STI marches ahead for the second week in a row

In a continuation of the continued upsurge in the Straits Times Index (STI) during the first week of trading in 2018, the second week is starting to see more momentum, and a relentless push upwards. The STI closed Monday (January 08, 2018) trading at 3,512.18, up 22.73 points intraday, and it looks like there are no opposite forces that could stand in a way as the index continues to surge higher.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), January 11, 2018)

There were some 1.9 billion shares worth S$944 million traded on the local bourse on Monday with the win/loss ratio at 258 counters versus 161 counters. There appears to be a ferocious appetite for shares following last year’s 18 per cent year-to-date (YTD) growth.

However, as we enter into Thursday, January 11, 2018, things start to change as fast as a lighting bolt. The local bourse started to take a step back, closing at 3,512.68, down 7.7 points, bringing the year-to-date (YTD) performance to 3.23 per cent.

Looking at the one-year daily chart of STI, we noticed that the index has made some close touches to the top end of the 14-day relative strength index (RSI) chart at 70. The index is somewhat ‘Overbought’. The momentum index below is also showing a huge spike when seen from the extreme right-end of the chart.

Stocks to watch out for with earnings season nearing

Investors have been asking financial advisers, including myself, which stocks to look out for, especially among the STI component stocks. Frankly speaking, if you think that the STI component stocks are good financial instruments to accumulate in the long run, look no further that the SPDR Straits Times Index Exchange Traded Fund (ETF), or the Nikko-AM Singapore ETF as index valuation is still relatively cheap at 13 – 14 times historical price-earnings (P/E) growth.

Source: Phillip POEMS 2.0 Trading Platform (Overlap of STI ETF (blue colour line), and Nikko-AM Singapore ETF (yellow colour line), January 11, 2018)

Looking at the overlap charts of both indices, it appears that both the Nikko-AM Singapore ETF is slightly outperforming the STI ETF prices. But, given the physical replication nature of both ETFs, they are, in essence, perfectly correlated.

However, if one is looking to beat the index, you may want to adopt a single or a group of stocks that provide recurring income through dividends, yet have that so-called ‘Alpha’ or the measure of outperformance yardstick to determine the overall direction of the index. This is difficult, but achievable trait, so investors are encouraged to keep analysing for opportunities.

Oil stocks in focus

Crude oil prices crossed the US$70 per barrel mark this week after hovering at US$60 per barrel mark for quite a while. The rise in crude oil prices have also impacted the bigger market cap counters like Keppel Corporation and Sembcorp Marine. Indeed, the share price of Keppel Corporation rose eight cents on Friday, January 12 to close at S$7.99, and is now trying to get past the S$8.00 per share psychological hurdle.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Keppel Corporation Limited, January 12, 2018)

Looking back at the share price of Keppel Corporation, the Christmas 2017 news that eventually saw a fine of US$422 million levied on the counter did not seem the pull down the stock price further, but instead helped the firm to recover past the pre-announcement price of around S$7.42 per share.

There was also a technical breakout shown on the chart where after the share price fell to as low as S$7.09 on Tuesday (December 26, 2017), the chart showed a ‘hockey stick’ like up move, and has never looked back.

How did the local markets end for the week

The STI makes another comeback after two minor setbacks during the week. The first came on Wednesday where the index fell slightly as some investors are hoping to cash out some gains. On Thursday, following news about China not expecting to finance the debts incurred by the US government, share prices of several US corporations, especially those top market cap stocks like Exxon Mobil, and Chevron fell hard

The news have spooked various investors which explains many of them found excuses to sell. However, towards the end of the week, the markets decided that it is time to press the ‘Long’ button resulting in the STI closing Friday’s trading session at 3,520.56, up 7.88 points.

Source: Phillip POEMS Trading Platform (One-year weekly chart of the Straits Times Index (STI), January 12, 2018

Looking at the chart above, the year-to-date performance has risen to 3.46 percent, whereas on a weekly comparison, the index is up 0.9 per cent. Indeed, the STI has come a long way as it trends up the charts. Some of the notable counters besides Keppel Corporation include DBS Bank, OCBC and UOB. DBS closed on Friday at S$26.34, down 12 cents, while OCBC and UOB closed at S$12.99 and S$27.87 respectively. UOB was the only bank stock that was in the ‘black’ as it climbed up 17 cents.

Newly STI debutant Venture got a boost in its share price when MayBank Kim Eng upgraded the stock with a 12-month target price of S$27.00. The sole technology stock closed up 25 cents at S$22.65, making it one of its best showings since the dotcom boom days of the early 2000s.

Singapore Press Holdings (SPH) Limited leads the reporting season among the STI components with a earnings 32 per cent rise in earnings to S$60.4 million led by investment gains. However, operating revenue fell by 7 per cent to S$258.8 million, dragged down by a 13.9 per cent decline in media revenue to S$173.9 million. SPH shares closed at S$2.63 per share, down 2 cents or 0.8 per cent before the market session ended on Friday.

