On your mark, get set, STI zooms higher

The Straits Times Index (STI) is set to roar higher, and we are only in the second week of November 2017. The STI, as of mid-week, has already crossed the 3,400 level mark and there appears to be no look-back as shown in the following daily chart of the index.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), November 08, 2017)

Looking at the daily chart of the Straits Times Index (STI), we noted that the index is trading above the various moving averages shown. Moreover, when we inserted in the Fibonacci Retracement (FR) lines, we noticed that the index has broken several technical resistance levels since the end of September 2017.

Also, we noticed from the 14-day relative strength index (RSI), and the momentum index below, the index is moving higher. The RSI is now at 76 and is now in severely ‘Overbought’ territory. Nevertheless, we think that such overbought levels are likely to remain for quite a while, and could even elevate higher.

Crude oil prices went past US$60

Source: Stockcharts.com (One-year weekly change in Brent Crude Oil prices, Nov 10, 2017)

Looking at the weekly chart of the Brent Crude Oil prices above, we noticed that the prices went above the 200-day moving average (MA) of US$63 per barrel, and ended the day on November 10 at US$63.85 per barrel.

We also noticed that the prices have moved up based on both the moving average convergence divergence (MACD) diagram below, the 14-day relative strength index (RSI) diagram above, The oil prices is also seen as being in the ‘Overbought’ region above 70. On the MACD chart below, we also noticed an uptrend of the chart

How has rise in oil prices benefit listed firms

We take a look at oil majors like Sembcorp Marine, Keppel Corporation, and China Aviation Oil (CAO) to find out more on the impact of oil prices on the stocks.

Sembcorp Marine

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Sembcorp Marine, November 11, 2017)

Taking a look at the one-year chart above, we noted that since the golden cross formation (50-day moving average crossing 100-day moving average lines on the way up) happened in early October, there has been a technical breakout, where at its peak, Sembcorp Marine’s price rose to about $2.00 per share in early November before ending Friday’s trading at $1.97. A total of 7.5 million shares changed hands on Friday.

We also noticed that despite the rise in the stock price, the relative strength index (RSI) did not flag out the stock as being ‘Overbought’. With this, we think that there is still room for potential upside for the stock, though the company is still dependent on the condition of oil prices.

How did Sembcorp Marine fare during the latest earnings announcement

Sembcorp Marine reported its 3QFY2017 results recently with revenues falling by 64.3 per cent to S$316.9 million, while net profit improved from a net loss of S21 million in 3QFY2016 to a net profit of S$2.7 million. This brings the 9 months 2017 net profit to S$47.9 million. The company noted that previous recognised revenue for the two Perisai rigs were revered in 3QFY2017, while revenue reversal for the three Oro Negro rigs will take place in 4QFY2017.

The stock does not come cheap in terms of valuation. According to SGX Stockfacts, the stock trades at close to 50 times historical earnings, and dividend yield of 1.02 per cent. The cash flow from operations is still negative on a year-to-date (YTD) basis, and net income margin is in the teens.

On its order book pipeline, the company recently signed on a Letter of Intent (LOI) with Statoil for its Johan Castberg FPSO project worth US$490 million (S$660 million). This agreement, if incepted, will see Sembcorp Marine engaging in the turnkey Engineering, Procurement, and Construction of the newbuild Floating Platform Support Offloading (FPSO) Hull and Living Quarters.

Keppel Corporation Ltd

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Keppel Corporation Ltd, November 10, 2017)

Likewise, Keppel Corporation, being one of the major beneficiaries of the crude oil price recovery, has also seen its stock moved higher. Similar to Sembcorp Marine, the golden cross formation was seen around early October, and since then, the stock rose higher, reaching the peak of close to S$7.70 per share, before ending Friday’s trading at S$7.53, down 7 cents. A total of 3.5 million shares changed hands.

Looking at Keppel Corporation’s business, the entity is more diversified in its holdings ranging from real estate, logistics, and telecommunications. In its latest 3QFY2017 financials, the company booked a net profit of S$291 million, and a 9-month net profit of S$711 million due to better than expected profits in investment and infrastructure.

Keppel’s offshore and marine (O&M) division achieved breakeven of S$0.2 million as compared to a loss of S$17 million in the previous quarter. Management is also currently reviewing the redevelopment of Keppel plot 4, 6 and Keppel Towers for potential property development opportunities.

According to Reuters, Keppel Corporation currently trades at a historical 18 times price-earnings (P/E) ratio with cash flows from operations for the last nine months of 2017 reaching S$330.02 million.

China Aviation Oil

In a research note by UOB Kay Hian, the analyst thinks that the contract award is likely to take place next year, as the LOI is still an unconfirmed contract. Moreover, UOB Kay Hian is forecasting a visible contract pipeline for next year to rise to S$1.8 – S$2.4 billion, and could even surpass its internal estimate of S$2.0 billion.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of China Aviation Oil, November 10, 2017)

The one-year chart of China Aviation Oil (CAO) showed quite a reversal of fortunes for the counter. The stock climbed up to as high as S$1.787 per share on air traffic demand among the Chinese travellers, this demand for jet fuel. However, since its latest earnings report for 3QFY2017 which showed sharper declines of 58 per cent in gross profits on a yearly basis to US$4.3 million, the stock took on a major turn downwards.

