The Straits Times Index (STI) is now consolidating at around 3,230 to 3,240 range this month, and for the past one week since the beginning of June 2017, the index barely moves up above 3,240. The trading volume has also been mild with a total of 1.9 billion shares traded worth about S$1.05 billion as of the market close on June 07, 2017. This compares to Tuesday’s trading volume of 1.6 billion shares traded worth about S$919 million. The STI closed on Wednesday, June 07 at 3,230.49, down 5 points, or minus 0.2 per cent intraday.
Looking at the one-year daily chart, it appeared that the Straits Times Index (STI) appears to enter into a consolidation pattern with the 14-day relative strength index (RSI) hovering around the mid-point of ‘Oversold’ position at 30 and ‘Overbought’ position at 70. There has also not been any lookback in the index for the last one year since June 2016. This has prompted some to question about the sustainability of such upward trends.
The index is still above the 50-day moving average line at 3,197.06. However should the STI falls below 3,197.06, we think the next level could be around 3,150 to 3,170 before staging another short-term rebound.
Looking at the trend-wise, the STI is still trending upwards, albeit slowly. We think that if the STI continues to stay above the 20-day MA, there are still opportunities to invite more uplift among positive believers in the continuing economic slowdown period.
However, at a historical price-to-earnings (P/E) multiple of 13 to 14 times, and has been trending upwards since last June, we think that there could be opportunities for some minor corrections. We prefer to make selective bets using fundamental analysis on stocks among sectors that have been underperforming.
Pent-up fortunes among IT, Materials and Real Estate sectors
In a research study published by SGX, it noted that the Information Technology (IT), Materials and Real Estate Management & Development sectors have been outperformers during the first five months of 2017, whereas Energy Telcos, and Healthcare were the under performers so far this year.
We are quite surprised that the healthcare sector has underperformed year-to-date as of May 2017. We noted that the ‘Healthcare’ sector was one of the best performers and ranked was eighth on the list in 2016.
In an January 18, 2017 SGX ‘My Gateway’ article, it outlined five best performing stocks in the SGX All Healthcare Index, namely International Healthway Corporation (+ 32 per cent); Pharmesis International (+ 25 per cent); AsiaMedic (+ 10.4 per cent); Talkmed Group (+6.9 per cent); and iX Biopharma (+ 5.4 per cent).
Taking a look at the one-year daily chart of the FTSE ST Healthcare Index, we noted that the index has been consolidating around the 1,430 to 1,440 level since the beginning of the month. We also noted that the index has a major correction sometime on April 26, 2017 when the index fell to a 52-week low of 1,394.58 before it resumes it upward surge. Since then, there has been a minor fluctuation in the index, but nothing has turned out major. The following diagram shows the actual daily trend of the FTSE ST Healthcare Index over the course of one year.
Comparing Talkmed Group then and now
We extracted a table using one of the latest healthcare sector related articles published online on the SGX ‘My Gateway’ section. We noted that as of January 17 this year, Talkmed Group showed up as one of the lowest price-earnings (P/E) multiple at 19.3 times on that day when the article was compiled.
Fast forward today, as of June 08, 2017, using data published on SGX ‘StockFacts’, we noted that Talkmed Group is now traded at a historical price-earnings (P/E) ratio of around 28 times multiple. The board of directors (BOD) had declared a one-for-one bonus share for each share held as of May 09, 2017. This was on top of an annual dividend per share amount of $0.0228 per share declared in February and was approved by shareholders at its Annual General Meeting (AGM) on April 25, 2017.
Since then, the stock has adjusted for the bonus share and dividend payout, and was last traded at $0.80 per share as of June 08, 2017. The stock went as high as $0.95 per share at the end of April. The following diagram shows the one-year daily chart of the stock price fluctuations at Talkmed Group.
Sanli Environment had a massive debut
Sanli Environment Limited, an environmental and water engineering firm run by former engineers at Moya Asia Limited made a massive debut on Thursday, June 08, 2017 by trading as high as S$0.40 per share, before retreating back to close the day at S$0.375. There were about 26.7 million shares traded with a total market capitalisation of S$10.3 million. The Initial Public Offer (IPO) price of the stock was S$0.225 per share, and at the close of its IPO offer on Wednesday, June 07, the company raised a total net proceeds of approximately S$9.72 million.
A brief background on Sanli Environment. It was set up in 2005/2006, and today, the company employs close to 400 people. According to one of the articles published on The Edge Markets website dated June 07, 2017, the company has two main businesses. The engineering, procurement, and construction segment upgrades water treatment plants and pumping stations. It also replaces old mechanical and electrical equipment. The division also designs and builds treatment systems.
The second division is the operations and maintenance segment. It services equipment used in water and waste management infrastructure. The maintenance contracts are typically for two to three years, and provide a source of recurring income.
In addition, the same article noted that Sanli’s major customers include the Public Utilities Board (PUB) and the National Environment Agency (NEA). In FY 2016, both PUB and NEA accounted for 85.7 per cent and 12.7 per cent of the revenue respectively. For the first one months ended March 31, PUB contracts contributed 99 per cent of the company’s revenue..