Hong Kong’s Hang Seng led gains above 31,000

Source: Stockcharts.com (One-year weekly chart of the Hang Seng Index (HSI), January 12, 2018)

Make no mistake, the Hang Seng Index (HSI) is on a ‘super’ climb up to the upper limits. Like an ascending aircraft, there appears to be no turning back with the index closing at a high of 31,412.54, barely two weeks at the end of last year where it broke the 30,000 psychological level.

At such astronomical levels, no one could believe and to be assured of its sustainability. The latest performance for HSI comes in the continued inflows of capital from the mainland and offshore. Analysts interviewed by CNBC noted that the inflows were the result of the 2016 introduction of the Shenzhen-Hong Kong Stock Connect, coupled by the reallocation of fund flows as part of their strategies to increase portfolio exposures to Hong Kong over other developed markets like the US, and Europe.

Most analysts interviewed cautioned that Hong Kong stocks typically rally around the Lunar New Year which falls in mid-February this year. This might suggest that a slight correction could be on the cards following the run-up.

European markets are on the rise

Source: Stockcharts.com (One-year weekly chart of the Stoxx Euro 600 index, January 12, 2018)

The pan-European Stoxx Euro 600 index rose higher to 398.49 points this week on the back of strong US data and stock market news, plus German coalition party leaders among the ruling Christian Democrats Party (CDP) and the Social Democratic Party (SDP) have reached a breakthrough in preliminary talks to form a new government.

According to data from CNBC.com, the German DAX closed up higher by 0.32 percent, while the EUR/USD went up higher on the back of the breakthrough talks. The UK’s FTSE 100 rose 0.2 per cent while France’s CAC 40 rose 0.52 per cent.

There has been some optimism this week in the Euro as well given the latest political confidence shown in Germany.

Source: Stockcharts.com (One-year weekly chart of the EUR/USD exchange rate, January 12, 2018)

The EUR/USD exchange rate received a warm reception as the latest minutes from the last European Central Bank (ECB) meeting showed that members could revisit its communication stance in early 2018, boosting expectations that policymakers are preparing to reduce their ongoing monetary stimulus programme. The policy makers are also seeing growth improved, and they felt that ECB should gradually pull away the ‘punch’ bowl and look at the broader revision of its stance to minimise disruptions later. It also reiterated that it will adopt a broader revision if the overall policy stance to gradually normalise rates.

US markets rise despite the 2-year Treasuries rose above 2 per cent

It is another record breaking close for US markets with the major investment banks reporting good set of earnings results, along with the rise in crude oil prices which topped US$70 per barrel this week. Here is a look at the closing US stock index figures on Friday, January 12, 2017:

Source: CNBC.com (January 12, 2017) (FB: Facebook; GS: Goldman Sachs)

For the week, the Dow rose by 2 per cent, and it triumphed over S&P 500 and the Nasdaq index. The US markets were also supported by reasonably good economic numbers including the latest December core consumer price index (CPI) which rose 0.3 per cent, and 1.8 per cent in 2017. This was the said to be the biggest advancement of the core CPI since January. Core CPI excludes volatile items like food and energy.

The two-year Treasury yields also gained past 2 per cent this week, and was the first time since September 2008 when investment bank, Lehman Brothers went bankrupt, sparking a year-long recession. Incidentally, the Straits Times Index was at around 3,900 which was at it peak before the crisis happened in 2008.

Source: Stockcharts.com (One-year daily chart of the US 2-year treasury yield rates, January 12, 2018)

So far, the markets appeared to be less concerned by the rise in the 2-year treasury yields though in normal circumstances, this could be alarming as yields are starting to keep pace with inflation levels, and could soon matter if the US Fed misjudged the economic conditions in raising rates too fast.

Where do we go from here

Markets are pricing in good earnings results, reasonably strong economic conditions around the globe, less terrorism in the Middle-East, and breakthrough in the ongong inter-Korean tensions, the momentum is expected to continue

How did your model portfolio perform

Note: Model equity portfolio performance as of January 12, 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 return this week has shown a major outperformance of 86.4 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 20.1 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 50.0 per cent since end June 2017); followed by Ascendas Reit (up 18.7 per cent since November 2016), and SATS Ltd (up 17.3 per cent since December 2016).

The model equity portfolio did experience a shortfall coming from Sheng Siong (down 6.1 per cent since June 2017); followed by Straits Trading Company  (down 5.3 per cent since end June 2017), and Singtel (down 4.8 per cent since 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 March 2018.

Upcoming Financial Results from January 15, 2018 onwards

Source: The Edge Magazine (January 15, 2018 issue #813)

Economic Calendar for week beginning January 15, 2018

Singapore

Source: TradingEconomics.com

China

Source: TradingEconomics.com

An important piece of data on the tap is China’s GDP growth rate which is expected to rise by 6.7 per cent. Premier Li Keqiang has mentioned earlier that China is expected to grow by 6.9 per cent in 2017.

United States

One key economic number to watch for is Friday, January 19 preliminary release of the University of Michigan’s Consumer Sentiment for January. The index is expected to achieve a rate of 95.30, versus a consensus estimate of 97.

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About Peak Hour 87 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