The meaning of ‘January Effect’ for STI is debunked in 2018

The term “January Effect” is a stock market phenomenon that happens every year where stock markets tend to be a sell off as investors and traders return from the holiday break wanting to realise profits, or cut losses on some of their stock positions in their investment portfolio.

Many investors tend to associate “January Effect” as the so-called ‘jinx’ month where one month of heavy sell-offs will typically determine how the year will end for stock markets. However, this may be true in certain cases like the heavy sell-off in Chinese markets starting in September 2015 which lasted to the beginning of 2016. In the end, the Straits Times Index (STI) ended 2016 on a relatively flat note at around 2,800 levels.

However, as many have noted in 2017, the STI closed off the year on December 29 on an upbeat note where the index rose 18 per cent year-to-date with the pace sparked off towards the end of 2016 known as the ‘Trump’ effect as investors become more optimistic. Moreover, with strong manufacturing growth, the rise in en-bloc deals, the come back of the local property market, and gradual recovery in the oil and gas sector, the STI followed accordingly and held on the gains till the close of 2017.

Let us take a look at the fiver-year STI chart to demonstrate the impact of ‘January Effect’:

Source: Phillip POEMS 2.0 Trading Platform (Five-year daily chart of the Straits Times Index (STI), January 29, 2018)

As one can notice from the chart, I have denoted the January months with vertical lines starting from 2015. Out of the four vertical lines, the latest one in January 2018 showed a continued climb and a continuation of the momentum from the previous year. For the months of January 2015, 2016, and 2017, there were dips. However, in January 2017, things start to change as the STI starts to gather momentum, and has not looked back since.

Stocks that have seen some volume activities

QT Vascular got device bought out by Medtronic

Source: Phillip POEMS 2.0 Trading Platform (One-year daily price of QT Vascular share price, January 30, 2018)

In a January 30, 2018 press release, Medtronic completes the purchase of QT Vascular’s Chocolate® PT Balloon Catheter for an undisclosed amount. According to the press release, the Chocolate® PT Balloon Catheter is designed to provide atraumatic dilation in the treatment of blocked arteries. The Chocolate BAR postmarket registry of 490 patients showed that use of Chocolate® PTA resulted in low rates of dissections and bailout stenting. Chocolate® PTA may be used as a stand-alone treatment or adjunctive treatment for stenosis in vessels above and below the knee. It is approved for use in the United States, Europe, Australia, Turkey, Singapore, and Hong Kong. Currently, it is commercially available by Medtronic in the United States and Europe.

The stock price jumped close to 17 – 18 per cent intraday on Tuesday to S$0.02 per share on volume of 266.4 million shares.

Oil and Gas (O&G) stocks move higher

Several oil and gas counters (O&G) moved higher after crude oil prices came back with a roar with a 0.3 per cent rise in Brent Crude Oil futures contracts on Friday to US$69.84. According to CNBC.com, a Reuters survey showed strong compliance with output cuts by OPEC and others including Russia offsetting concerns about surging US production.

A chart of the key FTSE ST Oil and Gas Index shown below will highlight the point on oil price recovery:

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of the FTSE ST Oil & Gas Index, February 02, 2018)

Looking at the chart above, it appears that the price of oil has risen close to another new highs of close to US$70 for the Brent crude oil (shown below), and the relative strength index (RSI) on the chart above appears to show an ‘Overbought’ situation.

Source: Stockcharts.com (One-year daily chart of Brent Crude Oil prices, February 02, 2018)

As one might have noticed, we can see some oil and gas (O&G) counters like Sembcorp Marine, Viking Offshore, Kim Heng Offshore, and Keppel Corporation rising at about 2 to 8 per cent. Pacific Radiance rose higher by 14 to 15 per cent to close at S$0.137 on news about its sweetened debt-for-equity swap where it agreed to offer full conversion of 19 new shares for every S$5, which equates to 3.8 shares for every S$1. Previously, the plan was for full conversion of the notes to new equity at a rate of three  new shares for every S$1 held.

Rising interest rates, emerging inflation expectations

The last two days of January 2018 saw global markets turned red with STI losing 12 to 13 points to close at 3,533.99 on January 31, 2018. One of the reasons for the major knockouts of global market indices is the rate of interest rate increases, and departing US Federal Reserve chairwoman noting 2018 is likely to see inflation coming back to the markets. The US central bank has started to reduce its balance sheet since early last year, and this causes the 10-year US Treasury yield rates (shown below) to rise to close to 2.84 per cent by end of the trading week on Friday.