According to a RHB Research report, the company reported lower gross profits as a result of lower gains from trading and optimisation activities as oil market reclined to backwardation (Spot prices higher than futures prices) during the quarter.  Moreover, the increase in operational costs incurred, due to various supply disruptions caused by weather  and refineries outages worsened the situation and dragged gross profits lower.

Despite the negatives, CAO’s jet fuel business volumes continues to grow and it is often used as a proxy for Chinese aviation market.  Volumes rose 7 per cent yearly in 3QFY2017, but was offset by decline in volume for other related middle distillate products which declined 26 per cent on a yearly basis.

CAO closed Friday’s session at $1.60, up 0.5 cents. A total of 2.2 million shares changed hands.

How did the STI perform end of the week

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of the Straits Times Index (STI), November 10, 2017)

The Straits Times Index (STI) closed Friday session (November 10, 2017) at 3,420.10. This was down by 3.8 points or 0.1 percent from the previous day’s close. Overall, for the week, the index is 1 per cent higher, while on a year-to-date (YTD) basis, the index is 19 per cent higher.

We attempt to do a Fibonacci Retracement (FR) analysis on the index and noticed that from the trough to current peak, the percentage gain is about 35.3 per cent from the lows in mid-February 2016.

Moreover, the index when plotted on a weekly basis, is above the 78.6 percent FR level, and heading upwards. We think that the next level to breach the resistance level is expected to be at around 3,500.

Meanwhile, the 14-day RSI has touched the 70 level mark which denotes the ‘Overbought’ region. The overall momentum is still rising, and we think that there is still enough support to push the index higher.

Investors who are looking at the uptrends are advised not to be too fearful of losing the opportunities. The Singapore market, like the rest of exchanges, are rising in the face of higher global equity flows, normalisation of interest rates, increased trade and consumer spending growth. Earnings growth is also part of the overall equation, and that has driven stock market values higher. These trends should be seen as healthy.

However, we do not discount the possibility of a huge market correction, and when it comes, we think that investors who do not take on high levels of financial leverage should be able to minimise their losses. We do advocate investors to go for time-tested strategies like dollar cost averaging which minimises the need to time the markets, yet embraced the notion of compounding effects that helps one money to grow overtime.

Hong Kong markets riding on IPO boom

Source: Stockcharts.com (One-year weekly chart of the Hang Seng Index (HIS), November 10, 2017)

Hong Kong’s Hang Seng Index (HSI) fell 0,1 per cent on Friday to close at 29,120.92. However for the week, the index rose 1.8 per cent. The HSI rise towards major highs has been one of the major talk among the investment community, with reforms being outlined in the wake of the  post China National Congress meetings, and the rising initial public offering (IPO) market which saw the debut of China Literature, a Tencent-backed firm seeking to capture the attention and market for Chinese novels in the electronic format.

According to Reuters.com, the week was dominated the rise in monetary inflows coming from Mainland China through the various Connect programmes. As of Thursday’s close, net purchases by Chinese investors approached 9 billion yuan (US$1.36 billion) under the Shanghai – Hong Kong Connect. This, according to Reuters, almost doubled last week’s total and well above the previous weekly average.

Taking a look at the one-year weekly chart of the HSI, we noted that the index has already breached the 14-day RSI, and is now at about 75 which indicates an ‘Overbought’ market. The MACD chart below is also indicating high volatility.

This past week, we saw the debut of a Tencent-backed public listed company, China Literature on Hong Kong Stock Exchange. The e-publishing business raised over US$1 billion from the listing and was initially priced at HK$55. When it opened up for trading on Tuesday, November 07, the stock price went as high as HK$110 before closing the day at HK$102.50. The percentage increase on an intraday basis is about 86 per cent and is one of the biggest gains so far in 2017.

Source: Techcrunch.com (November 08, 2017), Bloomberg

Concurrently, on Friday, November 10, we also saw the debut of San Franscisco and Singapore-based gaming technology firm, Razer Technologies on the grey market of the Hong Kong Stock Exchange. The entity commenced pre-IPO trading which saw share prices rose to the high of almost HK$5.00 per share. That was about 128.9 per cent from the IPO price of HK$3.88. We do expect a roaring start come Monday, November 13 when official trading of the counter begins.

European markets edged down amid concerns over earnings and Brexit uncertainties

Source: Stockcharts.com (One-year weekly chart of Stoxx Euro 600 index, November 11, 2017)

Looking at the one-year weekly chart of the Stoxx-Euro 600 index above, we noted that despite the short-term blip in the index where it closed down 0.37 per cent at 388.69 on Friday, the index continues to head higher on an upward trajectory.

