Global markets spooked by rising inflation expectations

The Straits Times Index (STI) joined other global markets in yet another major sell down as a choppy February draws to a close, and a brand new month of March begins. As this article is being written on Thursday, March 01, 2018, the STI is trading at just under the psychological 3,500 level.

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), March 01, 2018)

As shown in the daily chart, the STI has dipped below the 50-day moving average (MA), while the 14-day relative strength index (RSI) is just off from the major high of 70.

The local markets are still reeling from last month’s unexpected sell-downs around the world which has caused a lot of concerns among investors who might be concerned about the unsettled markets and how it impacted significantly their portfolio returns.

Singapore stocks continue to outperform major indices

According to a Singapore Exchange (SGX) research note published on March 01, 2018, the overall dividend inclusive return for the first two months of 2018 rose to 3.8 per cent despite a February price fall of 0.4 per cent.

According to SGX, as we compared to STI’s peers, the S$ denominated average returns of Australia, Hong Kong, and Japan averaged 0.8 per cent.

Source: SGX, Bloomberg (February 28, 2018)

The same article noted the lead by Venture which saw its stock price grew exponentially leading to the earnings announcement on February 28, 2018. The stock closed at S$26.92 on March 01, down from the S$27.56 on February 28.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Venture Manufacturing, March 02, 2018)

Venture Manufacturing’s stock has been roaring from the lows of S$10.70 to a recent high of close to S$29.00. This is equivalent to close to 170 per cent trough to peak rise without any critical setbacks.

Venture reported on February 28 that its full year 2017 profit was S$327.8 million, up from 106.3 per cent from 2016 and beating street estimates. Full year 2017 total revenue came in at S$4.0 billion, up 39.3 per cent from 2016 and in line with Street estimates. The company declared a final dividend of 60 Singapore cents, up from 50 Singapore cents in 4QFY2016.

Creative Technologies awaken from long slumber

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of Creative Technologies, March 02, 2018)

Creative Technologies used to be household name for its range of Sound Blaster cards in the noughties. However, the stock came roaring back out of nowhere, and is now priced at S$5.13 per share, up 99 Singapore cents, or 23.9 per cent as of Friday’s close. We think that the rise in the stock prices could be short sellers trying to cover their short bets earlier, and not actual buying based on any changes to the overall fundamentals of the company.

It was widely reported last week that Creative held a media preview to showcase its Super Xi-Fi technology through a chip, and is targeted at audiophiles. The headphones and revamped sound technology has vowed not only the crowd, but investors in general.

In a non-rated research report dated March 01, 2018 by CGS CIMB Securities, analysts noted Creative’s new strategy in rolling out its latest technology is a reflection of its previous painful lessons. In the past, when the company kept its Sound Blaster technology in-house, it invited competition to fill the now. Additionally, Creative found out intellectual properties (IP) has its limitations, therefore it is now sharing its technology and making it free.

Creative does not have a history showing positive profit growth. Analysts from CGS CIMB noted that Creative is currently trading at 2.9 times trailing Price-to-Sales (P/Sales) as compared to the long-term average of 0.8 times, and 2.7 times current Price-to-Book (P/BV) (vs. long-term average of 0.9x). Meanwhile, investors are not concerned by the short-term rush on the stock. We caution readers and investors not to follow the herd mentality as such a short-term spurt in buying will eventually not last for long due the weak fundamental picture of the company.

How did the Singapore markets perform at the start of March

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year weekly chart of The Straits Times Index (STI), March 03, 2018)

The Straits Times Index (STI) closed Friday, March 02 trading session at 3,479.20, down 34.65 points, or 1.5 per cent decline from the previous week. On a year-to-date comparison, the STI rose by 2.2 per cent.

Overall Friday’s trading session saw 2.29 billion shares worth S$1.28 billion changed hands as compared to 2.24 billion shares worth S$1.46 billion on Thursday. The index as shown in the chart above is still on an uptrend mode despite the various setbacks in February. We saw a 1,000 point drop in the Dow Jones Industrial Average (DJIA) index during February, and it is no wonder many local investors are spooked by the significant drop. However, with the STI still measuring about 12 to 13 times historical Price-to-Earnings (P/E) multiple, it trades at a discount as compared to other developed market indices, especially the major US stock indices.

Moreover, looking at the 14-day relative strength index (RSI) below, after the major sell down in early February, the market is now at the mid-point and is not overly bought up yet. This shows that the index could potentially stage another run, though it is likely to be bumpy ahead.

