STI has a lethargic August start

With global markets, especially the US markets continuing the rising momentum brought on volleys of good earnings reports, the Singapore markets appeared slow and sometimes move at a yawning pace.

On Wednesday, August 02, the Straits Times Index (STI) closed up 10.6 points or 0.3 per cent higher to close the trading day at 3,348.8. The volume of shares traded is 2.01 billion worth about S$1.3 billion total in total changed hands. Compared to the first trading day of August on Tuesday, the volume of shares traded was 2.7 billion traded and the gross dollar value was worth S$1.3 billion.

Source: Phillip POEMS trading platform (Weekly chart of the Straits Times Index (STI), August 02, 2017)

Looking at the weekly chart of the STI from the trough to peak, the index has grown by 32 per cent from the lows of 2,528.44 in early February 2016. We do recognise that the STI is in the ‘Overbought’ region of above 70 as illustrated in the relative strength index (RSI) chart at the bottom of the chart.

In other to examine further on the momentum of STI, we examined the four-hour chart, and noted that there appears to be not much price action as shown in the diagram below:

Source: Phillip POEMS Trading Platform (Four-hour chart of STI, August 02, 2017)

Have investors stay overly cautious

With the post March year-end AGMs out of the way at the end of July, many corporations and investors are looking ahead at what are the important events to look out for. These include the September interest rate meetings in US, the upcoming National Day Rally speech by Prime Minister Lee Hsien Loong as he lays out the government’s vision for Singapore, and China’s Communist Party (CCP) Conference in October.

As Singapore receives the majority of its trade income overseas, the recent manufacturing growth figures, industrial production figures, and inflation rate pickups, some investors took a radical move by avoiding the markets and shut themselves out.

There could be some truth in their thought process depending on which angle one is looking into. Using Technical Analysis (TA), investors are seeing momentum picking up and sometimes ran ahead of their fundamentals. This could be seen in the illustration earlier on the RSI of STI being in the ‘Overbought’ situation.

However from the fundamental analysis (FA) point of view, looking at the market trading at 13 to 14 times multiples on forward earnings, STI continues to be best performing stock market in the region, and is not relatively expensive as compared to markets, say the US where earnings multiples could go up to 18 to 21 times.

Contrasting earnings reports among STI component companies

Starhub reports dismal earnings results

Starhub reports lower profit growth with a 21 per cent decline in 2Q2017 earnings to S$85.7 million from S$108.6 million a year ago. Total revenues fell 1.1 per cent to S$579.1 million in the current quarter from S$585.7 million last year.

The decline in profits was due to the cessation of the Next-Generation Network (NGN) adoption grants and higher handset cost. There were also declines across its mobile, broadband and pay-TV segments. The only bright spot is the enterprise business where revenues rose 1.1 per cent on a yearly basis and remains the second largest revenue contributor after mobile at 17.1 per cent. This is according to a research report published by RHB Research Institute.

How did Starhub stock performed over the past year

The stock has been on a downtrend for the past year, and will close out the trading day on Thursday, August 03 at around S$2.66 - S$2.67 per share. There were about 6 million shares being traded, and the closing price on August 02 was S$2.70 per share. In all, it does seem to look too bad for a counter that is a STI component stock, but can still hold up despite the dismal earnings.

Source: Phillip POEMS trading platform (One-year daily price of Starhub stock, August 03, 2017)

CapitaLand earnings just kept revving up

CapitaLand posted 2Q2017 earnings of S$579.3 million, and was a 97 per cent jump from last year. The rise was mainly due to better operating performance, higher revaluation gains from investment properties in Singapore and China, and higher portfolio gains arising mainly from the divestments of Innov Tower in China and 18 rental housing properties in Japan.

However, the rise in earnings was offset by a 12.3 per cent decline to S$992.4 million, mainly due to lower contribution from development projects in Singapore.

In an analyst briefing held after the earnings announcement, The Business Times reported that CapitaLand will continue to be “aggressive but disciplined” when tendering for land to build up its Singapore residential land bank. The response was made after some questioning by an analyst on the bullish bid submitted for a mixed-use site at Bidadari which was eventually awarded to the consortium led by Kajima Development and Singapore Press Holdings (SPH) for S$1.132 billion, or S$1,181 psf per plot ratio (psf ppr) in June. CapitaLand’s joint bid with Yanlord Land submitted a bid worth S$958.1 million or S$1,000 psf ppr for a fifth placing.

