Hold on tight! Markets on a roller coaster ride

Another week, another round of trade related rhetoric being thrown all around US President Trump and Chinese government officials, causing markets to gyrate, and unhappiness for many. The new week was the start of a brand-new second quarter, but markets soon turned south as the Trump administration prepared to issue tough enforcement laws on intellectual property (IP) theft against the China, followed by retaliatory measures by the Chinese later in the week.

How did the STI reacted to the tit-for-tat rhetoric

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), April 05 2018)

After a dramatic fall of 7.5 per cent peak-to-trough (peak being 3,611.69 on January 24, 2018, and trough being 3,339.7 on April 04, 2018), the index briefly broke below the 200-day moving average and is now seen hovering around the level of 3,400. The uncertainties have taken a bite or two from the returns of many investors’ portfolios, and it is natural for many to be ‘edgy’ about what to do next.

Investors should not be focusing on trading on the wire

We have continually and will reiterate investors to take a step back and refrain from being too ‘trigger happy’ on the ‘Sell’ or ‘Buy’ key out of impulse without any in depth thoughts. Instead, we encourage investors to look at the big picture, and if necessary take a step back to evaluate their investment objectives. We do not advise investors to be too emotional in their trading but should instead adopt a consistent approach when it comes to constructing a portfolio. It is only through consistency and discipline, one can build up their investment portfolios with confidence.

Investors should always ask themselves why they need to sell or buy now and now a few months ago, or a few months later. Is there a need for one to have this pot of money? If one were to receive the sales proceeds, or to purchase some stocks/financial products, is there a real purpose or you just want to stay low and be too afraid of suffering more losses.

What is the trade dispute all about

In a comprehensive research report done by CGS-CIMB Research onApril 05, 2018, the research analyst provided a detailed timeline on how the trade dispute escalated to a huge deal. Basically, the trade dispute revolves around the Trump administration widening trade deficit gap with trade partner, China. The US Trade Representative Office (USTR) has proposed a 25 per cent tariff on 1,333 types of imports worth US$50 billion. This is equivalent to 2.1 per cent of total US imports. One of the purposes for such measures outlined by the USTR is in retaliation for what it alleges to be the “forced transfer of US technology and intellectual property (IP)’ by China. This is round two by the Trump administration on the unfair trade practices undertaken by many Chinese companies.

However, within hour of the announcement, China took the markets by surprise with retaliatory new trade tariffs of 25 per cent targeting at 106 types of US imports totalling US$50 billion (2.7 per cent of China’s total imports), including soybeans, automobiles, chemicals, automobiles, chemicals and aircraft. Chinese officials indicated that the timing of China’s duties will coincide with the implementation of US tariff measures.

Size of the US trade deficit with its key trade partners

Source: CGS-CIMB Research (April 05, 2018)

How did global markets react to the trade tensions

Source: Stockcharts.com (One-year daily chart of MSCI World Index (April 04 2018)

As noted in the one-year daily chart of the MSCI World Index, there was no let up in the selling with the index crossing below the 200-day moving average (MA) line, and the 14-day relative strength index (RSI) at 35 suggesting that the market is close to being ‘Oversold’.

VIX index remained elevated

Source: Stockcharts.com (One-year daily chart of Volatility Index (VIX), April 04 2018)

The Volatility Index (VIX) has stayed elevated since its plunge from a reading of 50 in early February. Although it is now hovering around 20, we do not expect the index to remain flat, but instead vulnerable to gyrations.

Gold prices remain elevated as Dollar Index plunges

Source: Stockcharts.com (One-year daily chart of price of gold, April 04, 2018)

The price of gold as quoted on the Chicago Mercantile Exchange (CME Group) rose to a high of close to US$1,340/oz as investors rush for safe haven refuge. The so-called ‘mad rush’ is typically seen as irrational, however with a lot of investor uncertainties over President Trump’s next moves on China, investors could think no more, and the immediate safe haven choices are gold, Swiss Franc, and the Japanese Yen currencies.

Dollar Index plunge hard, but has seen some mild recovery lately

Source: Stockcharts.com (One-year daily chart of the US Dollar Index (DXY), April 04, 2018)

The Dollar Index (DXY) is now seen trending in sync with the 200-day MA that is on a downward sloping mode. As shown on the above chart, there has no been any major lift in the DXY, and not even a decision to lift the Federal Funds Rate by another 25 basis points (bps) in March seemed to move the index significantly on the upside. There are concerns by many investors on the potential overvaluation of the US Dollar, and the huge fiscal deficit that is exacerbated with huge spending increases on corporate tax reforms, and infrastructure spending.

How do we make sense of these charts

Good question. Well! We recognised that President Trump typically has a personal trait of driving a ‘hardball’ in negotiations with the parties concerned, forcing them to take action on the  matter, and negotiate on better terms later. This has been replayed many times including the initial tariff actions on steel and aluminium where several nations have struck agreements with the US government in halting large shipments of the metals. Some nations have gotten temporary exemptions as well.

Likewise, we expect the US government to do the same with China through negotiations, give-and-take, and hopefully striking some compromise. The stock market gyrations we have seen lately react in similar manners as in plunge, then correct, and next, move higher.

