Two down days for STI, but still resilient

The second week of August 2017 saw the Straits Times Index (STI) trading lower by a consecutive total of 15 points from last Friday (August 04) close to end at 3,318.08 before the country’s National Day holiday on Wednesday, August 09. However, the index is still trading up by 15.2 per cent since the beginning of the year, and is good news for many who continues to hold onto the exchange traded fund of the STI.

Source: Phillip POEMS Mercury Trading Platform (One-year daily chart of Straits Times Index (STI) as of August 08, 2017)

Looking at the one-year candlestick chart of STI, we noted that the index is now hovering just above the 50-day moving average (MA) line on its way down, but has not penetrate below the line.

We think that if the index is to pierce below the 50-day MA, we think that the next support level to take note of is the 3,260 to 3,280 levels. However, if it breaks below those levels, we could see the index falling back to the 3,200 to 3,220 ranges.

On the flipside, if the index manages to stay afloat, the index could itself continue to rise beyond the recent high 3,354.71 which was also the day’s closing high on July 27.

Sabana is still alive and kicking

Sabana Reit is back in the news after a much talked about shareholder fiasco earlier this year. However, this time round, it is for a good reason as it is now engaged in discussions with a consortium led by private equity firm Warburg Pincus, and e-Shang Redwood (ESR) that could possibly lead to a buyout.

This news was expected by many investors as many had thought that by investing in around 5 per cent of Sabana’s share capital in early March by ESR, through its real estate investment trust (Reit) arm, it is an indication that there could be further inroads made by the Reit.

ESR-Reit (E Shang Redwood Reit) and Sabana have come out to say that they are still discussing about options that could possibly lead to a potential strategic transaction, but exact details are still not worked out, as the discussions are still in their early stages.

A temporary upside for Sabana?

Source: Phillip POEMS Mercury Trading Platform (One-year daily chart of Sabana Reit, August 08, 2017)

Looking at the one-year daily chart, and ignoring the market news for a moment, the stock’s jump on a single day with relatively low trading volume could possibly be a blip, and not likely to be sustainable. If the Reit did manage to successfully negotiate for a potential buyout transaction, we could see the stock rise by a bit, possibly by another 1 to 2 per cent. However, if one were to look for any extended returns, they could be disappointed as the stock would have absorbed most of the news earlier.

YZJ Shipping still on the roll

Yangzijiang (YZJ) Shipping Limited had turned itself from zero to hero when the stock rallied by 83 per cent in 2017 to lead the Singapore Straits Times Index. This is according to a Bloomberg.com report on Monday, August 07.

The company reported a 73 per cent surge in 2QFY2017 net profit to 719.9 million yuan (S$1461.1) due to higher top line growth and lower finance charge. However, the lower contract prices for the vessels under construction, gross margin slipped four percentage points year-on-year (yoy) to 21 percent.

A summary of the financial results is as follows:

Source: YZJ, UOB Kay Hian (August 10, 2017)

UOB Kay Hian has a neutral rating on the stock, and targeting the 12-month price level of $1.42 per share. In a report dated August 10, 2017, the analyst kept the contract wins assumption unchanged at US$1 billion, but have adjusted the revenue recognition period. The analyst cited declining steel prices and a depreciating Chinese Reminbi against the US Dollar as some of the reasons for the raising its earnings estimates.

As at end June 2017, YZJ has an outstanding order book of US$4 billion, comprising of 85 vessels.

Comparing YZJ Shipping and STI

Source: Phillip POEMS Trading Platform (One-year comparison of YZJ Shipbuilding and STI as of August 10, 2017)

Looking at the above chart, we noted that YZJ has risen beyond one’s imagination considering that there is still idle capacity among various ship building supply chains, The company has so far achieved a total return of 70 – 75 per cent rise since February 2017. When comparing the YZJ stock to the market index, namely the Straits Times Index (STI) whose total returns are somewhat flat, YZJ has outperformed the index by a mile.

We think that YZJ is perhaps a turnaround stock, if they can successfully maintain a good order volume, and sustainable price levels.