Source: Phillip POEMS trading platform (One-year daily chart of CapitaLand, August 03, 2017)

DBS earnings underwhelms

DBS Group Holdings reported its 2QFY2017 earnings, including one-time items of S$1.13 billion on Friday, August 04. The earnings figure was 8 per cent above of its second quarter period last year. However, the latest 2Q results were offset by lower net interest margin, trading income and gains on investment securities.

Total income remained flat at S$2.92 billion.

Non-performing assets (NPAs) rose marginally from 1QFY2017 to S$4.85 billion as non-performing loan (NPL) formation was offset by write-offs and recoveries. The NPL rate rate went up by 1.5 per cent.

The bank also declared an interim one-tier tax-exempt dividend per share of 33 Singapore cents for 1HFY2017. This was up 10 per cent from the 30 Singapore cents declared for 1HFY2016.

Looking at the charts of DBS

Source: Phillip POEMS trading platform (One-year daily chart of DBS shares, August 04, 2017)

The charts of DBS Group Holdings have been ever rising. From the lows of S$14.95 per share, the stock has now grown by 42 to 45 per to the current S$21.57. However, on a fundamental aspect of the business, the bank is currently trading at around 1.2 times book value, which is still somewhat on the high side, and above 1.0 times.

Hong Kong’s Hang Seng riding high on the coattails of China’s money inflows

At a record 27,534.01 for the Hang Seng Index (HSI) in Hong Kong, it was definitely a feat that few stock market exchanges can match within the Asia-Pacific region. With a buoyant property market, a bustling financial centre, the Hang Seng Index (HSI) is on the roll for yet another record high for the year.

Looking at the overall markets in China, investors do wonder where the enthusiasm was when the local population, in general, are getting too uncomfortable with Beijing’s intervention. However, there is still a case for continuing to stay vested within China as the country is experiencing an upsurge in trade activities as shown in this diagram:

Source: TradingEconomics.com (China’s monthly trade flows as of June 2017)

Hong Kong’s Hang Seng stays bullish

With greater monetary flows coming in externally, Hong Kong’s Hang Seng Index is getting a so-called adrenaline rush from monetary inflows from Mainland China. This is shown in the following diagram that illustrates the pace of monetary inflows in the form of foreign exchange reserves held by the Hong Kong Monetary Authority (HKMA). The current total amounts of foreign reserves held by HKMA averaged around US$410 billion as shown.

Source: TradingEconomics.com (Data as of June 2017)

Turning to the Hang Seng Index, we are now seeing the resurgence of capital, and the runup of the index, which a year ago, not many investors could imagine the rise. The market looks slightly overbought with the 14-day relative strength index (RSI) above 70, while the moving average convergence divergence (MACD) diagram continues to show a continuing run on the index.

Source: Stockcharts.com (One-year daily chart of the Hang Seng Index (HSI), August 03, 2017)

European markets in the doldrums

Source: Stockcharts.com (One-year daily chart of Stoxx600 European Stock Index as of August 03, 2017)

We noted that European markets are probably the odd ones out of the loop of major market euphoria around the globe. With Asia-Pacific countries, and the US markets rising on optimism about gradual global economic recovery, and favourable earnings growth among several firms, European markets appear to be trending down on concerns about the end of quantitative easing (QE) policies by the European Central Bank (ECB), and political uncertainties in the US.

Looking at the EuroStoxx 600 stock index, we can observe the uncertainties and distastes among investors as the index descended to recent lows of 378.93, far below the 50-day moving average (MA) of 385.36, while the 14-day RSI stays stable at around 48 to 50.

Despite the gloomy stock markets, the ongoings of what is happening in European financial markets did not show up in several economic data, namely the buoyant outlook among German businesses shown in the IFO expectations index which continued to rise and at 3.5-year highs. According to analysts from Phillip Securities, the German economy is performing better than expectations and growth.

Source: Phillip Securities Pte Ltd, “Phillip Monthly Report August 2017”, August 04, 2017

How do we comprehend such discord between economics and market data in Europe

This is a question which we find quite puzzling as improvements in economic data will normally translate to better market performances. However, in the case of Europe, it seems lacking. We think that part of the reason businesses often do not flow in tandem with financial market could be factors such as currency competitiveness, cost competitiveness, favourable business conditions. With such conditions, businesses will naturally be satisfied with the overall direction of the economy.

We also think that overtime, such differences will narrow, and financial markets will start to reflect the business sentiments. For now, at least, there seems to be a lack of congruence between the bearish markets in Europe, and optimism among European businesses.