Source: Stockcharts.com (One-year daily chart of the 10-year US Treasury yield rates, February 02, 2018)

Singapore interbank offered rates (SIBOR) rates rose in tandem

Source: Moneysmart.sg (One year daily chart of the three-month Singapore Interbank Offered Rate, SIBOR, February 02, 2018

The three-month Singapore Interbank Offered Rates (SIBOR) currently stands at about 1.5092 per cent per annum (pa), and forms the basis of pricing home mortgages. If the SIBOR rates were to match with the trajectory of the US 10-year Treasury yields, companies like banks, real state, consumer discretionary sensitive might get impacted from the higher interest rate impacts.

The 3-month Singapore Interbank Offered CFS) Rate currently stands at about 1.502 per cent annum. It is not a lot surprising considering the Singapore investor are now piling their cash into the Singapore Savings Bond (SSBs), and that swelled to S$172 million from S$150 million at the end of January 2018, according to an article published by The Edge Magazine, and the Monetary Authority of Singapore (MAS).

 Inflationary expectations in Singapore rising

According to the latest quarterly Singapore Index of Inflation Expectations (SinDEx) survey conducted by Singapore Management University (SMU) Sim Kee Boon Institute for Financial Economics (SKBI), the reading for December 2017 at 2.97 per cent and outbid the September 2017 forecast of 2.93 per cent.

In a December 31, 2017 survey of professional economists by MAS, the CPI-All Items Inflation is forecast to come in at 1.0 – 1.4 per cent in 2018, while MAS Core Inflation is expected to be 1.5 – 1.9 per cent.

As one notice, the inflationary expectations on the ground is vastly different from what the professional economists have forecasted in 2018. This has illustrated that most Singaporeans are indeed concerned and are expected inflation rates to rise higher in 2018.

How did Singapore markets end for the week

The Straits Times Index (STI) closed lower on Friday at 3,529.82, down 17.41 points or 1.05 per cent decline compared to last week. The decline in STI took down the year-to-date (YTD) performance to 3.7 percent.

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of the Straits Times Index (STI), February 02, 2018)

There were a total of 3.89 billion shares worth S$1.93 billion changed hands as compared to 2.77 billion shares worth S$1.71 billion on the previous trading day on February 01, 2018. There were several notable counters which saw deep losses including Singtel whose share fell from S$3.60 in the previous week to close at S$3.49. This comes after Daiwa Capital Markets issued a research report noting that the time is still not ripe to pile into telecommunications stocks with competition expected to heat up as Australian telco rival, TPG Telecom making its way to Singapore later this year.

This is followed by threats coming from the so-called Mobile Virtual Network Operators (MVNO) players like Circles.Life which is tied up with M1, and Zero Mobile which debuted end of 2017. The latter is tied with Singtel. The availability of lost cost mobile prepaid plans, coupled with unlimited data plan, and no fixed contract terms attract consumers, especially the millennials seeking for flexibility in choices.

Other shares which saw advances include many oil and gas (O&G) counters like Sembcorp Marine which rose 22 cents, or 8.56 per cent to close at S$2.79. Others like SingPost scored big with a huge 35 per cent increase in the bottom line when they reported their 3Q results in Friday. The stock of the e-commerce and mail operator rose eight cents, or 6.2 per cent to close Friday’s trading session at S$1.38. The latest showing by SingPost is said to be one of the best since it was left mired in issues relating to corporate governance, search for new chief executive officer, lack of direction, and the uncertainties over its partnership with Alibaba (BABA). The latest results speak for itself, and newly appointed CEO Paul Coutts is determined to lead SingPost to a better future through the ongoing restructuring efforts.

Hong Kong’s Hang Seng looks ‘peakish’

Source: Stockcharts.com (One-year weekly chart of Hang Seng Index (HSI), February 02, 2018)

A disappointing official China Purchasing Managers Index (PMI) earlier this week seems to negate the private sector Caixin Purchasing Managers’ Index which showed a reading of 51.5 during the month of January 2018 as compared to the consensus estimates of 51.3. The same survey in December showed a reading of 51.5. The joint Caixin and Markit report noted that growth in January was supported by increases in total new work and new export sales.

However, the official index missed expectations and came in at 51.5. The government noted that January’s poor performance was a result of tough environment controls and reigning on the relatively high debt levels.

Despite the mixed reading, and with the Hong Kong’s market closely tied to the Mainland, any fall out from demand could affect the financial markets. The latest crackdown did cause some negative impacts with declines in the HSI. Overall, for the week, the HSI lost 1.7 per cent.

Looking at the weekly chart above, despite the short decline, the HSI is on a tear to close Friday’s trading session at 32,601.78. The signs look bearish with the RSI chart showing the start of a decline from an ‘Overbought’ reading of 76.54. We don’t expect the decline to be fast and furious. Instead, any declines are expected to take the form of slight dips which are not expected to be in the region of 10 per cent to 20 per cent unless something horribly went wrong.