Investors should however not be too reactionary. It is not the wise move. Instead, do take a step back, evaluate the situation, and make your investment decisions in a rational manner. I know to write and talk is easy, but there is no free lunch. Do something better in your investment making decisions. It helps a lot.

How did the STI ended for the week

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), April 06, 2018)

The Straits Times Index (STI) was largely directionless during the recent trading week and ended Friday’s trading session at 3,442.50, up 36.85. For the week, the index was up by a bit by 0.42 per cent, and year-to-date (YTD) returns came in at 1.16 per cent.

Overall, total trading volume amounted to 2.18 billion shares worth S$1.39 billion changed hands. This compares to Thursday’s (April 05) trading volume of 1.06 billion shares worth S$1.19 billion changed hands.

Taking a look at the one-year daily chart shown above, we noted that the STI has met with a sharp fall to below the 200-day moving average (MA) line of close to 3,350, but later bounced back up to close Friday’s session at 3,442.50. It was largely a roller-coaster week without any meaningful direction to head to. It is unfortunate that a potential trade war or the rhetoric taking place between Washington DC and Beijing. This would later intensify with another round of tariffs on Friday evening as President Trump instructed the United States Trade Representative Office (USTR) to consider US$100 billion in additional tariffs against China.

However, the release of the latest US job figures for March 2018 at 103,000 as compared to the consensus estimates of 193,000 jobs did not cause the market indices to fall further. Most of the job numbers shown in March were impacted by weather-related issues that resulted in one million American jobs being disrupted. However, according to CNBC.com, March is typically a common month filled with natural disasters.

Source: US Bureau of Labour Statistics, CNBC.com

How did the S&P 500 perform for the week

Source: Stockcharts.com (One-year daily chart of S&P 500 index, April 06, 2018)

The market-capitalisation weighted S&P 500 index reacted negatively to the additional US$100 million tariffs against China with the index closing Friday’s session at 2,604.47 or 2.2 per cent decline. For the week, the S&P 500 index fell 1.4 per cent.

Summary of closing major US stock indices

Source: CNBC.com (April 06, 2018)

The constant back and forth by the Trump Administration and China has left investors fearful of what is next. Market observers are expecting cooler heads to prevail over the current trade tensions, but it appeared that each new week since last month brings about uncertainties over what are the next moves by the US President. The latest salvo on China has also brought the focus on White House Economic Adviser and former CNBC talkshow host, Larry Kudlow who continued to reiterate that the tariffs are still subjected to public hearing and the US government continued to be opened for discussions with China on how the trade tensions can be resolved soon.

Despite the various potential retaliatory measures the Chinese government officials have stated including the possible slowdown in the purchase of US Treasuries, administration officials continue to be adamant and continued to stick to their stance towards China’s alleged unfair trade practices that was thought to have caused the loss of American jobs, and businesses.

How will the latest trade spat with China play out

We continue to believe that both US and China will eventually come to a compromise situation despite the latest comments by Treasury Secretary Steve Mnuchin indicating that a trade war could still be a possibility. There are no winners in a trade war, except losers. The Chinese officials appeared to willing to relent and continues to stay open in reducing its trade deficit with US. However, the US government did not appear to provide any indications that they are slowing down in their latest trade actions against China.

The trade tensions have not only impacted global stock markets, but also global trade relations as well. It is not in anyone’s interest to let the trade tensions drag on and if some nations are willing to speak out on this issue, it will certainly help in alleviating the differences. We are hopeful a compromise solution can be found soon.

How did our model investment portfolio perform

Note: Model equity portfolio performance as of April 06, 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 returns this week have shown a major outperformance of 85.3 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 18.5 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 39.5 per cent since end June 2017); followed by Ascendas Reit (up 14.5 per cent since November 2016), and SATS Ltd (up 7.5 per cent since December 2016).

The model equity portfolio did experience a shortfall coming from Singtel (down 9.5 per cent since December 2016); followed by Straits Trading (down 8.6 per cent since end June 2017), and Sheng Siong (3.5 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 June 2018.

Upcoming Earnings News next week

Source: Phillip Securities Pte Ltd, SGX (April 07, 2018)

Major economy reports to look out for next week

Singapore

Source: Tradingeconomics.com

A keenly awaited economic event set to take place is the semi-annual monetary policy meeting by Monetary Authority of Singapore (MAS). Many expect the MAS to change its language regarding the direction of the Singapore Dollar, however with the current trade tensions, there could be a possibility that MAS might withhold its decision till the next meeting in October.

Another report will be the advanced estimates of the first quarter gross domestic product (GDP) growth.

China

Source: Tradingeconomics.com

With trade tensions front and centre, Friday (April 13) economic data release on China’s balance of trade is expected to be examined closely by analysts keen on trying to understand the extent of the current trade tensions with the United States.

United States

Some of the key economic data to be watched closely next week include America’s overal inflation outlook, the latest US Federal Reserve’s March meeting minutes, and Friday’s preliminary report on consumer sentiment by University of Michigan.

Finally, a word of advice before signing off. Plan, and work diligently on your investments, bear in mind overall portfolio risk management, and follow through your investment plan. Best of luck. Till next week, have a good work week.

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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