A topsy turvy week for financial markets

The global financial markets are entering into a state of flux with geopolitical tensions, French elections, along with investors’ concerns about the possibility of France exiting the European Union (EU), and the unexpected announcement by United Kingdom (UK) prime minister Theresa May to call for a general election on June 8 to secure the voters’ mandate to exit the EU, among others.

Taking a look at the weekly chart of the MSCI World Index (excluding US), it appeared that the trendline is set to consolidate at around 1,776 to 1,800 region, while the 14-day Relative Strength Index (RSI) is off from the major high of 70 to 62.14 at the time of this writeup. This might suggest a temporary pause among investors who might be looking into favourable entry points.

However, we also note that the index has taken on a ‘Dead Cross’ trend where the 50-day cuts below the 200-day moving average (MA) on the way down since February 2016. The index has not surpassed the 1,800 since September 2015, and this could suggest a deeper issue of investors not actively participating in the markets.

Source: Stockcharts.com (Three-year weekly chart of MSCI World Index)

The Straits Times Index takes the cue from the overall global markets downturn

Coming back to the local Straits Times Index (STI), we are taking a great concern on the overall direction of the index which has not sunk past the 50-day moving average (MA) of 3,136.55. The index first went past the 20-day MA at 3,163.782 on April 17, and within a space of two days, the index is now falling slightly below the 50-day MA. It is also fast approaching the 78.6 per cent Fibonacci Retracement level of 3,103.56.

Note: One-year daily chart of Singapore Straits Times Index (As of April 19, 2017)

Taking a closer look at the extreme right hand side of the chart, readers might have noticed the increasing trend in the six months of this year, but has come off slightly at the end of March till April. We think that if the index broke the 3,103.56 support level, the next level to look at is 3,030.05 on the 61.8 per cent Fibonacci Retracement level.

Looking at the medium term, we think that the STI could be around 3,100 to 3,200 by end of 2Q2017. We took into account the possibility of major volatilities coming from the French elections, the US Federal Reserve meeting in May, and the outcome of the UK General Election in June which was not previously factored into our analysis. However, we think that the risks of an unexpected outcome of a UK Conservative party defeat are expected to be muted. Nevertheless, as we have learnt the lessons from the ‘Brexit’ vote outcome on June 23/24, 2016, nothing can be taken from granted.

Sector summary

Taking a look at the sector heatmap, we noticed that the telecommunications sector is so far the worst performing sector on a one-year basis, as compared to the Information Technology sector which grew by 40 per cent over the past one year.

Source: SGX

When looking at the leading FTSE ST Telecommunications Index, we noted the index took a steep dive from about 992 towards the end of March 2016 to the current 952 points currently. This represents a retracement to the downside of almost 4 per cent from the March peak. Most of the decline could be attributed to profit taking, and reaction to the news TPG Telecom has secured a coveted mobile license network in Australia, thus threatening names like Optus One (Singtel), and Hutchinson Whampoa, which is controlled by Hong Kong billionaire Li Ka Shing, and his son Richard Li.

Source: 3-year daily chart (FTSE Telecommunications Index)

However, if we were to look closer to the chart, we noted that the negative direction indicators (DIs) have triumphed over the positive DIs, thus it affects the whole sector.

Looking at just the overlap of both the one-year daily charts of Singtel and the FTSE Telecommunications Index, both of them took on the same path and trajectory. In addition, Singtel stock alone is now trading below the 20-day, 50-day, and 200-day moving averages as shown in the diagram below.

Note: One-year daily chart of Singtel (April 20 2017)

Looking at the post TPG Telecom news last week, we noted that Singtel’s shares has taken a hard beating, and has broken the $3.76 support line on the 78.6 per cent Fibonacci Retracement Line. Going forward, there could be a chance that the stock to head to a free fall till $3.60, before there is any opportunity of a turnaround. Incidentally, $3.60 was the lowest price level set in late November 2016.

We also note the FTSE ST Telecommunications Index is also taking on a similar path as Singtel’s stock price, and so far, there appears to be no end in sight for recovery opportunities. The next set of financial results for the quarter ending March 2017 is scheduled to be released next month, but there has not been any dates fixed yet.

