STI is slow to react to the overall market relief rally

The Straits Times Index (STI) ended up slightly positive at the open of this week beginning Monday, April 25, 2017 when global markets were heaving a sigh of relief, followed by a general positive financial market actions. The important event, in case any of you are who keeping track of the financial market is last weekend’s announcement that France’s two main political parties, namely Emanuel Macron, emerged as the overall winner in the first round election, along with his counterpart, Marine Le Pen, who came in close second. Both are scheduled to face each other for the second round of French President elections on May 07.

The STI closed slightly lower on Thursday, April 27. Despite that, the index managed to close relatively unchanged at 3,171.36. The one-year daily chart shown below has briefly crossed downwards to the 50-day moving average (MA) before it got back up to head above the 20 MA at 3,110.45. The all-time high is still at around 3,190. However, despite the sharp relief rally this week as a result of the French election outcome, the STI barely react, and instead was focusing on uncertainties over the Inter-Korean tensions.

Note: Close-up shot of the one-year daily Straits Times Index (April 26, 2017)

Notable earnings news

Real estate and Reit counters were the main focus this week with large-cap CapitaLand reported a 77.2 per cent rise in net profits to $386.8 million as a result of improved operating performance, including the sale of 45 units of The Nassim to a private investment vehicle owned by banker, Wee Cho Yow, and higher portfolio gains that lifted the entity’s results in its 1Q2017. For the quarter ending March 31, CapitaLand’s total revenue rose 0.4 per cent to $897.5 million, and the revenue increase was due to more handovers from its development projects in China and rental contribution from newly acquired properties that were offset by lower revenue from development projects in Singapore.

According to SGX stockfacts, the real estate counter trades around an enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) of 15.2 times, and has a historical dividend yield of 2.7 per cent. It’s cash flows from operations (CFO) is about $3.3 billion as of FY 2016 ending December 31, 2016, and its return on equity (ROE) is around 6 per cent. On the leverage front, CapitaLand continues to maintain a historical leverage factor of 60 to 70 per cent.

On the technical analysis of CapitaLand, the chart is showing the stock is gathering momentum and is heading towards its all-time high of $3.79. So far, volume has been quite consistent, while the average directional index (ADX) is consolidating at around 20 to 30, with more positive directional indicators (DIs). The stock price ended the trading day on Wednesday, April 26, 2017 at $3.72 per share and is close to the highs of $3.79.

Note: One-year daily chart of CapitaLand Ltd (April 26, 2017)

Another real estate related counter, this time in the Reit space, Ascendas Reit reported a 13 per cent increase in distribution per unit (DPU) to 3.852 Singapore cents for the quarter ending March 31, 2017. This compares to the 3.41 Singapore cents a year ago. The gross revenue rose 2.4 per cent to $209 million and is driven in part to the full quarter contribution from One@Changi City.  Net property income (NPI) rose 7.4 per cent to $154.1 million.

According to OCBC Investment Research, the rise in income was due driven largely by inorganic growth, and less utilities expenses recorded due to lower rates contracted for certain properties and lower property tax expenses arising from retrospective downward revisions in annual value of some properties.

On the fundamental analysis of Ascendas Reit, the counter trades at around 1.2 times book value, and yields around 6.01 per cent. The Reit has a leverage factor of 33.8 per cent with a majority presence in Singapore (86 per cent), followed by Australia at 14 per cent.

The counter has also found some favour among investors with stock price hitting the top at $2.60, and it came after the trend has been consolidating itself at $2.50 to $2.55, before an overshoot. We could see more upside in the stock, if the momentum from this week’s earnings announcement could carry through.

Note: One-year daily chart of Ascendas Reit (April 27, 2017)

M1 might get consummated

On April 27, M1 was quoted by Bloomberg.com that a couple of investors have approached the entity to place their offer terms. The parties include a Mainland Chinese coal producer, Shanxi Meijin Energy, and China Broadband have submitted separate bids to buy M1 for a total acquisition price of US$1.4 billion. Other potential acquirers included Bahrain Telecommunications Co. and private equity funds have also made non-binding bids. Earlier, M1’s largest owners, Axiata Group Bhd., Keppel Telecommunications & Transportation Inc., and Singapore Press Holdings Ltd. have appointed Morgan Stanley to help explore options including a sale of the telecom operator, according to M1’s SGX filings in March.

M1’s fundamentals and Technicals

According to SGX Stockfacts, M1 is currently valued at 14.1 times historical price-earnings (P/E) multiple, and with a 12-month dividend yield of 5.9 per cent. This compares to Starhub where its dividend yield is 7.7 per cent, and trading at 14.2 times historical P/E multiple. Singtel, its biggest rival currently trades at 15.6 times P/E, but dividend yield is about 4.7 per cent.

