A comeback for STI after a brief technology sector blow up

The Straits Times Index (STI) recovered after Friday and Monday’s sell off of various technology stocks. The so-called ‘blue-chip’ index closed Tuesday, June 13, 2017 trading session at 3,257.52, or 9.18 points up. The index is currently trading at around 3,252 – 2,253, down slightly at the date of this article on Wednesday, June 14, 2017. On Monday, during the brief technology industry rout, the STI closed down 5.85 points at 3,248.34.

Note: One-year daily chart of Straits Times Index (STI) (As of June 14, 2017)

Looking at the one-year daily chart of STI, we note that even with a brief drop below the 50-day moving average (MA) line around late April 2017, the index continued to maintain its upward momentum. The upward momentum continues to be intact despite the two brief brushes on the 50-day MA in mid- and late May 2017.

Brief technology rout this week

Note: One-year daily chart of FTSE ST Technology Index (June 15, 2017)

Taking a look at the one-year chart of FTSE ST Technology Index, we noted that the index is on a general downtrend despite the growth of the manufacturing sector, especially the electronics cluster. We noted that the index recently fell below the 100-day moving average (MA) line at , and is currently treading around the 100-day MA at 223.41.

We examine some of the most sought-after counters namely Hi-P, Sunningdale Tech, AEM, and UMS to get a general feel on the extent of the technology stock rout happened on Monday, June 12, 2017.

Hi-P

Sunningdale Tech

AEM

UMS

Note: One-year weekly charts of Hi-P, Sunningdale Tech, AEM and UMS respectively (June 15, 2017)

Looking at the four charts, we noted that all of them took on similar shapes, and form in terms of the declines from the peaks. If we were to examine the length of the red candles of all four charts, we noted that UMS appeared to show one of the longest red candles. The volume of shares traded was about 23.8 million shares on Monday, June 12.

Looking at Thursday, June 15 trading volume, there is no apparent sudden spike in the overall volume with about 23.3 million shares traded for UMS.

We think the drop could be an acknowledgement among many investors that most of the listed technology stocks have outrun their current fundamentals. In fact, the Nasdaq Index in the United States closed lower by 29 points to end at 6,165.50 on Thursday, June 15 primarily due to the valuation concerns of some of the technology stocks. This will fully be elaborated in the next sections.

A flurry of IPOs and bond issuances sparking market interest

The onrush of several initial public offer (IPO) issues in both the debt and equity markets have sparked some interest among investors. Within the debt markets, the various perpetual bond issues including those of HSBC, Starhub, Lippo Malls Reit, and Sembcorp Industries have driven up much interest within the debt market space. This level of interest has also risen despite the US Federal Reserve raising interest rates to 1 – 1.25 per cent on Thursday morning. Moreover, according to a latest Business Times article, the three-month swap offer rate (used for bond pricing purposes) fell to 0.76764 per cent on Wednesday, and the five-year SOR rate fell hard to a year-to-date low of 1.721 per cent on Thursday, down 66.4 points from the beginning of 2017.

Source: The Business Times (June 16, 2017), Bloomberg

If we were to take an example of an existing perpetual bond issue, Lippo Malls Indonesia Reit (LMIRT). The bond is trading at 104.7 with an offer yield of 5.73352 per cent on June 16, 2017. The bond was issued earlier to fund the S$33.2 million Kendari acquisition, as well as to temporary refinance the S$50 million 5.875 per cent bond due in July 06, 2017, and the S$75 million 4.48 per cent bond due on November 28, 2017. On June 14, LMIRT announced that its second perpetual bond issue with a 6.6 per cent coupon was quoted at 101.56, and was hotly taken up.

Similarly, over in the equity markets, the latest IPO issuances including those of Sanli Environment Limited, World Class Land Group Limited, and HRNet Group Ltd. have been oversubscribed despite the slow market conditions. The latest one and the first company to be listed on Singapore Exchange (SGX) Mainboard, HRNet Group Ltd. received an overwhelming response from investors as the issue (both private placement and retail issue) was approximately 15.26 times oversubscribed. The company is one of the largest Asia-based recruitment agency in the Asia-Pacific (excluding Japan) region had issued 193.4 million new shares priced at $0.90 per share. As of 5 pm market close on its first day of trading on June 16, the stock ended at $0.92 per share with a total trading volume of around 17 million shares.

Investors are also eagerly looking out for the next big Mainboard issue, Net Link Trust, which had come out to disclose in early June that SGX has issued a conditional eligibility-to-list letter for the company. The Singtel subsidiary is said to be looking to raise at least S$2 billion which would make the listing as one of the largest in years.