US markets get set for another leg up

The latest jobs numbers released on Friday, August 04 brought to a climax of a busy trading week. The latest data showed a net addition of 209,000 jobs in July. This compares to expectations to payroll growth of 183,000 jobs with the jobless rate ticking down to 4.3 per cent. The latest rate is one of the lowest since March 2001, according to CNBC.com.

As the data is being reported, stock market futures reacted favourably and was rising to indicate a positive open. The government bond yields also rise in tandem with stock prices.

At the close of the trading day, all the major stock indices, including the Dow, S&P, and Nasdaq all rose in tandem.

A summary of US market closing bell figures on Friday, Aug 04 is as shown:

Source CNBC.com

Weekly chart of US S&P 500 index

Source: Stockcharts.com (One-year weekly chart of S&P 500 stock index, August 04, 2017

Looking at the one-year weekly S&P 500 index chart, we noted that the index is at the ‘Overbought’ region as illustrated in the top part of the diagram showing the 14-day RSI. However, momentum as illustrated by the Moving Average Convergence Divergence (MACD) diagram below is starting to flatten out. This could indicate the weariness of the market after several consecutives run up on the markets.

We think that with stock market volatility at historic lows and with markets at an euphoria stage, there could be risks of a market correction if things go awry or markets started to suffer a panic run. However, at this moment, markets seemed to be confident of what lies ahead.

This week, on August 01, we have also seen one of the tech darlings, Apple Inc., reporting strong quarterly earnings. The Dow component stock soared higher on 2Q2017 on revenues of US$45.4 billion versus US$44.89 billion expected by Thomson Reuters. Adjusted earnings per share (EPS) came in at US$1.67 versus US$1.57 per share expected by Thomson Reuters.

Reacting to the earnings news, the stock climbed more than six per cent in extended hours and there were expectations that it could hit near US$160 per share. On Friday, the stock closed at US$156.39.

Source: Phillip POEMS Mercury Trading Platform (One-year daily chart of Apple Inc. (AAPL), August 05, 2017)

Looking at the chart of Apple (AAPL) stock, we noted that the stock climbed to an all-time high of US$159.75, with a weekly gain of 5.2 per cent based on Friday’s closing price. We think that there could be a slight pullback of the stock due to the low volume hit on Friday.

We think the sustainability of the run ups will depend on the continuous research and development (R&D) processes being put into its range of products/services. At this price level, we think that investors could be ‘buying after the news’. We advise readers to keep monitoring the prices, and not hasten the entry into the stock unless one is absolutely convinced that the iPhones can sell like the so-called ‘hot cakes’. It is also critical especially when the holiday season is around the corner, and is also a season where rivalry among the competitors are one of the fiercest.

How did our model equity investment portfolio perform

Note: Model equity portfolio performance as of August 04, 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 close to 86 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 14.5 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 Mapletree Logistics Trust (up 17.2 per cent since Nov 2016); Cogent Holdings Limited (up 15.0 since January 2017); and Ascendas Reit (up 13.6 per cent since January 2017).

The model equity portfolio did experienced a shortfall coming from Sheng Shiong (down 5.1 per cent since June 2017), Soilbuild Business Space Reit (shortfall of 2.4 per cent since June 2017), and Straits Trading Limited (down 0.4 per cent since June 2017).

Given the portfolio is at its month-end, we are not planning to make any changes or do any rebalancing for the portfolio. We shall review the overall portfolio at the end of August 2017.

Key market events to look out for in the upcoming week

Earnings calendar for the coming week

Source: Phillip Securities Pte Ltd, SGX

The upcoming week (Week starting from Aug 07, 2017) is a short week with Singapore’s National Day on Wednesday, Aug 09, 2017. Investors might want to take note of some key STI component stocks’ earnings release dates, namely Global Logistic Properties (GLP) which is scheduled to release earnings results on National Day Eve on August 08, followed by ComfortDelgro, City Developments Ltd, Singtel, and ST Engineering (all are scheduled) for August 11 earnings releases.

Singapore economic data releases in the coming week:

The only set of economic data and an important one is the 2Q2017 gross domestic product (GDP) ending June 2017 for Singapore is about 2.5 per cent. In an earlier survey among private economists, most of them have forecasted growth for the whole of 2017 to be around 2.5 per cent growth, while the government has pencilled growth in the region of 1 per cent to 3 per cent, with growth likely to come in higher than 2 per cent.

Global economic happenings

The US government will be releasing the core inflation and general inflation rates. The data is critical in understanding whether the US Federal Reserve has the sufficient case to hasten the interest rate normalisation process.

China will also be releasing their inflation numbers next week with trade and inflation data scheduled for Tuesday and Wednesday, August 08 and 09.

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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