Global Markets as tracked by the MSCI World Index is up by almost 2.7 per cent, while Singapore’s Singapore Straits Times Index (STI) is up by 6.3 per cent since the start of the year. The Dow Jones Industrial (DJI) Index in US has also crossed the 20,000 mark this past week. What does these stock index performances mean for investors? Is the STI is at its cusp of recovery, or is this a false signal given the challenging economic conditions that lie ahead? Have the major stock indices overextended themselves too fast?
Hold on! Wait for a second. Let’s step back and evaluate the valuation of the major indices. The DJI is now trading at around 17 to 21 times earnings, but STI is trading at around 13 times. Other regional markets are also trading at low price earnings (P/E) multiples relative to the US. This could mean that the US market multiples are approaching to full to slightly overvalued territory. However, the rise of the global stock indices, including STI did grab many investors’ attention. Some sectors including the banks, infrastructure-related, oil and gas industries, among others have also been in the positive limelight.
Banks lead the top performers
Leading the top performers among the STI constituents are the three local banks, DBS, OCBC Group, and UOB each, with each gaining 9.8 per cent, 5.7 per cent, and 2.8 per cent respectively on a year-to-date (YTD) basis. The DBS stock has awed many investors and financial professionals like me, and the price performances of all the three bank counters have been staggering. Boasting a price-to-book (P/B) ratio of 1.09, and a current dividend yield of 3.2 per cent, it is almost a no-brainer to go into this bank stock. However, for potential buyers wanting to seek entry into DBS stock, there might be a need to determine the appropriate entry points before placing a ‘buy’ order. Others might want to bet on the notion of “buy high, sell even higher”, but I won’t advise adopting this strategy unless you are absolutely confident, and a lot of it has to fall on a combination of market timing, and a bit of luck.
DBS is outperforming the STI
Looking at the comparison chart between STI and DBS, one can notice DBS stock had a phenomenal rise since November last year. On a yearly basis, the DBS stock is up by around 40 per cent, while the STI is about 21 per cent higher. Despite the huge run-up, DBS is still trading at a low price-to-book multiple of 1.1 times, and dividend yield of 3.1 per cent.
Investors should be asking themselves whether DBS stock is a good long-term investment, and should they be relinquishing their investments in DBS? Looking at the fundamentals solely, the stock is still relatively cheap as compared to OCBC (P/B of 1.12 times), but slightly expensive as compared to UOB Group (P/B of 1 time). In fact, UOB Group is now one the cheapest local bank stock in book value terms and its dividend yield is about 3.3 per cent.
On a technical analysis (TA) perspective, DBS stock looks like it could be ripe of some profit taking and with the latest closing stock price of $19.17 (27 Jan), it is close to a peak of $19.20. The last time the stock hit $19 to $20 was in 2015, and it hit $21.50 at one point during that year as well. Potential investors interested to get into the piece of action might want to wait for slight pullbacks to buy on dips, or perhaps undertake a dollar-cost averaging approach, and not time the market.
Hang Seng Index
The Hang Seng Index (HSI) is also turning upwards to close at 23,360.78 on January 27, 2017. This brings the year-to-date (YTD) performance to 6.2 per cent. The index had a bounce up from the 100-day moving average (MA) of 22,481.29, but investors have not been buying aggressively. The average directional index (ADX) (not shown) is trading slightly higher at 23.851, but is still below the 47.12 recorded in September 2016. Over the week, most of the news flows coming from China are mostly unchanged, including the capital outflows, and rise commodity prices. The latest week also saw trading volumes dipped due the Chinese New Year festivities.
Going forward, if the HSI managed to break through the 23,500 level, the next target is 24,000. However, should the HSI disappoints, the support line could be around 22,500 which lies on the 50-day MA.
S&P 500 Index
The S&P 500 Index ended the week at 2,294.69. This brings the YTD performance to 2.5 per cent. The week also saw the DJI broke through the 20,000 mark, and is the first full week of President Trump’s administration. So far, US markets have not reacted negatively to the new President’s term. Instead, investors are focusing on earnings, and the economy. On Friday, January 27, US reported weaker than expected economic growth numbers with full-year 2016 gross domestic product (GDP) coming at 1.6 per cent, while on a quarterly comparison, the US economy only grew by 1.9 per cent during 4Q2016, as compared to consensus estimates of 2.2 per cent.
Looking at the chart, the S&P 500 Index appears to have broken from its relatively flat line to end up higher at the end of the week. However, the ADX fell to its previous December 2016 low of around 14. Compared to the previous directional indicator (DI) recorded towards the end of last year (27.55), the divergence between both data suggested that some investors might be pulling off their most aggressive stock bets from the US and put into other markets like the Emerging Markets.
Taking a look at two exchange traded funds (ETF), the S&P 500 ETF and the SPDR MSCI Emerging Markets ETF shown in the chart below, we note a big divergence between both ETFs, with the latter outperforming on a 50 per cent yearly growth as compared to a 20 per cent yearly growth for the former.
How is our portfolio performing
Looking at the week’s performance, our model portfolio grew about 5 per cent since we started the exercise at the end of November 2016 with a $100,000 sum to begin with. The three bank counters, Dairy Farm, and SATS were our main contributors to the portfolio outperformance. The three bank counters’ stock price growth since end of November 2016 are in the range of 2.9 per cent for UOB Group to 9.2 per cent for DBS Group. Dairy Farm’s stock price rose by 17.9 per cent, while SATS Ltd’s stock price grew by 10.2 per cent during the same time period.
Separately, the three oil and gas counters in our watchlist and was briefly discussed in my previous weekly market summary article have also shown some outperformances as compared to last Friday’s close on January 20, 2017. Keppel Corporation is up 1.6 per cent ($6.27, Jan 27), and Sembcorp Industries is up 2.2 per cent ($3.19, Jan 27). Ezion Holdings stock price came in relatively flat at $0.41 per share as compared to the January 20 market close.
Overall, we are still maintaining our portfolio holdings, and may consider taking off some counters after evaluating the cost and benefits. We are also increasingly monitoring the technology sector, transportation, health care, and property sectors for any value plays. We shall update readers as the weeks progress.
What to watch for next week
The new week, post Chinese New Year will be more local earnings news, including SIA Engineering ($3.50, Jan 27), and Starhub ($3.02, Jan 27). Both companies are expected to post their latest earnings results on Friday, February 03, 2017.
There are no known local economic news that are expected to be released next week. The key US payroll number will be published on Friday, February 03, 2017. Economists are expecting 165,000 payroll numbers created, and unemployment rate remained unchanged at 4.7 per cent. December 2016 US payroll figures came in with 155,000 new jobs created, and 4.7 per cent unemployment rate.
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.