The Straits Times Index (STI) gave back most of its gains on Wednesday, June 21, 2017 to end the trading day at 3,201.77, down 28.65 points, or less than a percent drop. The latest drop has trimmed STI gains for the year-to-date (YTD) to 11.1 per cent. With the oil markets entering into bear market territory closing at around US$45 to US$46 per barrel for August Brent Crude futures prices, and China’s latest inclusion of its A-shares into the Morgan Stanley Capital International (MSCI) indexes, the financial markets seemed to ignore the good news, and chose the former as an excuse to sell down the markets.
How did STI perform so far
With about a week to go before STI closes for the 1H2017 and companies scheduled to report their June quarter end financial figures next month, the STI appeared to be swayed by global market events than what is happening among the local markets.
Taking a look at the chart below, the STI has also just broken below the 100-day moving average (MA) mark on June 21 after hovering around the 50-day MA mark for much of the month of June.
Investors might be questioning if this is a good time to sell their stocks. We think that in many situations of stock market euphoria, and fears, investors should evaluate based on the context of their total portfolio. They should also evaluate the costs and benefits for selling now as compared to later. We think that timing the market is generally discouraged as most investors are unable to beat the markets over the long-run. It is also generally unwise to chase the markets as costs usually outweigh the benefits unless the investor is day trader or a scalper.
We think that with the gross domestic product (GDP) forecast among private economists being upgrade to 2.5 per cent for the June quarter from 2.3 per cent in March, there is anticipation that the Singapore economy might benefit from the growth in areas such as manufacturing, and services like the e-commerce/logistics industries. However, we think that one of the potential major headwinds could be the oil and gas (O&G) sector which the local economy is significantly exposed to might put a dampener on the overall growth trajectory of the local economy. The government is still maintaining its 2017 year-end GDP forecast of 1 to 3 per cent, but uncertainties over protectionist measures by the US government, and the possibility of China’s economy having a hard landing due to its overheated property markets might sway the forecast range to the lower end.
Notable company-related news for the week
It is a moment of ups and downs lately for Noble Group with the stock moving not by fundamentals, but by its ongoing negotiations with lenders and talks with strategic investors like Sinochem on whether there are any credit extensions for the former and injecting new equity stake for the latter.
This week, Noble Group got another breather, this time round, with creditors. With a week to go before the credit lines expire, the company confirmed on Tuesday, June 20 that its lenders agreed to push back the repayment deadline by another four months. The company has also said that it had deferred payment of the coupon on its US$400 million perpetual securities due on June 26.
According to a CNBC.com article, the company has also persuaded banks to extend the US$2 billion credit line, but is urged to find a strategic investor. In addition, the company is also continuing talks with its bankers in relation to its revolving credit facility due in May 2018.
The various on-going negotiations with creditors, and strategic investor are quite overwhelming given the financial outlook for the company appearing less optimistic each day. If any of the creditors were to disagree with the revised credit terms, the company could be facing potential winding up demands from creditors. The company is seriously in need for cash and any credit extensions are a plus for shareholders and management, but as in many dire straits situations, it comes with a heavy price.
Despite the credit woes, there are some investors that appeared to be unfazed by the dire news, as the stock climbed up by at least 15 to 16 per cent intraday on Tuesday, June 20 when the announcement was made. The stock ended the trading day on Wednesday, June 21 at $0.52 per share or up 1 per cent for the day. A total of 35.5 million shares were traded for the counter at the close of Wednesday trading.
Disconnect between A-share inclusion in MSCI indexes and S-Chip stocks
The local FTSE ST China Index appears to disregard the latest announcement on China’s A-share inclusion in MSCI emerging market indexes as the index closed down 0.13 points, or 0.06 per cent lower intraday to end at 230.94.
Taking a look at the one-year daily chart, we noted that the index appears to be tracking closely with the upward trending MA lines, but it is now consolidating around 230 to 231 levels after it reached its all-time high of 238.02 in mid-May. Looking closely, we also noted that the index appears to be falling slightly below the 50-day and 100-day MA, as both MA lines appeared to be converging against each other. The momentum index (below) the chart is also showing signs of flat growth.
Oil prices fell hard into bear market territory
Crude oil prices declined significantly this week with Brent Crude Oil prices touching the low of US$44.82. With the global financial markets heading towards an uptrend mode, oil prices went the opposite direction and slid 20 percent since the start of 2017. It is also the weakest performance since 1997 for the first half of this year.