The 14-day RSI sits around the comfortable mid-level of about 55.88 and is not overly skewed in any manner to the ‘Overbought’ or ‘Oversold’ levels. Overall, the momentum pace seemed quite normal.

The index is now about 10 points higher than the 50-day moving average (MA) level, and 30 points higher than the 200-day MA level. We do not think that it is going to pose any significant risks unless there is a severe credit crunch, or the return of the European Debt Crisis in 2011 – 2012. The European Central Bank (ECB) has already hinted that they are not planning to normalise interest rates yet this year as inflation expectations continue to remain weak. However, ECB President Mario Draghi repeatedly emphasised the central bank will not be hesitant to deal with any significant changes in the economic outlook should the need arises.

Earnings reports are expected to dominate the European markets trading, and thus far, those reports have generally be good owing to the low inflationary levels, the liquidity is aplenty. There could be some concerns arising from the ongoing Brexit talks with the United Kingdom, and global monetary flows.

US markets continue its ascent despite some minor hiccups

US stock markets took a breather on Friday after most of them hitting multi-year highs. The closing US index numbers are as follows:

Source: CNBC.com (November 10, 2017)

The Dow Jones Industrial Average (DJIA) took on the majority of the fall across the board with 0.17 per cent decline intraday on Friday or 39.73 points lower to close at 23,422.21, while the S&P 500 Large-Cap Index fell 2.3 per cent or 0.1% decline. The Nasdaq index bucked the overall trend to close up higher at 6,750.94, or a rise of 0.01 per cent.

Taking a look at one of the indices, the S&P 500, we noticed that despite the short-drop on Frday, the overall trend of the chart is still heading upwards.

Source: Stockcharts.com (One-year weekly chart of S&P 500 stock index, November 10, 2017)

Looking at the one-year weekly chart of S&P 500 stock index, we noted that aside from the general uptrend of the index, the 14-day RSI is also being ‘Overbought’ significantly. At 75.35, the index is already is being bought at a feverish pace. The same goes for the MACD chart below which also shows high momentum. We think that the overall rise, if supported by true earnings growth, should be welcomed. However, the availability of cheap marker depth tends to result in higher leverage which is seen as unwelcome.

The recent examples of brick-and-mortar retailers like Gap, American Eagle is sufficient to prove the point of overexpansion, and the use of leverage. With the increasing affluence, and e-commerce shopping, along with the likes of Amazon encroaching deeper into the brick-and -mortars business, retailers are increasingly being pressured to perform, especially when margins are shrinking further.

For technology firms, including the so-called FAANG stocks like Facebook, Amazon, Apple, Netflix, and Google, these firms have mostly emerged winners as technology-focused stocks are being increasingly being included in the investment/retirement portfolios of many investors.

Semiconductor firms are also being touted heavily by investors to be one of the beneficiaries for all things digital, and artificial intelligence (AI) systems as they are after all, manufacturers of the chips that are being used to run such systems. In a CNBC.com news article, it noted that chip makers like Micron, and Advanced Micro Devices, which formed part of the iShares PHLX Semiconductor exchange-traded fund (SOXX) is almost up by more than 40 percent YTD in 2017.

How did our model investment portfolio perform

Note: Model equity portfolio performance as of November 10, 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 86.8 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 17.7 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 Group (up 50.0 per cent since end June 2017); followed by Cogent (up 45.0 per cent since January 2017), and Mapletree Logistics Trust (up 27.6 per cent since November 2016).

The model equity portfolio did experienced a shortfall coming from Sheng Siong (down 4.0 per cent since June 2017); followed by Straits Trading Company (down 3.3 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 December 2017.

Local earnings calendar

Source: Phillip Securities Pte Ltd, SGX

With the corporate reporting season due to wind down soon, some upcoming earnings, namely the mid- to large-cap stocks that investors might be keen to look out for include United Engineers, Wilmar, and Golden Agri. So far, commodity and property stocks have shown some improvements though for the former, prices remain volatile due to the various shifts in weather patterns.

Singapore Economic Reports

Source: TradingEconomics.com

China Economic Reports

Source: TradingEconomics.com

An important highlight of the week for China’s economic report for the coming week is China’s industrial production numbers, and retail sales. The industrial production figures for the month of October will form a key gauge to understand China’s industrial outlook. We expect the data to be somewhat impacted by the Golden Week holidays during the first week of October, and work stoppages of various pollution intensive industries in the lead-up to the National Party Congress.

US Economic Data

Some key US economic data investors might be keen to look out for include the inflation numbers which might determine the US Federal Reserve’s interest rate directions. Next, will be the retail sales numbers.

In summary, global markets are trending upwards, but you might not want to chase prices. Instead, adopt the necessary risk management techniques, avoid over leveraging, and adopt the traditional methods like dollar cost averaging techniques. With that, you should be able to grow your investment portfolio in a more systematic manner, while minimising the instances of making costly investment mistakes trading in and out of markets.

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About Peak Hour 62 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