STI is struggling to start, but managed to stay afloat at end of the week

The Straits Times Index (STI) started out on Monday, October 02 on a high note by opening about 30 points to a high of 3,264.89 before closing at 3,262.1 by the end of the trading day. However, as days passed, with most of the regional markets stepping up, including Hong Kong’s Hang Seng Index rising by 600 over points intraday on Tuesday, October 03, the STI is still lagging behind its regional peers.


Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of The Straits Times Index (STI) October 04, 2017)

Looking at the chart above, we noted that the current price is wedged among the 20-day, 50-day, and 100-day moving averages (MAs). There appears to be not much trend, or indication of any potential upside or downside. In short, the chart looks like it is trading in sideway pattern with no visible trends.

Which stocks are in focus this week

SIA Engineering stock plunge prompted SGX Query

SIA Engineering Company (SIAEC), once a STI component stock saw its shares plunged by 7 to 8 per cent intraday on Wednesday, Oct 04 to a low of S$3.20. According to a Bloomberg report, an unnamed source told reporters that JP Morgan was said to raise S$89 million after pricing SIA Engineering at the low-end of the marketed range.

JP Morgan had sold at S$3.11 per share according to people familiar with the transaction, but final price was set at 10.1 per cent discount from the last close.

Price action of SIAEC

Source: Phillip POEMS 2.0 Trading Platform (One-year daily price chart of SIA Engineering Company (SIAEC), October 04, 2017)

The sharp drop shown on the above chart reflects some of the impacts from the sale of stock by JP Morgan. Prior to the significant drop, there has been consecutive trend of downslides from the peak of S$4.21 per share in mid-June to the current price of S$3.15 per share as of October 04. This reflects an approximately 25 per cent drop over the course of a four month period.

Moreover, the moving average converge divergence (MACD) chart below the index is still struggling to come out of its negative territory.

Fundamentally, the stock trades at 21 to 22 times historical price-earnings multiple, along with a dividend yield of 4.05 per cent. Compared to Singapore Technologies Engineering, the latter (ST Engineering) is also trading at about the same earnings multiples with dividend yield of 4.44 per cent.

City Developments got a major boost from East Coast transaction

City Developments Limited (CDL), together with its sister company, Hong Realty, managed to snag an East Coast property development, called Amber Park for S$906 million, or $1,515 per square foot (psf) per plot ratio, based on an allowable gross plot ratio of 2.8. According to The Business Times, owners can expect to receive gross sale proceeds of about S$4.3 million and S$8.3 million.

How does the chart of CDL look

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of City Developments Limited (CDL) stock, October 05, 2017)

We noted that the chart, despite having fallen from the high of S$12.33 per share, is still moving on an uptrend. The chart is staying just above the 20-day and 50-day moving averages (MAs). We think, that as the property upcycle is sustainable and on an upturn. However, we do also note that there has not been any meaningful technical breakout seen yet. Until that happen, we think that a slow and gradual rise can be expected.

Fundamentally, the stock trades at around 17 to 18 times price-earnings multiples, along with a dividend yield of 0.7 per cent. The company generated about S$1.2 billion in cash from operations, and its current ratio is about 2.7 to 2.8 times. The data is based on its FY 2016 full-year earnings results. The price-to-book (P/B) value is about 1.1 times.

En-bloc deals heating up

There have been several property en-bloc deals, the latest being Normanton Park, followed by Cairnhill Mansions. The FTSE ST Real Estate Holding and Development Index has also started to rise to 903.83, and is within the all-time high of 921.63 achieved in August 12, 2017.

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of the FTSE ST Real Estate Holding and Development Index, October 06, 2017)

We note that the index is on an uptrend, with the MACD showing mild bullishness. However, we are hesitant in declaring that the property cycle in recovering, although recent URA flash estimates showed that there is a bit of recovery after 4 years of down cycle since second half of 2013. Nevertheless, we think that it is a good start, and should there be more gradual removal of the existing property cooling measures, the index could have some potential of going higher.