The recessionary picture for oil prices appeared to be the workings of demand and supply dynamics with the Organization for Petroleum Exporting Countries (OPEC) being the forefront in trying to curb oil production. However, not all OPEC nations are willing to adhere to the oil production cuts. Investors are also discouraged by the data showing oil refineries in China are cutting operations during the peak demand summer season.
Taking a look at the FTSE ST Oil and Gas Index and the United States Brent Oil Fund Exchange Traded Fund (BNO), we noted similar downward trends shown in the following chart:
Looking at solely the FTSE ST Oil and Gas Index, we noted that the index has fallen below the 20-day and the 50-day MA. However, the 100-day MA is showing a divergence, and is upward trending. We think that the uptrend mode for the 100-day MA is relatively insignificant given the 50-day MA crossed the 100-day MA on a downward trend in mid-May 2017. This is one of the examples of the so-called ‘Dead Cross’.
Hong Kong’s Hang Seng did not move much after China’s inclusion in MSCI Indexes
The Hong Kong’s Hang Seng Index (HSI) traded flat on Thursday, June 22 at 25,774.53, down by 0.1 per cent. The inclusion of about 222 over ‘A’ shares from Mainland China into MSCI Indexes did not appear to move a lot as shown in the chart below:
Taking a look at the one-year daily chart of the HSI, we note that there appears to be some consolidation in the chart at around 25,600 to 25,700 levels. However, for the past six months or so, the chart is showing an uptrend and is now up by 19 to 20 per cent since the beginning of the year.
We noted from a Reuters.com article describing Thursday trading action that many investors chose to ponder on the latest decision by MSCI to include China’s ‘A’ shares into the index amid uncertainties over whether there could be diversion of interest away from Hong Kong’s ‘H’ shares to ‘A’ shares.
However, if one were to sit down and think about it. There is already a Hong Kong – Shanghai Connect Programme, and a Hong Kong – Shenzhen Connect programme that allows local and mainland Chinese investors to trade the ‘A’ and ‘H’ shares. Also, the barriers to trading across platforms and markets have been brought down, and with the inclusion of the ‘A’ shares into the MSCI Indexes, there should not be price arbitrages, unless market inefficiencies continue to present in the Mainland Chinese markets.
The Reuters.com article did point out that an index measuring price differences between dual-listed companies in Shanghai and Hong Kong hit a six-month high before ending up 0.8 per cent at 125.05. A value above 100 indicates Shanghai shares are pricing at a premium to shares in the same company trading in Hong Kong, and vice versa.
Moreover, momentum as measured by the 14-day Relative Strength Index (RSI) for HSI is relatively mild at around 52 and on a declining mode. We think that there could be a lull before investors will start to feel comfortable adding on more Chinese ‘A’ shares.
Shanghai Composite Index appears to show a rising trend
Taking a look at the one-year daily price chart of the Shanghai Stock Exchange (SSE) Composite shown above, we noted that the index is taking on an uptrend move. But, we do want to remind investors that the chart the 50-day moving average (MA) has cut through the 200-day MA on the downtrend. This could suggest a bearish move downwards for many investors seeking to capitalise on potential ‘short’ opportunities.
However, we think that the overall trend of the chart is showing uptrend with momentum shown in the 14-day RSI having an uptrend mode, though it is still below the 70 point mark. This might suggest that the RSI is just starting to cross the 50 to 60 barrier, but could be held back due to some hesitation or caution among investors.
European markets are consolidating its gains
Following the parliamentary victory by the En Marche (Onward) party led by French President Emmanuel Macron, European financial markets appeared to be taking on a positive tone, albeit some caution over some of the past issues like the Greek Debt crisis, and decision on the ‘Brexit’ talks might have hamper some investors to put more capital into the markets.
The continent-wide Euro Stoxx 600 index ended the week at 389.62, with momentum measured by the 14-day RSI appeared to show a downtrend. The index is also consolidating its gains around the 387 to 390 levels with the 389.35 being the 50-day MA.
While oil prices entering into bear market territory this week to almost US$42 per barrel in general, they did recover on Friday with the West Texas Intermediate (WTI) and the Brent Crude oil prices rose to US$43.15 and US$45.65 per barrel respectively. In general, oil prices remained weak as shown below:
European economic indicators look weak
According to a market roundup article from CNBC.com, the two economic titans in the Euro area, France and Germany, released their latest Purchasing Managers’ Index (PMI) numbers for June showing weak manufacturing and service sector output growth figures. Germany’s manufacturing and service sectors which account for over two-thirds of the economy dipped to 56.1 in June from 57.4 in May for the overall PMI gauges.
Business activity in France was also hit despite the optimism surrounding newly elected Macron. The PMI for France fell to 55.3 down from 56.9 in May.
