-month price target from US$164 to US$170 per share due to expectations that AAPL will be introducing a superpremium IPhone with a US$1,000 price tag. Based on the closing price of US$153.95, the 12-month price target represents a 10 per cent premium to the closing price. This could also mean that AAPL’s market capitalisation could reach a potential level of US$900 billion from US$800 billion when it was reported widely in early May by various news outlets that they were the first company to hit the that market cap levels.

Note: One-year daily chart of Apple Inc. (May 13, 2017)

Global stocks are still trading at relatively high levels

Note: IShares MSCI World Index ETF (One-year daily chart, May 13, 2017)

In the closing summary before we present our model investment portfolio returns, and important business-related events coming up for next week, we would want to highlight that global stocks, as represented by the IShares MSCI World Index Exchange Traded Fund (ETF) (shown above) is at its historical highs before closing at US$79.83 on May 12, 2017. We have mixed feelings by the overwhelming bullishness among investors, and yet, investors are discounting the possibility of major corrections if they do happen. We think that a healthy stock market requires some form of corrections in order to temper the high expectations among investors. We remain cautious under current market conditions, and we urged clients/investors to start relooking at their portfolios and perhaps decide which stocks are ripe to take profits. We also urge investors to adopt good risk management practices including putting tight stop-loss limits, minimising leveraged trading, and doing thorough due diligence before entering into any form of investment.

How did our model investment portfolio perform

Source: Our model investment portfolio (As of May 12, 2017)

Our model investment portfolio has so far achieved a total return (capital appreciation and dividend) of 9.9 per cent since its inception at the end of November 2016. This compares to the benchmark Straits Times Index (STI) which gained 12.6 per cent during the same period. Our top three holdings include Dairy Farm (gained 24.3 per cent since end of December 2016), followed by Venture Corporation Ltd (gained 27.6 per cent since end of January 2017), and DBS Group Holdings Ltd (gained 17.8 per cent since end of November 2016).

However, our top two laggard stocks continued to be ISOTeam (fell 6.3 per cent since March 31, 2017), and Singtel which shed 1.9 per cent since it was included in the portfolio at the end of last year.

We noted that Singtel has been the hardest hit with the upcoming entry of the fourth teleco player, TPG Telecom next year. The stock has shed by 7.7 per cent since its peak of S$4.02 per share in mid-February 2017. We also noted that Singtel is expected to report their full-year (FY) 2017 earnings this Thursday, May 18, 2017, and it might be interesting to understand their strategies in countering the fourth teleo player, and the existing competition. The current consensus 12-month price target estimate for Singtel is S$4.252, and the stock is generally rated as ‘Outperform’.

We are still keeping a watchlist of Oil and Gas (O&G) listed companies including Keppel Corporation, Ezion, Boustead, Mermaid Maritime, Hiap Seng Engineering, PEC Corp., and Nordic Group. With the Organization for Petroleum Exporting Countries (OPEC) set to meet on May 22, 2017 to decide on the next round of production cuts, we think that the Saudis continue to hold an upper hand going into the meeting. The Saudis might also leave the production cuts unchanged, and other OPEC nations don’t have much choice but to follow through.

What to look out for next week

A slew of local earnings reports will be released next week including Golden Agri-Resources which will be reporting its 1QFY2017 results on May 15, followed by Singapore Airlines will report their FY2017 results on May 18. SATS and Global Logistic Properties will report their full-year earnings on May 19.

On the local economic front, developers will be reporting their new home sales data on May 15 and the trade data for April on May 17. Economists are expecting non-oil exports for April 2017 to climb 12.4 per cent on a yearly basis, but could decline 4.1 per cent on a monthly comparison.

Over in US, housing data in the form permits and housing starts data will be released. The industrial production data for April 2017 will 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.

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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