Looking deeper at the individual stock, YZJ Shipping through the charts

Source: Phillip POEMS Trading Platform (One-year daily chart of YZJ Shipbuilding, August 10, 2017)

The chart above showing the one-year change in YZJ Shipping Limited looks like a rocket blasting its way up. The stock appears to have no look backs with substantial trading volume of close to 25 million shares.

The average directional index (ADX) shows a positive stock momentum with positive directional indicators (DIs) outperform the negative DIs.

At the recent high of S$1.64 per share, we think that there is still room to grow. However, short-term pullbacks can be seen at close to S$1.55 to $1.60 per share. Some analysts have recommended an entry price of S$1.48 to S$1.50 per share.

Singtel and CDL stocks ended mixed

Singtel’s profits during its second quarter fell 5.6 per cent to $891.6 million as its telecom subsidiary, Airtel struggles to expand its turf in India. Its staff restructuring costs mainly from Optus Australia accounted for an S$18 million exceptional net loss, against a net gain of S$1 million in same quarter last year. Underlying net profit fell 3.5 per cent to S$910 million, but would have risen 2.9 per cent if Airtel had been excluded. Singtel shares ended up flat on Friday, August 11 at S$3.76 per share.

As for City Developments Limited (CDL) which reported its 2Q earnings on the same day, it suffered a 17.9 per cent fall in net profit to $109.88 million, and the sudden resignation of its current CEO, Grant Kelley who will be filling up another CEO position back in his home country in Australia.

CDL’s management went on to say that current CEO-designate, Sherman Kwek will take over the helm after Kelley leaves on December 31, 2017.

On the whole, CDL did manage to eke out some gains in net profit and revenue during the 2017 first half with net profit of S$195.4 million compared to S$239.14 million in the same period last year, and revenue of S$1.64 billion compared to S$1.82 billion last year.

CDL shares ended Friday’s trading session at S$11.14, down 53 cents or 4.5 per cent intraday.

Hong Kong shares fell hard on North Korean tensions

Source: Phillip POEMS Mercury Trading Platform (One-year weekly chart of Hang Seng Index, August 11, 2017)

The Hang Seng Index (HSI) in Hong Kong was not spared in the aftermath of a war of words between US President Donald Trump and North Korean President, Kim Jong Un. The index suffered a 1.5 per cent decline to end Friday’s trading session at 26,883.51.

One of the biggest losers was social media giant, Tencent whose stock fell as much as 5 per cent as investors saw an opportunity to take some profits. Other counters like HSBC also fell by more than 2 per cent.

Looking at the above weekly chart of HSI, we noted that the index is still trending upwards despite a drop on Friday. Investors have also been wondering whether HSI has corrected meaningfully. We opined that it is most likely not corrected significantly as the green candlesticks are still showing a positive momentum upwards.

We recognised that investors are looking for opportunities to enter into HSI stocks, particularly with the new Hong Kong – Shanghai Connection where exposure to the ‘A’ shares markets are highly sought after by foreign investors eager to tap into the wealth of the Mainland Chinese companies. However, to call the current market in Hong Kong has entered into bear territory might be far-fetched idea

We will continue to monitor the index. We think the critical support level at this juncture is the support level of 26,000. If the index does breached the 26,000 level, it could drop further to as much as 25,000 before a short rebound might provide some relief.

If the HSI managed to hold off against further declines, we could see the index rising to 28,000 or 29,000 levels. These are levels which many called them as ‘the sky has no limits’.

Declines in European stocks ensues

Source: Stockcharts.com (One-year weekly chart of Stoxx Europe 600 Index, August 11, 2017)

The declines in European stock prices continue this week with the pan-European stock index, the Stoxx Europe 600 Index shedding more points to close the trading week at 372.14. The index is also declining towards the 50-day moving average (MA) line of 366.93 on the weekly chart.

The 14-day relative strength index (RSI) shown above the chart is declining, but is not signaling an ‘ovesold’ market yet. (RSI below 30 is considered as ‘oversold’, while RSI above 70 is considered as ‘overbought’).

However, the moving average convergence and divergence (MACD) graph below could be indicating a decline in the overall index as the 12-day line has crossed the 26-day line on the way down since June. Moreover, the decline coincides with the decline in the weekly chart of the Stoxx Europe 600 Index around in June. We think that this observation offers some background information on the overall movements of the index as a whole.