Looking at the chart comparison among the three telco companies, M1 surged ahead Singtel and Starhub and is likely to driven by the latest news about its potential privitisation moves.

Note: One-year price comparison of M1 (Red), Singtel (Brown) and Starhub (Green).

Biggest sector outperformers

Source: SGX

For the month of April, the biggest gainers have been the information technology sector, while laggards have been in the telecommunications services industry. This is not surprising given that the latest statistics published by the Economic Development Board (EDB) showing that Singapore’s manufacturing output rose by 10.2 per cent year-on-year (yoy) in March, and most of the output growth has been driven by the electronics sector. The electronics sector’s output has increased 37.7 per cent from a year ago, and is largely driven by the semiconductors segment which posted growth of 54.6 per cent. The precision engineering sector rose by 12.8 per cent, along with precision modules and components segment rising by 15.7 per cent.

As for the telecommunications sector, we noted earlier about the rivalry among the telco providers will likely escalate next year when the fourth telco player, Australia’s TPG Telecom enters into the fray. This might cause some disruption to the local telecommunications industry. We believe that TPG Telecom is setting its sights on introducing innovative products and solutions targeted at the local consumers. We also think that the telecommunications industry is expected to face more heat as 2018 approaches.

Hong Kong’s Hang Seng resumes upward trajectory

Note: One-year price chart for the Hang Seng Index (HSI)

Looking at the one-year price chart of Hong Kong’s Hang Seng Index (HSI), the upward momentum continues. However, despite nearing its all-time high of 24,717.44, the HSI is still technically not overbought with its relative strength index at 55.48, and less than the 70 mark for ‘Overbought’ territory. On momentum, the index appeared to be at the upper bound above 0. According to a Reuters.com market roundup article, the final trading session of April saw continuous money inflow coming from Mainland China, thus fueling the market. Reuters also reported that Mainland Chinese investors used approximately 14.2 per cent of the daily quota buying Hong Kong stocks via the Shanghai-Hong Kong Stock Connect, as compared to the 6.1 per cent for the opposite trade.

EuroStoxx 50 on the march upwards following French elections outcome

Following a close first round election victory from centrist French elections candidate, Emmanuel Macron, the stage is set for a face-off over the second round scheduled for May 07 against ultra-right candidate, Marine Le Pen. On Monday, April 24 when European markets opened, the major European stock indices surged, including the Euro currency itself.

The EuroStoxx 50, a leading barometer of blue chip quality European stocks rose to end the week at 3,559.59 after touching briefly at the 50-day moving average mark at 3,531.59 (Please see diagram below. The relative strength index (RSI) is also trading higher to end at 65.98, and close to the ‘Overbought’ region of 70. The momentum, as expressed by the Moving Average Convergence and Divergence (MACD) has also rose in tandem with the overall rise in the EuroStoxx 50 stock index.

Source: Stockcharts.com (One-year price changes of EuroStoxx 50 as of April 28, 2017)

The Euro currency has recouped its past losses

With results outcome coming from the French Presidential elections narrowed to Macron, and Le Pen, the Euro-US Dollar (EUR/USD) pair trade spiked up above the 50-day moving average (MA) line at 1.083. However, there is a question of whether the Euro could maintain at above the 50-day MA with the second round of election run-off coming up on May 07. If Le Pen wins on May 07, we think that both the European stock markets and the Euro currency might turn volatile.

Source: Stockcharts.com (One-year daily chart of EUR/USD pair trade, April 28, 2017)

ECB left interest rates unchanged

During the week on April 27, the European Central Bank (ECB) met and the monetary policy committee left interest rates unchanged at zero percent ahead of the second round French elections on May 07. The ECB chief, Mario Draghi reiterated his warnings from previous meetings that risks remained tilted towards the downside. He was quoted as saying that “Incoming data since our meeting in early March confirm that the cyclical recovery of the euro area is becoming increasingly solid and that downside risks have further diminished.” The ECB has pledged to continue its monthly bond buying programme at a rate of €60 billion, and has kept its inflation target at 2.0 per cent. However, inflation data has consistently being showing a rising trend of inflation since early this year. It remains questionable on whether ECB could be nearing an end to its bond buying programme, in contrary to what the data is currently showing.

Source: Tradingeconomics.com (April 30, 2017)

Major US stock indices never look back

All the major US stock indices, the Dow Jones, S&P 500, and Nasdaq managed to pull off a big run on the upside with percentage gains of about 1 per cent for the month. The S&P 500 and the Dow both ended their fifth positive month in six, while the Nasdaq managed to hit 6,000 level mark this week on the back of strong technology sector earnings coming from the likes of Alphabet, Microsoft, and Facebook. However, when the glasses ar

The past week, most of the US market activities have centred on the latest tax proposal introduced by the Trump administration. One of them is the proposed income tax rate to cover insurance, etc.