Note: One-year chart overlaps of Singtel and FTSE ST Telecommunications Index (April 20, 2017)

Hong Kong’s Hang Seng taking a first dip below 50-day moving average

Note: One-year daily chart of Hang Seng Index (HSI) (As of April 19, 2017)

Looking at the chart above, we noted that the Hang Seng Index has stayed above the 50-day moving average (MA) line since the start of the year, but most noticeably, the index has recently traded below the 50-day MA line at 23,988.69 recently. The index ended the trading day on April 20, 2017 at 24,056.98, up 231.1 points, or 0.97 per cent intraday.

There are a few factors that might explain the volatility around the level. The first one is geopolitical tensions in the previous week that gave some reasons for a pause. Another reason is traders might have turn cautious on the recent stepped-up property curbs and the deleveraging campaign. However, we think that those property curbs mentioned by the press often come up, and are not really a major news driver. However, we think that if China were to impose tighter housing regulations in the months ahead, there could be a possibility that Hong Kong-listed developers could be impacted quite significantly.

European financial markets are still brimming with hope

With the French Presidential elections looming this weekend (April 23, 24, 2017), and the latest terrorist incident in Paris, the leading Euro Stoxx 50 index appears to be unfazed by the unexpected outcome coming from a potential first round electoral victory by nationalists like leading Presidential hopefuls, Ms. Marine LePen, and centrist, Mr. Emmanuel Macron.

According to opinion polls, many are betting Macron to be marginally ahead of Le Pen. However, the Paris terror attacks on Thursday might alter the results. Moreover, communist candidate Jean-Luc Mélenchon is drawing level with another candidate Francois Fillion, and is now within four points of Macron.

Source: Stockcharts.com. (Euro Stoxx 50 index readings as of April, 21, 2017)

Looking at the weekly chart of the Euro Stoxx 50 index, we noted that there is a continuing uptrend of the index whilst the expected neck-to-neck French elections. With the index at 3,440.27, the relative strength index (RSI) shown above the main chart is hovering the top end of the ‘Overbought’ level.

Moreover, the 50-day moving average (MA) is moving upwards and is looking to converge with the 200-day MA to form a so-called ‘Golden Cross’ on the way upwards. Some market watchers think that investors are being too complacent about a potential election upset. However, the charts do not seem to suggest any potential shortfalls or knee jerk reaction at the polling booths in France.

US markets turning slightly downwards, but not out of the picture yet

All the major US stock indexes rose for the week with the S&P 500 index gaining around one percent during the week.

Source: CNBC.com, Factset

Stocks roared back intraday on Friday after President Trump reiterated Treasury Secretary Steven Mnuchin comments earlier that the government will unveil a “massive tax cut” in a new reform, though the timing of the reform was unclear. Both United Technologies Limited and Microsoft Corporation Ltd were the top gaining stocks on the Dow, while Verizon stock ended positive on the S&P 500. Until this week, about three-quarters of the S&P 500 companies that had reported topped earnings-per-share estimates, while 67 percent beat on sales, according to data from The Earnings Scout.

Looking at the overall trend of S&P 500 index, we noted that the index has fallen below the 50-day MA, and has been trying to break the support line since its first recorded fall last week. We think that the index might be going through a consolidation period. However, we think that at almost 22 to 23 times forward price-earnings multiple for the S&P 500 index, it appeared that US stocks are relatively overpriced relative to global stock markets with earnings multiples averaging 13 to 17 times.

Source: Stockcharts.com (One-year daily chart of the S&P 500 stock index as of April 21, 2017)

The Volatility Index of the VIX Index has also taken a slight dip from its major highs early in the week after North Korea launched missiles last weekend over the Sea of Japan. However, despite concerns over Sunday’s election outcome in France, traders appeared to be unfazed by the results, and there appears to be no significant signs of any upward trajectory of the VIX index as shown in the following diagram:

Source: Stockcharts.com (One-year daily chart of the VIX index as of April 21, 2017)

Next week, US earnings season is expected to kickstart into high gear with about 189 S&P 500 companies slated to report their quarterly results. We expect somewhat a positive US earnings season which might favour investors who are looking for clues of the continued earnings growth. However, we continue to also think that some investors might focus more on the geo-political tensions , and we normally advise clients to take a complete overview of the situation on hand before investing. In that way, investors might minimise the timing element and focus more on the fundamentals of the economy and the companies themselves.