European Markets sliding down from highs

The pan-European markets led by the benchmark, Stoxx Euro 600 Index suffered some declines in the index as ripple effect from the global market selling that impacted the major Asia-Pacific markets, and US markets.

Source: Stockcharts.com (One-year weekly chart of the Stoxx Euro 600 index, February 02, 2018)

Looking at the chart above, the index fell hard on in the previous two days, but is at above the 50-day moving average (MA) at 388.08. We also noticed that the 14-day RSI is still hovering at the middle of 49 to 50.

In a recent CNN Money report, it was also reported that growth in the 28-member European Union reached 2.5 per cent in 2017. This compares to the consensus estimates of 2.3 per cent expansion. This might have led investors to search out for better returns through the local bourses through the use of ETFs tied to the counters they are holding.

For clients and readers reading this note, please take note that there is an ETF that has European exposure, and the ticker symbol is IEV or iShares Europe ETF.

Source: Stockcharts.com (One-year weekly chart of the iShares Europe ETF, February 02, 2018)

Although there was a deep dive or a red candle showed on the right-hand side of the chart, the overall trend is still heading upwards as both the 50-day and 100-day moving average (MA) lines have not been breached. The 14-day RSI has also fallen from its ‘Overbought’ highs and is now below 70, and momentum is still rising. We urge readers to refrain from taking unnecessary actions to hit the ‘sell’ button immediately. Instead, they should revaluate the situation.

The wanderlust about the US stock markets looks lost

With President Trump’s first State of the Union speech this past week on Tuesday on February 29 ended without any policy specifics, not many investors gave him credit and instead unleashed a massive ‘sell’ programme that saw the Dow Jones Industrial Index plummet down by a massive 600 over points to close Friday’s trading session at 25,520.96. A detailed breakdown of the closing numbers of the major US stock indices is as follows:

Source: Marketwatch.com (February 02, 2018)

The 10-year US Treasury Yield Rates have also rose to close to 2.8 per cent, and is on track be one of the highest for the past four years. Many investors are feeling very jittery about the rise in interest rates.  The fear is also being exhibited through the CBOE Volatility Index (VIX) which shot up from around 10.79 to 17.31 in recent days. The VIX chart is shown below:

Source: Stockcharts.com (One-year daily chart of the Volatility Index (VIX), February 02, 2018)

Investors are frantically asking their financial advisers what to do with all these stocks that are in the ‘sea of red’. As a financial adviser myself, I have also been asked what to do. Frankly speaking, not doing anything is probably the best thing. It is during these daunting times, investors start to panic and they lost control of their rationale, and decision-making. I would urge investors to take a step back, evaluate your investment portfolio. It is not the time to regret, but to understand the makeup of your portfolio. Should you rebalance, or restructure your investment portfolio. Do you want to consider taking losses and/or profits after so many years of holding them without any headways so far.

Investors should also try to focus on dividend stocks as regular income provides a degree of certainty. However, please do not rule out growth stocks totally. Do consider the costs and benefits of keeping your growth stocks as well. It has to be evaluated in totality or at a portfolio level, rather than individual stock basis. It cannot be emphasised further that a portfolio approach needs to be adopted and not a single stock approach.

How did our model investment portfolio perform

Note: Model equity portfolio performance as of February 02, 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 86.55 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on December 31, 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 59.2 per cent since end June 2017); followed by Ascendas Reit (up 15.3 per cent since November 2016), and SATS Ltd (up 13.9 per cent since December 2016).

The model equity portfolio did experience a shortfall coming from Singtel (down 7.7 per cent since December 2016); followed by Sheng Siong  (down 6.6 per cent since end June 2017), and Straits Trading Company (down 5.3 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 March 2018.

Upcoming Earnings News next week

Source: Phillip Securities Pte Ltd, SGX

Some of the key STI counter earnings reports to look out for next week include HPH Trust,  DBS, and Singtel.

Economic Calendar for the coming week

Singapore

Source: TradingEconomics.com

With the key manufacturing data showing multi-year highs, it will be critical to keep monitoring in the months to come for the continuity of growth in the manufacturing sector.

China

Source: TradingEconomics.com

With the US retaliation in the form of tariffs on major Chinese solar panels, and washing machines, it will be critical to monitor the balance of trade figures.

In addition, Chinese inflation data will also be monitored especially when environmental curbs have impacted business and consumer costs.

United States

With US jobs report showing 200,000 payrolls created, and unemployment rate stays low at 4.1 per cent, all eyes will be on the Institute of Supply Management (ISM) non-Purchasing Managers’ Index (PMI), and the sensitive trade figures.

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About Peak Hour 86 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