Net Link Trust designs, builds, and operates the infrastructure for Singapore’s Next Generation Nationwide Broadband Network (NextGen NBN). According to The Straits Times article dated June 02, 2017, Singtel does not have effective control of NetLink Trust, and is prepared to take the company public. Singtel has also plans to sell its stake in the firm to below 25 per cent by April 22, 2018.

Hong Kong’s Hang Seng Index dips slightly, but overall trend is up

Source: Stockcharts.com (One-year daily Hang Seng Index (HSI) chart, June 16, 2017)

The Hong Kong’s Hang Seng Index (HSI) closed the day on June 16, 2017 at 25,626.49 points, up 0.2 per cent intraday. The index registered a 1.6 per cent loss for the week, and was said to be the biggest since early March. On Thursday, the benchmark index fell 1.2 per cent.

Looking at the chart above, the overall trend is still moving upwards, except for some slight correction in June. The relative strength index (RSI) is around 50 to 51. This is at the midway region of between the ‘Oversold’ region of 30, and ‘Overbought’ region of 70. There is not a lot of pentup momentum. However, it does warrant some concern as the HSI has enjoyed quite an extended run since the start of the year due to the capital inflows from China. However, should those capital flows start to run dry, any sharp pullbacks might cause the index to turn increasingly volatile.

We think that on a short-term, as long as the HSI can be maintained at above the 50-day moving average (MA) level of 24,986.58, the index might continue to ride higher in the short-run. However, with the fickleness nature of these fund flows, investors are advised to tighten their stop loss limits in the event of any big moves in the index.

Moreover, the fund flows movement is very much dependent on the US Federal Reserve policies. With one more hike slated in September, and the plans to reduce its US$4.5 trillion balance sheet by year’s end, this raises concerns about tighter liquidity globally. The result of tighter liquidity could mean that capital flows will move out of Asia.

This week, we have also gotten China economic data which showed weaker producer inflation and investment data. China’s producer price index (PPI) in May rose 5.5 per cent, versus an expected gain of 5.7 per cent. This was slower than the 6.4 per cent in April. The slowdown in PPI raises concerns for many as most investors have reckoned that with China’s steel industry being the forefront of the economic revival in the past, it should provide the much needed lift up of the economy. However, the steel industry has now started to show some signs of slowing growth, and this could have big impacts on the PPI readings in US and Europe due to the trade flows between China and the Western countries.

European markets dip below key technical support levels

Source: One-year daily chart of EuroStoxx 50 Index (June 16, 2017)

We note from the above one-year daily chart of the EuroStoxx 50 index that it had recently dipped below the 50-day MA level, and is probably the first encounter since the beginning of the year. This is quite significant as the index has a close brush sometime in end March/April 2017, but bounce up quickly. It rose ever since, and peaked at 3,550 to 3,600 before trending downwards.

The European markets were also impacted in part in the past week by the upcoming second round of French parliamentary elections taking place on Sunday, June 18, and the International Monetary Fund (IMF) agreement to participate in the Greek bailout programme, but with a caveat. The IMF is prepared to make available a sum of less than US$2 billion, but will not disburse the funds until the conclusion of the Euro Zone debt relief measures next year. While the funds are not available till next year, creditors have agreed to disburse US$9.5 billion to allow the Greeks to complete the payments in July.

Mild correction seen for some US tech stocks

The US markets were filled with some buzz  on Friday, June 16 when Amazon.com (AMZN) announced late Friday, June 16 that it will be acquiring organic produce supermarket chain Whole Foods (WFM) for US$13.7 billion, or $42 per share. This sent the shares of Amazon.com higher by 2.4 per cent, while Whole Foods stock rose by 29 per cent in a single day! The acquisition news took down several peer stocks including Costco (CSCO), Supervalu (SVU), Kroger (KR), and the closest competitor in the brick and mortar hypermarket space, Wal Mart (WMT).

On a different note, the technology laden Nasdaq had an uneventful week when Goldman Sachs put out a research note calling the technology markets as ‘overvalued’. The valuation call also prompted other research houses to put out similar reports citing overvaluations among various technology names, including the so-called ‘FAANG’ stocks like Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet Inc. (Parent company of Google, GOOG).