The overall Euro Zone PMI also dipped to 55.7 from 56.8 as well.
We note that the latest disappointing data could be due the traditional lull summer period where most Europeans and their families are taking a break or making trips elsewhere. However, aside from seasonal factors, we note that the uncertainties over ‘Brexit’ talks continue to dominate the news headlines, and there is still no agreement among the United Kingdom and members from the EU. This might have add on the woes facing investors in European markets.
We do not think that it is expected to be a long-term issue as valuations are still competitive at about 13 to 17 times price-earnings (P/E) ratio as compared to the US S&P 500 which is trading around 18 to 20 times. There continues to be some room for growth, but the question over European integration will still be on investors’ minds as they evaluate some of the big European companies like Siemens, Roche, and Total, in general.
US markets on the go despite valuation concerns
With the relative high valuations for the US financial markets in general, especially the technology and healthcare sectors which benefited from renewed focus on the Trump administration in uplifting the former (technology sector) through tax incentives, and the latter (healthcare sector) through the major revamp of one of former President Obama’s signature healthcare spending programme, also known as the ‘Affordable Care’ programme, or ‘Obamacare’.
Looking at the one-year daily chart of the S&P 500 chart shown above, we noted that the S&P 500 index gains appeared to be capped about 2,400 to 2,500 levels, without much increases. The index is also consolidating itself, and closed on Friday at 2,438.30, up 3.8 points, or 0.16 per cent. Energy stocks were the main focus after it officially entered in the bear territory of about the US$42 per barrel as measured by the international Brent crude oil.
The momentum indicator as represented by the 14-day RSI chart shows some mild upside, but underlying the risk is it might experience suffering a deep sell down of the assets should there be a global pullback of funds, political instability, or increasingly nationalistic movements that seek to push back against free trade in order to divert towards domestic industries and boost local jobs. However such obstacles can overcome by adopting the various approaches like on-the-job training opportunities, constant engagement with investors/shareholders, and the general public.
Summary of the closing US markets on Friday, June 23, 2017
How did our model investment portfolio perform
Since the inception of the model investment portfolio on November 30, 2016, it achieved a positive gross total return (dividends and capital appreciation) of 8.9 per cent, as compared to the benchmark Straits Times Index (STI) of 10.7 per cent during the same period. Our top three best performing stocks in total return basis continue to be PNE Industries (+27.1 per cent since inception), followed by Venture Corporation Limited (+21.3 per cent since inception), and OCBC Bank Group Ltd. (+17.4 per cent since inception). Our laggard stocks are ISOTeam (negative 11.4 per cent since inception), Sembcorp Industries (negative 3.2 per cent since inception), and Singtel (+0.3 per cent since inception).
With June quarter-end approaching, we are targeting the banks, ISOTeam, and Dairy Farm Holdings Limited for rebalancing purposes.
There are also some stocks on our watchlist that we are currently monitoring including Keppel Corporation, Ezion, Hai Leck, Nordic Group, Boustead, and a non O&G company which we have not formally identified, but will reveal it in our upcoming monthly newsletter.
Market events to watch next week
It will be relatively short week to start with the Hari Raya long weekend holidays. For the local markets in Singapore, the government will be releasing producer price index (PPI) figures for the month of May on June 29. The forecasts are calling for a rise of 6.1 per cent. On the same day itself, we are going to get the import and export prices. This will follow by Friday (June 30) where we are expected to get the bank lending figures for the month of May from the Monetary Authority of Singapore (MAS).
Over in China, the much anticipated June manufacturing Purchasing Managers’ Index (PMI) data is scheduled to be released on June 30. The forecasts are calling for a 51.4 reading. In May, the PMI figure stood at 51.2. The non-manufacturing PMI forecast is for a 54.6 reading while last month’s figure (May 2017) stood at 54.5.
Over in the United States, the key Federal Reserve committee members will be making various visits around the country to discuss about monetary policies including San Francisco Fed President John Williams, followed by Federal Reserve Bank of Minneapolis, Neel Kashkari.
On the data front, investors will be getting the latest information on durable goods orders, S&P Case Shiller home data, pending home sales, and the latest and final revision to US 1Q2017 Gross Domestic Product (GDP). Most are expecting the economy to grow by 1.3 per cent in the March quarter.
There are some US companies that in the focus, namely the healthcare, and technology sectors despite the high valuation multiples associated with names in these sectors. The other down beaten sectors includes the oil and gas (O&G) sector which is bogged down by the ongoing bear market situation.
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 email@example.com, or +(65)9721 3987.