Hong Kong markets head south as global market fell

Despite unveiling a record budget surplus of HK$138 billion this week on February 28 by Hong Kong’s Finance Secretary Paul Chan, along with incentives aimed at advancing innovation and technology, along with massive social spending, the local financial markets are not spared by what is happening offshore.

Hong Kong’s Hang Seng Index closed Friday’s session at 30,583.45, down 460.8 points or over 2 per cent, as concerns of a global trade war might shatter market confidence, along with concerns over the prospects of a faster US monetary tightening. With the Hong Kong Dollar pegged to the US Dollar, those concerns accelerated as the Chinese territory is still trying to cope with high property markets, and an unsatisfied public opinion on the government led by Chief Executive Carrie Lam.

Source: Stockcharts.com (One-year weekly chart of the Hang Seng Index (HSI), March 02, 2018)

Looking at the weekly chart above, the Hang Seng Index (HSI) is still facing some minor obstacles as it seeks to maintain its upward trajectory. The index staged a significant fall lately as it fell from a peak of around 33,000 to 30,583.45 or 7.3 per cent fall. Though the fall is relatively steep, the overall trend is still upward sloping.

For investors who would like to participate in making short-term bets on the market indices, there are many financial instruments including contracts for differences (CFDs), index warrants, index futures, and most recently, daily leverage certificates or DLCs. In short, DLCs are essentially short-term derivatives, and listed on the Singapore Exchange (SGX). It allows investors to make one direction bets using embedded leverage to profit using long or short strategies.

Taking a look at one of the short HSI DLCs which has a seven times leverage factor on it, and expiring in January 2021, it priced at S$3.38, 27 Singapore cents up, or 8.7 per cent rise.

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of the 7 times short DLCs on the HSI expiring on January 14, 2021, March 02, 2018)

Hong Kong’s HSI, like all markets are still facing some minor upheavals. The market has recently turned to slightly on the expensive side in terms of valuation multiples at about 18 times historical P/E. A significant upside from 30,000 would be tested, but if the index were to fall below the support level of 27,000, we think that there could be a significant free fall, but we are withholding that possibility for now.

European markets spooked by soon-to-be implemented steel tariffs

Source: Stockcharts.com (One-year weekly chart of the Stoxx Euro 600 index, March 02, 2018)

The calmness over European financial markets for the past year was literally shattered during the month of February 2018 as the pan-European Stoxx Euro 600 index took a steep dive below the 50-day moving average (MA), and closed at 367.04. The index was at a high of about 400 at the start of the year. The tumble came about as US President Donald Trump said that his country will impose 25 per cent tariff on steel imports, and 10 per cent on aluminium. This could impact European steelmakers like ArcelorMittal which supplies a majority of the world’s demand for steel products ranging from the construction, car manufacturing, technology, and other essential industries.

Other market-related news out of Europe that could cause more tension and unease among investors include the upcoming Italian elections which could see the far-left Five Star Movement (M5S) led by Beppe Grillo taking a substantial stake in the government. The party is seen to be hostile towards European unity, and integration. Investors would be quite concerned over the uncertainty of the future of European Union if a new Italian administration were to choose the direction of the United Kingdom in wanting to exit Europe.

US markets snapped winning streaks

The overall US markets came off a heavy selling market with heightened volatilities, and uneasiness over the Trump administration policies, and the monetary tightening. The S&P 500 index closed Friday’s trading session at 0.5 per cent higher at 2,691.25, after falling more than 1 per cent.

Source: Stockcharts.com (One-year daily chart of S&P 500 index, March 02, 2018)

As one might have noticed on the daily chart of the S&P 500 stock index, the index has now gone below the 50-day MA on two occasions, namely in early February and early March 2018. There was a relief rally on Friday which was mostly led by healthcare sector. Apart from healthcare, the moving average convergence and divergence (MACD) diagram points to a negative end to the past record highs.

The month of February saw markets taking a dive with the Dow Jones Industrial Average (DJIA) staging a close to 1,000 point decline in early February. Many investors took it as the end of the bull-run. However, we think that it is otherwise as some of the forward estimates like consumer sentiment, business confidence, and unemployment have picked up.

Moreover, the earnings growth has helped to fuel markets growth. But, with the latest announcement of steel and aluminium tariffs, it is difficult to gauge how forward estimates laid out by management earlier require any form of revisions.