How did the STI end for the week

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of The Straits Tines Index (STI), October 06, 2017)

We noted that the Straits Times Index ended the week, up 29 points on Friday, October 06, 2017 to close at 3,291.29. On a year-to-date (YTD), the index was up 14.3 per cent, and was up from the 12 to 13 per cent YTD a week ago. There were about 2.2 billion shares worth S$1.3 billion changed hands on Friday. This was up from the 1.2 billion shares worth S$957.3 million done on Thursday.

Some of the notable STI component stock counters which saw active movements include Singtel which closed unchanged at S$3.68 per share. CDL which came on top bidders for the Amber Park en bloc sale closed up 1.7 per cent. This is followed by DBS, OCBC and UOB, each with a 0.8 per cent, 1.07 per cent, and a 1.5 per cent rise respectively. DBS, OCBC and UOB ended Friday’s trading at S$21.50, S$11.37, and S$24.36 per share respectively.

Hang Seng Index continues to trend higher

Source: Phillip POEMS 2.0 Mercury Trading Platform (One-year weekly chart of the Hang Seng Index (HSI), October 06, 2017)

We noticed that besides the rising trend of Hang Seng Index (HSI) in Hong Kong, the MACD stochastic oscillator is showing an upturn. The index is above the 20-day, 50-day, and 100-day MAs. We think that as the momentum leading up to the China National Party Congress on October 18, there could be some push towards the upside for the HSI.

The HSI closed Friday’s trading session at 28,458.04, and according to Reuters.com, the index is now 3.3 per cent up for the week. Banks and Autos led the session with many expecting these sectors to benefit from the latest reduction in the reserve requirement ratios (RRR). This was the first time that People’s Bank of China (PBOC) cut the (RRR).

The other sector that felt the impacts of a decline in tourism traffic is Macau’s casino stocks. According to an article by Reuters, it was reported that during the first-four days of the ‘Golden Week’ holidays, Macau’s tourism figures fell 2 per cent year-on-year.

European stocks stayed resilient as Catalan crisis took on a firm footing

If you think that the German elections were the main cause for decline in European stocks two weeks ago, Span’s political crisis in the Catalan region takes centre stage as the future of the European Union (EU) now hangs on unity among nations. We shall see how the Ibex stock exchange fare during the past week.

Source: Stockcharts.com (One-year weekly chart of the Spanish IBEX stock index, October 06, 2017)

Looking at the weekly chart above, we noted that despite the political crisis in Spain, the moving averages (MAs) are seeing some recovery on the upside, including the 50-day MA. However, the MACD stochastic oscillator is trending downwards, perhaps indicating that there could be some downside expected. The 14-day relative strength index (RSI) is close to the mid-range, and is trending downwards.

As the question of independence, it is quite fluid with no way of knowing when will the independence struggle will end, we think that investors in Spanish stocks might want to continue monitoring the situation before deciding whether to add. So far, we understand that at least one Spanish bank, Caxia Bank is thinking of pulling out of the Catalan region, followed by other corporations who are also in the process of deciding the appropriate actions to take. According to CNBC.com, it noted that Banco Sabadell has said on Thursday that it will shift is headquarters  out of Catalonia.

How did the Stoxx Europe 600 perform

Source: Stockcharts.com (One-year weekly chart of Stoxx Europe 600 Index, October 06, 2017)

Despite the crisis brewing in Europe, the pan-European Stoxx Euro 600 stock index remained resilient, and is still holding onto the uptrend. As of October 06, the index stood at 389.47, with the 50-day MA moving upwards. The index traded down intraday on Friday on concerns about US jobs growth. Employees in US suffered job loss amounting to around 33,000, as compared to consensus economists’ estimates of an additional 90,000 jobs created.

On the MACD stochastics oscillator, it is also making a positive trend, thus discounting the Catalan crisis.

Overall, we think that notwithstanding the prolonged outcome of the Catalan crisis, and the gradual unwinding of the quantitative easing (QE) programme by the European Central Bank (ECB), we think that the region is another area which invetors might want to explore.