Hong Kong’s Hang Seng Index (HSI) is still moving upwards
The Hang Seng Index (HSI) closed on June 08, 2017 at 26,063.06, up 0.34 per cent or 88.9 points. Looking at the one-year daily chart of HSI, we noted that the index has surpassed several technical levels as denoted by the various support and resistance lines known as Fibonacci retracements. At 26,063.06, the index is trading at almost 5.4 per cent above the 100 per cent Fibonacci Retracement line.
According to a market news summary provided by Reuters.com, Thursday’s market action was dominated by the robustness of China’s May trade data has somewhat offset by some of the geopolitical events including the elections in the United Kingdom, the Qatari crisis where several Middle-Eastern countries have put up blockades on the emirate, and former Federal Bureau of Investigation (FBI) director, Mr. James Comey’s testimony on Russian involvement among several key White House officials, including President Trump.
The latest China’s trade data showed an increase in the Balance of Trade of US$408 billion in May 2017 as compared to US$380 billion previously. Exports in May rose to US$1.9 trillion in May, as compared to US$1.8 trillion in April, while Imports also rose to US$1.5 trillion during May, as compared to US$1.4 trillion previously. The data suggested that China’s export growth is still on track despite falling commodity prices.
EuroStoxx 50 Index is starting to decline and consolidate
Looking at the one-year daily chart of EuroStoxx 50 index, we noted that the momentum as illustrated by the moving average convergence and divergence (MACD) index below has started to trend down, so do the main index itself. From a high of almost 3,650 level as shown in the above chart, the index has since trend down, and is hovering around the 50-day moving average (MA) line of 3,549.
We think that if the index manages to break down below the 50-day MA line, there could be a fall of another 5 to 10 per cent from that line, given that the index had quite a run upwards since February lows of around 3,250.
If it does stay above the 50-day MA support line, we think that it could revisit the all-time highs of 3,650, though we doubt that it could happen in the near term with the bond buying programme gradually slowing down. European Central Bank (ECB) President, Mario Draghi left the benchmark unchanged on Thursday, June 08, 2017, but dropped any reference to future rate cuts. In a statement release, the ECB chief said it expects interest rate to “remain at present levels for an extended period of time.” It added that the ECB is committed to extend its quantitative easing (QE) programme if needed.
How did the Euro currency fare
We not that the Euro currency is taking a slight dip, and is now at the 14.6 per cent retracement line of EUR1.11807 to one US Dollar. The 14-day relative strength index (RSI) is also suggesting that there is weakness in the momentum to sustain the high Euro, and there is a risk that the high levels of the Euro currency might negatively impact the general competitiveness of the Euro area. Germany is presently one of the largest exporting nations among the European Union member countries, and should there be a continued rise of the Euro currency as seen previously using the technical chart shown above, Germany and its citizens might start to question if the common currency benefits them economically.
Hung UK parliament after Thursday’s general election
The United Kingdom had its post Brexit election in a year since the referendum vote which culminated to the loss of the previous majority held by the Conservative Party in the United Kingdom. The leader of the party and prime minister, Theresa May managed to secure 318 seats, but its percentage has narrowed to 48.9 per cent. However, the Labour Party led by Jeremy Corbyn managed to snag 262 seats, and securing 40.3 per cent of the seats. Although the Conservatives won the election, it failed to secure any majority. It will now need to form a coalition government with the Democratic Unionist Party (DUP) which makes up of many Irish nationalists who may easily walk away and join forces with the Labour Party.
With the less than resounding victory Prime Minister May have achieved, it makes the negotiations for eventual British exit from the European Party more difficult. The British Pound currency fell hard, and at one time the drop was significant enough to warn of a potential massive capital flight out of the UK. The currency fell to a low of as much as 1.2775 per US Dollar, before succumbing to end at 1.2632, and is likely to face under pressure as negotiations with the DUP is mixed with various uncertainties.
With a weak British Pound, the stock markets, namely the FTSE 100 Index rebounded higher to close at 7,527.33. Unlike the EuroStoxx 50 index, the upward trend only showed up in late April, early May when the FTSE 100 index is at close to 7,150. Since then, the index rallied close to 5.3 per cent since its lows to end Friday’s trading (June 09, 2017) at 7,527.33. There is much optimism possibly of a potential softer stance adopted by PM May as she will begin the negotiations in 10 days’ time.
How should investors view Europe as an investment potential
We think that investors should not jump into the conclusion that with the latest UK voting result, many EU countries will start to accelerate plans to go solo. However, with the average EuroStoxx 50 index earnings multiple of 17 to 18 times, as compared to the US market multiples of 24 to 25 times, there is still a compelling case to take a hard look at Europe and its macroeconomic fundamentals as the ECB starts to slowly slow down the pace of the quantitative easing measures.
The US markets is still on the winning pace
The widely followed US stock markets appeared to have sustained its ninth year of gains well despite the various skepticisms over the sustainability of those gains. The UK elections outcome, and former Federal Bureau of Investigation (FBI) director, James Comey’s testimony to the Congress on alleged investigation obstruction on former National Security Adviser Michael Flynn has not dampened investor sentiments.