Our model investment performance so far this week

Note: Model investment portfolio returns (As of April 21, 2017)

The model investment portfolio is up 2.6 per cent since inception at the end of November 2016, while the benchmark Straits Times Index (STI) is trading upwards by 8.01 per cent during the same period. Our best performing stock is still Dairy Farm Holdings which is up 23 per cent since we added the stock at the end of last year, while the worst performing stock for the week is ISOTeam Ltd which is currently trading down by 5 per cent since we added the stock at the end of March 2017.

Overall, we think that given the volatilities of the stock market, we are focused on the long-term without being overly concerned about the various distractions that might hinder our judgement on the appropriate steps needed to steer the fund. Although fund performance is highly stressed, we are not about to chase for performance while maximising short-term gains.

With a growing uncertain global economic environment, we continued to put emphasis on strong companies with good fundamentals. We are currently taking a close look at some oil and gas (O&G) names like Keppel Corporation, Ezion, Boustead, Mermaid Maritime, Hiap Seng Engineering Ltd, Hai Leck, PEC Ltd. and Nordic Group. We noted that these companies have strong free cash flows, and are trading low P/E multiples. We do especially like Hai Leck for its strong free cash flows generation, and management ability to steer the company out of the major O&G industry woes. We are also in PEC for its free cash flow generation.

We are also in favour of property counters, but we are not prepared to enter into the sector. We are concerned about the significant run up recently following strong new private home sales data for March which was released this week showing robust private property sales driven by discounts, new launches, and investors thinking that the market has almost seen its bottom.

The FTSE ST Real Estate Index has chalked up lots of momentum and is on a rising trend (see diagram below). We noted some property counters like KSH has shot up from $0.50 per share to about $0.80 a couple of weeks ago on news that the Chinese government has set up a Special Economic Zone (SEZ) in Hebei and KSH, together with its consortium of joint venture partners comprising of Heeton Holdings, Lian Beng, and Oxley Limited has properties located in the SEZ which could benefit from the new designation by the Chinese.

We would avoid chasing for performance for now, and focused on beaten down sectors like O&G, and the Telecommunications sector which we illustrated earlier showing its lows.

Note: One-year daily chart of the FTSE ST Real Estate Index (As of April 21, 2017)

What to look forward for the new week

On the local economic front, investors would be looking for inflation data coming out on Monday, April 24, followed by Industrial Production on Wednesday (April 26). The Monetary Authority of Singapore (MAS) is expected to release in semiannual macroeconomic report this week and investors would be the overall economic conditions and guidance for gross domestic product (GDP) growth in 2017 and beyond. On Friday, investors would be getting the final estimate of private and home sale data for 1Q2017, and unemployment rate.

Other economic data scheduled to be released on Friday include the producer price index, import/export prices, and 1Q2017 Business Confidence readings.

Local-listed companies releasing their earnings include Ho Bee Land Limited, and UOB Group Ltd next week. The week also marks the last week where many companies are holding their Annual General Meetings (AGM) before the deadline of April 30, 2017.

Over in the United States, apart from earnings releases, investors would be watching for S&P/Case-Shiller Home Price, and New Home sales data. The data release comes after the latest reading on US Existing Home sales data which showed continued rising trend with 5.71 million sales transactions recorded, as compared to the consensus estimates of 5.5 million sales transactions recorded. Later on Friday, April 28, investors would also be getting the first advance estimates of the latest US GDP growth rate for 1Q2017. The forecast is 1.3 per cent. However, the latest weekly reading for 1Q2017 GDP growth published by the Federal Reserve Bank of Atlanta showed an unchanged estimate of 0.5 per cent as of April 18. This reading is much lower than the consensus data, and this is quite a concern particularly when the overall economy is very much dependent on consumer spending growth to steer the economy towards continued growth.

Source: Federal Reserve Bank of Atlanta (April 22, 2017)

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. 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.