A week of mixed performance for STI index

This week’s performance of the Straits Times Index (STI) appears to start off weak, but saw some optimism among investors by mid-week as the index soared to 9 per cent up on a year-to-date (YTD) basis to close Wednesday, March 08, 2017 trading day at 3,145.29, or 14.85 points higher on an intraday basis. The trading volume on Wednesday’s stock market action saw 2.56 billion shares traded, up 3.8 per cent from the previous day.

Some of the counters which drew some attention include Global Logistic Properties (GLP). The stock gained about 2.3 per cent intraday or up six cents from the previous session to end at $2.73 per share. The stock rose as much as $2.80 on Wednesday, and broke the 52-week high of $2.78 per share level. GLP’s trading action has also got the attention of Singapore Exchange (SGX) which issued a trading query to the management, but only to receive a previously disclosed statement that they are currently negotiating with selected parties to conduct due diligence of the firm. Market rumours appeared to point towards some form of a privatisation plan for the entire organisation.

How did the STI chart perform

Note: One-year daily chart of Straits Times Index (STI) chart (Wednesday, March 08, 2017)

Looking at the technical chart above, we note that the STI has bounced from its yearly lows of 2,760.97 to hit the 50 per cent retracement line using the Fibonacci Retracement chart feature. The STI has now been climbing since the end of December 2016 when the index was 2,889.15. We believe that investors who are looking for financial assurance and protection might want to consider lowering their exposures towards debt laden companies even though the general economic growth in Singapore is relatively stable, but with rising interest rates that are in the horizon, it pays to take note of the interest rate volatility impacts on these companies. Another reason for cautiousness is the rising momentum of the index which might suggest a substantial amount ‘hot’ money is pouring into the local markets. Such so-called ‘hot’ money is considered relatively volatile, and could be short-term in nature as investors could pull out of the markets leading to sharp declines in market prices.

M&A potentials

In a recent DBS Research report entitled “Singapore Thematic Report: Spotlight on M&A”, analysts have cited some potential merger and acquisition (M&A) targets after what has happened to several privitisation deals including the latest from Spindex Industries which is currently planning to get privatised; Auric Pacific which is now going through a privatisation process; and Kingboard Copper is also in the process of getting privatised by its parent company in Hong Kong.

Some of the potential M&A names cited in the report included several cash rich, but undervalued and illiquid stocks like Sunningdale Tech, Fu Yu Corp, UMS, Venture Corp., SIA Engineering, and PEC. Others in the property and oil and gas (O&G) sector include Bukit Sembawang, Global Logistic Properties (GLP), United Engineers, PACC Offshore (POSH Offshore),  and Mermaid Marine. In the consumer category, Delfi and Courts Asia are two names cited as potential M&A stocks.

Taking a look at potential names in the technology, and precision engineering industries, namely Sunningdale Tech, Fu Yu Corp, UMS, and Venture Corp have been in focus recently.

Technology sector names listed as M&A potentials

Source: One-year daily stock chart of UMS (Prices are as of March 09, 2017)

Looking at the volume, and stock price chart, we noted that the stock is trending higher, and has gone up for the past two weeks or so with substantial trading volume of around 2 to 3 million shares traded. Looking at the Relative Strength Index (RSI) (Not shown), the stock is also moving above the ‘Overbought’ territory which is above the 70 mark suggesting a strong buying momentum of the stock.

For disclosure purposes, I personally own 300 shares of UMS, and another 2,000 shares in a separate joint account.

Venture Corporation

Note: Daily stock price chart of Venture Corporation as of March 10, 2017

Venture Corporation stock price has been moving upwards for the past week to reach an all-time high of $11.25 on 7 March with volume of close to 3 million shares changing hands. On Friday, March 10, the stock closed slightly off and ended the trading day at $10.98. The volume traded was around 1.09 million shares on March 10.