This past week’s market in the US was mostly dominated by the FAANG stocks, commonly referring to Facebook, Apple, Amazon, Netflix, and Alphabet Inc. (parent company of Google). The Technology sector dominated by these five counters have took the Nasdaq Composite Index to new highs, and reaching as high as 6,300 before ending at 6,207.92 by the end of the trading day at 6,207.92.
The one-day sharp drop was culminates a year’s worth of extended run starting from beginning of the year when Nasdaq was at its lows at 5,400 levels. The climb did defy many skeptics who thought that at 26 to 30 times price earnings multiples, the technology sector is long due for correction. However, with the advancement of technology, coupled with the attraction towards the FAANG stocks among investors, and fund managers, the index constituents continue to form part of the investment portfolios that are geared towards growth.
Should we be concerned about potential overvaluation of FAANG stocks
This is a good question and needs to be addressed in the context of portfolio construction process. The FAANG stocks are made up of mostly technology companies that revolves around the lives of many people in US and globally. However, we think that there comes to a point where investors would have to judge whether the returns are sustainable, and whether their values could fall drastically in the event of a major financial crisis where liquidity dominates all concerns.
However, at the current levels, with the 14-day RSI remaining stable, there appears to be no sign of abatement or loss of market confidence. The one-day correction on Friday, June 09, 2017 was probably due to valuation concerns, and not likely to be a credit crunch situation. However, we do think that there could instances of a liquidity crunch especially when markets are closed over the weekend, and investors need the accessibility to liqudity. Apart from there, we think that it could be investors taking some slight profits after a huge run-up in the Nasdaq Composite Index.
To hike rates or not to
The Federal Reserve Open Market Committee (FOMC) meeting is scheduled to meet next week (June 13 – 14, 2017), and the futures market is pricing a 99.6 per cent certainty that the committee will hike interest rates by 100 to 125 basis points. However, there are also conflicting signals in the market where the non-farm payroll figures for May came in at 138,000 as compared to expectations of 184,000, and inflation figures look healthier at 2.2 per cent in April. This results in a lot of guesswork among investors over the possible moves that the Fed might take.
The timing of the interest rate hike and with the stock market volatility levels still low based on the Volatility (VIX) Index, this presents new challenges. The uncertainty is even greater as the Fed embarks on unwinding the nearly US$4 trillion worth of US Treasury and agency securities in its balance sheet by end of this year. The impacts of such a move need to be calculated, and targeted so as not to disrupt the financial system. However, there is no doubt that the central bankers have begun their interest rate normalisation process, and this shows that the US economy is recovering well.
How did our model investment portfolio perform
The total returns we generated for our model investment portfolio since inception at the end of November 2016 is a positive 10.7 per cent. With the Straits Times Index ending Friday, June 09, 2017 trading at 3,254.19, the total returns generated during the same period came in around 12 per cent. Our best performing counter in our portfolio continues to be PNE Industries which generated a total return (capital and dividend returns) of 36.5 per cent. Our least performing stock is ISOTeam Ltd which sets us back by a negative 11.4 per cent. However, we recognise that stock is not covered by many analysts, but we believe in analysing the fundamentals to evaluate whether it is a good long-term fit.
We continue to be stay invested in the names and probably do another round of rebalancing by end of the month and second quarter. For now, we continue to monitor the stocks in our watchlist including Keppel Corporation, Ezion, Hai Leck, Nordic Group, and Boustead. We have dropped Micro Mechanics in our watchlist as its valuations have surpassed our expectations, and we will prefer not to chase, and move on to other investments.
What to expect for next week
Investors trading in Singapore will be seeing a slew of economic data starting with retail sales figures for April 2017 which is scheduled for release on Monday, June 12. Analysts are currently forecasting a yearly rise of 3.2 per cent, and a monthly rise of 0.8 per cent in April. Next will be the unemployment figures which is often a closely watched event as reports of retrenchment appears constantly in news media. Analysts are forecasting a final figure of a rise of 2.1 per cent in 1Q2017.
Apart from retail and unemployment figures, the balance of trade figures will be released on Friday, June 16, and many analysts are expected a reduction to S$5.4 billion for May as compared to S$6.8 billion previously.
Among the Initial Public Offer (IPO) share launches, the two debutants, World Class Land, and HRNet Group Limited are expected to generate investor buzz given the latest roaring debut of Sanli Environment Limited. World Class Land (WCL) is slated to be listed on the SGX’s Catalist Board on June 15 at a subscription price of 26 cents, whereas HRNet Group Limited will be making its maiden debut on SGX’s Mainboard on June 14 at S$0.90 per share. Both IPOs are expected to see some interest from investors who yearn to participate in the markets.
Over in US, the Fed meeting on June 14 will be a closely watched event, and inflation data that is expected to be released on the eve of the FOMC meeting will also be closely watched. Both the core consumers’ price index (CPI), and core producers’ price index (PPI) are expected to hit close to 2 per cent. This is the level that many analysts have centred on for more potential rate hikes at future meetings if the price levels at both the consumer and producer levels were to sustain further, the hawkish approach towards future rate hikes will continue to dominate among the business headlines.
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.