Summary of closing US market numbers

Source: CNBC.com (March 02, 2018)

New Fed Chairman appears to be sound more hawkish

This week, we saw two major appearances by new US Federal Reserve chairman Jerome Powell making his stance on inflation and overall economy during his two-day testimonies to congressional leaders. The testimonies, also known as Humphrey Hawkins testimonies where the Federal Reserve head will brief Congress on the overall state of the US economy.

In both testimonies, Powell noted that there has been no “decisive” signs of wage inflation, but he has also said that the Fed is expecting more gains in wage inflation on the horizon, but might not significantly impact overall state of the economy. According to CNBC, the January unemployment data showed average hourly earnings accelerated by 2.9 per cent. Powell said that the Fed expects to continue to hike rates gradually as it looks to keep economic growth in check while not thwarting the recovery.

The US treasury yields jumped over the week as there could be concerns of higher inflation to come especially with raw materials costs rising as a result of the steel and aluminium tariffs. The 10-year US Treasury Yield rose this week and closed at 2.86 per cent.

Source: Stockcharts.com (One-year daily chart of the US 10-year Treasury yield rates, March 02, 2018)

US Dollar took a tumble after US raises steel tariffs

The US Dollar is on a weakened trajectory following January’s comments by US Treasury Secretary Steve Mnuchin’s comments regarding the apparent preference by the Trump Administration for a weakened US Dollar, and most recently the imposition of steel and aluminium tariffs which might prolonged any potential major recoveries of the US Dollar as shown in the chart below depicting the US Dollar Index or DXY.

Source: Stockcharts.com (One-year daily chart of the US Dollar Index (DXY), March 02, 2018)

Although the US Federal Reserve sounded more hawkish on rates this year, coupled with rising inflationary expectations, the US Dollar did not follow through with major strengthening. Instead, it turned weaker since the start of 2018. However, that could change as the probabilities of rate hike on March 21, 2018 appeared to have heightened. The data, as suggested by the Federal Funds Futures, appeared to point towards a probability of 83.1 per cent for a rate hike of 150 – 175 basis points (bps).

Source: CME Fed Watch Tool (March 02, 2018)

Whatever interest rate decision expected on March 21 will be closely watched by market participants. The market has certainly saw some clues during Fed chairman Jerome Powell’s testimonies to the Congress, and the various economic releases leading up to Fed Day on March 21 will provide more clues on the overall interest rate directions.

How did our model investment portfolio perform

Note: Model equity portfolio performance as of March 02, 2018. 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 85.19 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on December 31, 2017. This compares to the total return of 19.79 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 48.7 per cent since end June 2017); followed by Ascendas Reit (up 11.1 per cent since November 2016), and SATS Ltd (up 4.0 per cent since December 2016).

The model equity portfolio did experience a shortfall coming from Singtel (down 11.4 per cent since December 2016); followed by Straits Trading Company  (down 7.3 per cent since end June 2017), and Sheng Siong (5.1 per cent since end June 2017).

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 March 2018.

Upcoming Earnings News next week

The Jardine Group of Companies will be take centrestage in earnings news next week.

Source: The Edge Magazine Singapore (Issue #820, March 05, 2018)

Upcoming Economic Reports next week

Singapore

Source: TradingEconomics.com

China

Source: TradingEconomics.com

After a dismal, or not so exciting official Purchasing Mangers’ Index (PMI) out of China this past week, next week’s key data on the private sector PMI will offer more clues on how the small and medium-sized enterprises fare during the month of February as far as production output is concerned. However, investors do need to be cautious on any unexpected swings as Lunar New Year festivities started in mid-February, and factories could have shut down earlier to facilitate workers to head back to their hometowns during the holidays.

Other key Chinese events are the opening of the National People’s Congress where President Xi Jiping’s legacy as the leader will be sealed with possibly another longer term in office. Other key economic data releases include Chinese trade balance figures which have now taken on centrestage following the imposition of US tariffs on steel, aluminium, solar panels, and washing machines.

Chinese inflation figures will also be on the agenda particularly with the Lunar New Year festivities which could cause basic necessities like cost of food items to rise.

United States

Next week will be the release of key US employment figures and will be keenly watched by market participants especially when wage inflation was the focus in the two-day testimonies by US Federal Reserve Chairman, Jerome Powell. The unemployment figures due on Friday, March 09 is expected to show non-farm payrolls during the month of February rose to 200,000, and unemployment rate to remain unchanged at 4.1 per cent.

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About Peak Hour 87 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