The average directional index (ADX) has more positive Directional Indicators (DIs) than the negative DIs. The stock is trading close to 17 times historical earnings, and dividend yield is around 4.6 per cent according to data from SGX StockFacts. The top five shareholders include the founder and Chief Executive Office (CEO) Nigit Wong with 6.9 per cent of the shareholdings, followed by fund houses like Aberdeen Asset Management PLC with 6.3 per cent. Sprucegrove Investment Management, BNP Paribas, and Blackrock, Inc. formed the rest of the top three fund companies.

Looking at the fundamentals and the technical analysis (TA) chart, it appears that the stock is close to fairly valued to slightly overvalued when compared to the 16 to 17 times price-earnings (P/E) ratio of the STI.

However, many investors are still holding onto stock and are hesitant to sell as some may have bought several years ago, and would like to sit through the ride. However, we caution that the higher the stock move on a given day, there could be a sharp correction, and investors could start bailing out. In such cases, it is vital that as one gets older, he/she should regularly rebalance the stock’s portfolio to minimize tracking error disappointment, and potential underperformance of the investment for many investors.

Real Estate Sector got a Friday boost from government

Note: Daily chart of the FTSE ST Real Estate Holding and Development Index (March 10, 2017)

The FTSE ST Real Estate Holding and Development Index shot up yesterday (March 10) by 2.4 per cent intraday to end the trading day at 838.24 points. One of the major market moving news of the day was the surprise announcement by the government that they would going to relax some property cooling measures instituted since 2009. A summary of the measures can be shown in this Business Times graphic:

Source: The Business Times (March 11, 2017)

The three changes announced include 1) The revision of the holding period for Seller’s Stamp Duty (SSD) calculation is shortened to three years from four years previously; and on top of it, the rates have each been reduced by 4 percentage points each for each holding period; 2) The Total Debt Servicing Ratio (TDSR) will not apply for mortgage equity withdrawal loans (MWL) with loan-to-value (LTV) ratio of 50 per cent and below. However, the existing 60 per cent LTV ratio of ordinary home mortgage loans still applies; 3) The Additional Conveyance Duties (ACD) was revised to curb on the transfer of shares on property holding entities (PHE) that primarily own residential properties in Singapore. The newly revised rate is a flat 12 per cent ACD for holding period of 3 years, plus another 0.2 per cent share duty for the share transfer to the buyer. This was also in line of what National Development Minister Lawrence Wong spoke about in Parliament a few days ago regarding adopting a more equitable treatment on Additional Buyer’s Stamp Duties (ABSD) among individuals and corporate entities.

Some analysts opined saying that the impact of these changes will likely be minimal, as the most of the existing rules under the ABSD, and the LTV limits remain, which aims to curb speculation among foreigners and locals. However, for those facing difficulties managing their mortgage payments, the relaxation of the latest measures might lighten or remove the SSD burden.

Property counters soared

Property stocks including CapitaLand, City Development (CDL), UOL Ltd ended the trading day higher when news broke. However, sell-side analysts like OCBC Research were not surprised. In a brief note, OCBC Research noted that the timing of the reversals was  not a complete surprise as it noted that the Singapore government has over the last three cycles a near unbroken record of actively reviewing property legislations against its goals of price stability, and had historically began reversing curbs after homes prices had dipped between 8%-17% from the peak It noted that the private residential sector is currently down 11% from the last peak over the last 13 quarters.

OCBC Research has also revised its forecast for private home prices in 2017 to decline of 1 per cent to 5 per cent, from its previous forecast of 3 per cent to 7 per cent. They placed a neutral rating for Singapore developers.