According to a CNBC.com article, the main drags to Friday’s trading session were oil and gas (O&G) and basic resources stocks, with the latter sector declining by more than 2.5 per cent.

Although Europe was far from the centre of the current geopolitical tensions in the Korean Peninsula, its financial markets are not immune to fear among investors who have been downsizing their portfolios and piling them into safe haven assets like the Swiss Francs, the Japanese Yen, and gold.

US markets ended up in the green during the week after a major sell-down

The US financial markets avoided further losses for the week with major indices showing up positive by the end of the trading session on Friday, August 11. The S&P 500 index gained 0.13 per cent to close at 2,441.32, while the Dow Jones Industrial Average (DJIA) closed the week at 21,858.32, up 14.31 points. The technology-laden Nasdaq ended the trading session up 0.64 per cent to close at 6,256.56 as the large-cap tech stocks rebounded.

A summary of Friday’s market closing figures is shown below:

Source: CNBC.com (August 11, 2017)

Looking at the weekly chart of the S&P 500 index, the overall trend is still up, but the MACD chart at the bottom of the chart showed that the 12-day, and the 26-day lines are converging towards each other, and could be a signal of peak market capitalisation levels for most of the companies on the S&P 500 index.

Source: Stockcharts.com (One-year weekly chart of the S&P 500 index, August 11, 2017)

Investors would also be interested to ask if the US markets have corrected significantly, or will there be a market crash-like scenario. We can only say that based on technical analysis (TA) alone, and the chart shown above, a significant market correction seems farfetched, but possible. Some potential market correction scenarios include hostilities breaking out between US and North Korea, an impeachment of the US President, or a sudden withdrawal of liquidity in the US financial markets. However, these types of scenarios may take months to develop, and we can’t predict them in a definite manner, except to continue monitoring the developments as they unfold.

Volatility is coming back

Source: Stockcharts.com (One-year daily chart of the VIX index, August 11, 2017)

The measure of implied stock volatility, the VIX index is starting to show some life with the index spiking higher from the lows of about 10 to the current 15 and above. As the VIX is known as the ‘Fear Gauge’, we can somehow deduce what investors are feeling towards the current political tensions, and the desire to seek for safe havens during such market turmoil. The MACD graph below is also showing greater momentum as investors’ sentiments are currently quite negative.

In summary, looking at the four markets, the STI, the Hang Seng Index in Hong Kong, the StoxxEuro 600 index in Europe, and the S&P 500 Index in US, we think that there is a common theme among investors’ sentiments to describe the overall current situation, “Get me out of these markets, and we want to be in safe haven assets!” However, we opined that all four markets are hardly in any market correction modes, and are probably taking some breather before continuing. Thus, it pays to continue monitor the various developments, and decide on one self how to benefit from it.

How did our model investment portfolio perform

Note: Model equity portfolio performance as of August 11, 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 80.3 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 12.9 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; followed by Cogent Holdings Limited (up 15 per cent since January 2017), and Ascendas Reit (up 13.2 per cent since November 2016).

The model equity portfolio did experienced a shortfall coming from Sheng Shiong (down 7.6 per cent since June 2017); Sembcorp Industries Limited (down 2.2 per cent since January 2017); and Soilbuild Business Space Reit (shortfall of 1.4 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.

What local economic and company earnings events to take note next week

Source: TradingEconomics.com

After a highly anticipated, and market beating forecast for Singapore’s 2Q Gross Domestic Product (GDP) number of 2.9 per cent this year, the next key data to watch for next week is the trade balance figures for the month of July. The current forecast is projecting a slowdown from the US$7.1 billion achieved previously to a projected US$6.4 billion number for July. We think the companies may be taking stock of their current demand, and are adjusting their imports and exports accordingly.

US economic calendar

Some key economic data points to look for in US include retail sales for the month of July, followed by the US Federal Reserve’s Federal Open Market Committee (FOMC) meeting minutes on Thursday, and the University of Michigan Consumer Sentiment Index on Friday.

Company earnings updates

Source: The Edge Magazine (Issue #792, August 14 – August 20, 2017)

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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