Major US stock indices snapped a 8-day winning streak

After a major headline 8-day, most of the US stocks succumb to a weak labour report which showed that US employers merely added 33,000 jobs in September 2017, as compared to the economists’ expectations of a 90,000 jobs increase. The unemployment rate fell from 4.4 per cent to a 16-low of 4.2 per cent in September.

A summary of the closing US stock indices

Source: CNBC.com

How did the S&P 500 chart perform

Source: Stockcharts.com (One-year weekly chart of S&P 500 Index, October 06, 2017)

Despite the disappointing September 2017 data, much of decline, we think that S&P 500 stock index may continue to rise. However, we are concerned that the relative strength index (RSI) is still at the ‘Overbought’ level. The MACD stochastic oscillator is also starting to firm up.

Volatility Index (VIX) continues to remain low

Source: Stockcharts.com (One-year weekly data of the Volatility Index (VIX) as of October 06, 2017)

Rate hike expectations remain high by end of the year

Source: CME Group (FedWatch Tool, October 06, 2017)

Despite a disappointing jobs report in US, the Fed Funds Futures (FFF) continue to point towards a rate hike in December. The US Federal Reserve is still on track to raise interest rates despite the impact of the three hurricanes (Hurricane Harvey, Irma, and Maria) which struck both Texas and Florida last month.

Favourable economic and fiscal policies provide tailwinds for US stock markets

The ISM manufacturing and non-manufacturing data released this past week is also suggesting that the US economy is still on track for recovery. Meanwhile, on the politics front, the US House of Representatives passed a US$4.1 trillion budget on Thursday, and this marked the first step to sustainable tax reforms.

With these data, and steps to ease tax burdens for US corporations, we think that US investors might look favourably to stocks. However, with valuation multiples at their all-time highs at close to 20 and above, it is becoming too expensive.

We think that the upcoming US earnings season shall provide a gauge of what to expect from corporations in terms of business spending plans, and outlook for end of 2017, and perhaps next year. The US Fed policies will also be top of the agenda for most senior management members as they share their outlook with analysts and investors.

How did our model investment portfolio perform

Note: Model equity portfolio performance as of October 06, 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 85.9 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 Cogent Holdings Limited (up 37.9 per cent since November 2016); followed by Nordic Group (up 35.5 per cent since June 2017), and Mapletree Logistics Trust (up 24.1 per cent since November 2016).

The model equity portfolio did experienced a shortfall coming from Sheng Siong (down 7.6 per cent since June 2017); Sembcorp Industries (shortfall of 4.1 per cent since January 2017). SATS Ltd (down 2.9 per cent since end December 2016).

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.

Upcoming earnings release

Source: SGX, Phillip Securities

Local economic data release

Source: Tradingeconomics.com

A closely watched economic data for next week will be the flash estimates of the 3Q2017 gross domestic product (GDP) data where the forecast is currently pegged at 0.8 per cent quarterly growth rate and 2.9 per cent yearly growth rate. The government is currently forecasting FY 2017 GDP growth rate to be between 1 per cent to 3 per cent. Most economists are forecasting growth to be the upper end of 2 per cent for 2017.

China

Source: Tradingeconomics.com

With Chinese investors returning on Monday, October 09 after a week-long ‘Golden Week’ holiday, a slew of economic data awaits, including the all-important Caixin Purchasing Managers’ Index (PMI), and the Balance of Trade data to be released on Friday, October 13. Many economists are expecting some robustness in the private sector PMI, though with recent pollution controls implemented in the coal industry, there could be some negative impacts. Thus, it does pay to watch closely the data.

United States

Next week will see the latest minutes from the September Federal Open Market Committee (FOMC) meeting by the US Federal Reserve will be released. Investors will be on a lookout for clues on the pace of reductions in the Fed’s balance sheet, and rate hike changes.

Other key economic data include the US core and non-core inflation data, retail sales, and Consumer Sentiment gauge from the University of Michigan.

Summary

For investors still trying to figure out what to do the next two months to the final year, do not panic. It pays to do your due diligence, and stay tune to the upcoming earnings season for clues and outlook from the management of the various corporations.

Good luck all.

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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