Source: Stockcharts.com (One-year daily chart of Nasdaq Composite Index (June 17, 2017))

Taking a look at the one-year chart of the Nasdaq Composite Index, we noted that the index appeared to be losing its upward momentum when the index fell from a peak of around 6,300 to end on Friday, June 16 at 6,151.76. There is a total of about 100 point drop or 2.4 per cent decline from the peak. The downtrend looks quite significant if we were to consider that the index has fallen close to the 50-day MA is around 6,085.58. The last time it dipped slightly below the 50-day MA was in April when Nasdaq was around 5,850.

The relative strength index (RSI) is also showing some slowing momentum with the reading coming in at 47.42, and is heading close to the ‘30’ mark which is the ‘Oversold’ territory.

We think the correction in the tech space is needed with valuations being at astronomical levels at 100 times price-earnings multiples like Amazon.com. However, we continue to think that as technology stocks continue to evolve through various advancements, there are many opportunities for comebacks. The easing of some of the prices needs to be taken into context on their growth levels, and whether they have the relevant capacity to improve further. We think the correction is needed and should be relatively healthy.

The overall US stock markets have also seen some impacts from the US Federal Reserve to raise interest rates by 25 basis points (bps) to 1.00 per cent to 1.25 per cent, with one more rate hike in line, possibly in September. It also announced plans to normalise its US$4.2 trillion balance sheet by unwinding the US Treasury and agency debt it currently holds. Yellen told reporters in a press conference after the conclusion of the two-day meeting on June 14 that the plan will be put in place “relatively soon”, with the initial cap for reduction would be set at US$6 billion per month for its US Treasury holdings, and increasing by US$6 billion every quarter over a 12-month period until it reached US$30 billion per month.

For agency debt and mortgage-backed securities, the cap will be US$4 billion per month initially, rising by US$4 billion at quarterly intervals over a year until it reached US$20 billion per month.

With the news, the broader S&P 500 index did not react much, with the index showing relatively flat trend during the week. The S&P 500 index closed out at the week marginally higher, along with several mixed economic data including falling consumer prices, retail sales, and 1Q2017 Gross Domestic Product (GDP) growth showing a mild 1.2 per cent growth as compared to the 4Q2016 GDP reading of 2.1 per cent. The markets are questioning over the timing of the latest rate hikes, along with the disappointing economic data received so far.

Source: CNBC.com

Our model investment portfolio performance

Source: Our model investment portfolio performance (As of June 16, 2017)

Our model investment portfolio achieved a total return (capital and dividend growth) of 9.5 per cent since inception at the end of November, 2016. The benchmark Straits Times Index (STI) rose by 11.2 per cent during the same period. Our outperforming stock continues to be PNE Industries which rose by 27.1 per cent since the end of last year, followed by Venture Manufacturing, and OCBC. Our worst performing stock continues to be ISOTeam Ltd.

We continue to monitor stocks, mainly in the oil and gas (O&G) sector for potential inclusion next month after our quarterly rebalancing period. We are now monitoring Keppel Corporation Limited, Ezion, Nordic Group, Hai Leck, and Boustead. We think that some of these O&G firms are relatively undervalued with good positive cash flows.

We recognise that the O&G industry is in a deep correction phase. However, we think that with the combination of government support, gradual recovery of oil prices, and resumption of new orders, those companies that are financially sound, along with low debt leverage are poised to weather the storms.

What to look out for next week

With the approach towards the end of the second quarter, and a couple of holidays coming up towards end of the month, there are not many local company news, except for economic data namely Singapore’s inflation measures and industrial production figures due to be released on June 23. These data points will point to more information about price growth and whether manufacturing sector which has been the key support pillar in the last few quarters will continue to drive the economy further.

Outside of Singapore, some key economic events to take note for next week include the results of Sunday’s (June 18) French parliamentary results, followed by the first round of ‘Brexit’ talks with the European Commission, and the release of Bank of Japan (BOJ) minutes from its April monetary policy meeting.

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, and trading representative. For a free financial health check/discussion, please contact taysg76@gmail.com, or +(65)9721 3987.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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About Peak Hour 87 Articles
I am in my mid-to-late 40s, married, and am thankful for my wife for all the things she has done. We do not plan to have kids, but are blessed with the simple lifestyle that we truly cherished with each other. I used to be from the financial services industry, having spent 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. I am currently working as a market analyst with a Singapore-based agrochemicals company. I have a deep interest in equities trading/research and analysis, data analytics, real estate, REITs, forex, and digital currencies. I don't consider myself as an avid writer, but I hope to learn as much possible. I am a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. I hope to complete my CFA examinations within the next five years. I value all the feedback provided by fellow readers and bloggers. Please provide any feedback on the work I did. Thank you readers.