A summary of the intraday price moves of publicly-listed property developers:

Source: The Business Times (March 11, 2017)

S&P 500 Index continues its march upwards

Source: Oanda Singapore (Daily chart of S&P 500 index as of March 10, 2017)

The S&P 500 index in US is growing strength to strength with a close of 2,372.60 on March 10, 2017. The intraday rise was around 7.73 points, or 0.3 per cent higher. The rise came as the US Labour Department released February jobs number which showed an overall rise of 235,000 new jobs created and the overall unemployment fell to 4.7 per cent from January’s number of 4.8 per cent. The latest figures beat expectations of around 190,000 jobs growth, and unemployment rate remained unchanged in 4.8 per cent.

The robust job growth, coupled with favourable manufacturing numbers coming out for the past few months fueled expectations that the US Federal Reserve is poised to raise interest rates at the March meeting next week (March 14 – 15). The Fed Funds Futures ended the trading day with a 88.6 per cent probability of a 75 to 100 basis points (bps) rate hike come March 15.

Looking at the above chart with both low trading volume, and an elevated ADX, the US market is increasingly becoming more expensive relative to other global markets. The S&P 500 historical P/E is now 26 to 27 times, and is way above the historical median of 14 times.

Are we going to see a market correction anytime soon

With an elevated price environment in US, a significant stock market correction might be a possibility if enthusiasm among market participants began to wane. However, it is unlikely given that there have been a lot of safeguards implemented by global banking and securities regulators in curbing extreme forms of speculation. However, if it does happen, it might not be the end of the world as there would be many value investors who took prudent moves to insulate themselves from extreme volatilities, might find assets cheaper than before. However, to preempt a crash-like situation might be a bit too premature.

Hong Kong’s Hang Seng Index trending slightly down

Source: Oanda Singapore (Daily chart of the Hong Kong Hang Seng Index as of March 10, 2017)

The Hong Kong Hang Seng Index (HSI) closed the week at 23,568.67, or 0.3 per cent higher intraday, and traders were kept on the sidelines as they are waiting to get a read of the US jobs data out later on Friday evening. The trading action was mainly led by energy shares which fell sharply as bearish sentiments continue to linger when crude oil prices fell below US$50 per barrel a couple of days ago.

The ADX shown above has also took a sharp decline with index ending at 22.845 points, down from its peal set in late February at 35.5393 points. The week was also boosted by comments from the latest China National Congress that they are going to liberalise the financial sector, and create more liquidity for market participants.

How did our investment portfolio perform

Note: My stock portfolio as of March 11, 2017

In all, since the inception of our investment portfolio in end November 2016, the total returns of our portfolio have risen by 7.15 per cent, as compared to the STI which rose by 7.85 per cent during the same time period.

Dairy Farm Holdings Ltd, followed by DBS Group and Venture Corporation have been the main stock price drivers for our portfolio, each rising by 27 per cent, 7.9 per cent, and 7.8 per cent respectively  since inception in November. Other laggards continue to be Keppel DC Reit which fell 6.1 per cent since November 2016, and Raffles Medical which fell 5.1 per cent since putting into the portfolio in January 2017.

We are still continuing to hold onto our current portfolio without any stock sold. We are also constantly evaluating our portfolio for new inclusion and based on last week’s market roundup, I highlighted Keppel Corporation, Ezion, and UMS Holdings as some of the possible inclusions. We are still eyeing after the March US Fed meeting, and end of this current quarter before doing any portfolio rebalancing. Barring any unforeseen circumstances, we feel comfortable in retaining our current portfolio as it is.

What to look out for next week

The major local earnings season has concluded. The key Singapore economic data to be released next week include the final unemployment data for 4Q2016 to be released on Wednesday, March 15 where economists are expecting an unchanged forecast of 2.2 per cent for unemployment rate, followed by the exports data and trade balance data on Friday, March 17.

Over in US, key inflation data including consumer prices, and producer prices would be released. Another major event to look out for is the US Federal Reserve meetings which will conclude on March 15, with a statement and appearance by Chairwoman, Janet Yellen. Investors will be looking at not only the rate decision, but also the so-called ‘dot’ plots to gauge the trajectory of interest rate hikes in the next few months.

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
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