Note: CNBC.com, Factset

Mr. Trump’s administration has also unveiled its proposed tax plan while facing growing threats from the Democrats to end the tax cuts altogether as many perceived that the current tax plan entrenches the interests of the wealthy instead of the middle-class income households. Many critics think that the wealthy and high income households benefit especially when the change of the top tier tax rate from 39.6 per cent to 35 per cent benefits those households earning over US$400,000 per year.

The details of the plan calls for the reduction of the current seven tax brackets to three tax brackets, namely 20 per cent up to the top tier rate of 35 per cent; Second, doubling the standard deduction; Third, providing tax relief for families with child and dependent care expenses. The tax reform plan also calls for the elimination of targeted tax breaks that mainly benefit the wealthiest tax payers. It also calls for the protection of home ownership and charitable gift tax reductions. There is also a repeal of the Alternative Minimum Tax (AMT), and an end to the death, or estate tax.

For business owners, the tax reform plan calls for a standard 15 per cent flat corporate tax rate. It also includes a territorial tax system to level the playing field for American companies; having a one-time tax on trillions of dollars held overseas; and eliminating tax breaks for special interests.

Nevertheless, the major US stock indices continue their uptrends given that most businesses are likely to thrive under a low tax environment. It might also prompt management of some listed counters to repatriate their overseas profits into US, thus creating capital inflows into the stock markets.

How did our model investment portfolio perform

Note: My investment portfolio (April 28, 2017)

The model investment portfolio gained 4.3 per cent since inception at the end of November 2016, as compared to the Straits Times Index (STI) benchmark gain of 8 per cent during the same time period. Our top three best performing stocks in terms of capital appreciation include Dairy Farm Holdings, Venture Corporation Ltd, and Cogent Holdings Limited. They gained 27.1 per cent, 19.7 per cent, and 15.7 per cent respectively. We held Dairy Farm since the end of 2016, while Venture and Cogent, those two stocks were included at the end of January 2017.

We are still on the lookout for strong oil and gas stocks including Keppel Corporation, Hai Leck Holdings Ltd, Ezion, Boustead, Mermaid Maritime, Hiap Seng Engineering, PEC Ltd, and Nordic Group. We believe that strong free cash flows are critical in our potential stock picks, and we think that these companies have managed to overcome the industry challenges, and are still striving to manage their operations efficiently.

Other sectors we are still on the lookout are industrial companies especially when manufacturing output in Singapore has so far exceeded expectations. Some industrial companies we are keeping watch include Tat Seng Packaging Ltd, Teckwah Industrial, and Micro-Mechanics. We noted that these companies have low P/E multiples, strong free cash flows, and strong senior management backgrounds.

On some of our sectors we are avoiding include the property counters which we think that the sector has overshot to the upside. Although there are signs of a potential turnaround for local real estate market, we think that from a technical chart perspective, it might be worth waiting for the real estate stocks to come down a bit before entering. However, at the current stock price levels, we will choose not to chase for these stocks.

What to look out for next week

A slew of earnings reports is expected to be released during the first week of May. First, is DBS Group Holdings who will announce its 1Q2017 results on May 02, followed by Sembcorp Industries and telco Starhub who will announce their 1Q2017 results on May 03.  Other results that may be showing on the radars of investors include Manulife US Reit on May 02, F&B operator Breadtalk on May 03, and OUE entities, OUE Hospitality Trust and OUE Commercial Reit on May 04 and 05 respectively.

On the economic front, the local manufacturing purchasing managers index (PMI) is scheduled to be released on May 02. The forecast is calling for 51.4. on Friday, May 05, the government is expected to release data for retail sales and foreign exchange reserves.

Over in US, more earnings reports are expected to be released, including names like Cardinal Health, fertilizer maker Agrium Corp., and BP Plc, among others. The major US economic news for next week is the US job numbers where economists are expecting 175,000 jobs created in April, and unemployment rate to rise a bit to 4.7 per cent. In March, the economy saw an unexpected 98,000 new jobs created and is far below the estimates of 180,000 to 190,000 jobs created each month.

The US Federal Reserve will hold its two-day monetary policy meeting on Tuesday, and Wednesday, May 02, and May 03. The probability of a 75 to 100 basis points (bps) is close to certainty with 95.2 percent probability as forecasted by the Federal Funds or Fed Funds Futures.

Source: CME Group FedWatch Tool

The recent economic data on existing home sales, manufacturing and retail sales figures have been robust. Fed Chairwoman, Janet Yellen has also signaled that the committee is ready to hike rates by at least 3 times this year. Nevertheless, Ms. Yellen maintains that the committee will stay data dependent, and act accordingly to temper any upsurge in inflation, and unemployment. Barring the two mandates the US Fed has, we think that interest rates are expected to show a rising trend going forward.

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 33 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