Has STI 3,000 been overhyped

The Straits Times Index (STI) appeared to be stalling at slightly above 3,000 points, and it makes us wonder whether there is any momentum to charge up higher. Last week, everyone was marveled by how far STI has come when it broke the 3,000 level. However, this week, the momentum seems to be waning, along with hardly any significant upsides, and the overall market action is relatively muted. Yes! There are concerns about hard ‘Brexit’, China’s GDP growth, and President Trump’s inauguration, but earnings announcements from Singapore Exchange, Capital Mall Trust (CMT), and Frasers Centrepoint Trust (FCT) does not seem to have caused much excitement among investors.

How did STI end on Friday

The STI ended the week by 2.86 points higher, or 0.1 per cent on an intraday basis to close at 3,011.08 on January 20, 2017. This brings the year-to-date (YTD) performance to a plus 4.45 per cent. Trading volume rose intraday to 2.39 billion shares as compared to 1.92 billion shares on the previous day. There were 182 rises against 218 falls in stock prices, and this might point to somewhat of an overall bearish market sentiment.

The major laggards have been the three banks where DBS fell 0.06 per cent to close at $18.27, while OCBC and UOB ended flat and down 0.38 percent to close at $9.30 for the former and $20.72 for the latter. Singtel shares went up 0.79 per cent, while CapitaLand advanced by 0.31 per cent. Despite the slow to flat performance for the STI this week, the overall stock performance of the three major banks seem to be trending higher as shown in the FTSE ST Financial Index chart (bottom).

What are the technicals showing for STI

The momentum chart (not shown) has fallen from 112.82 points at the beginning of the week and ended at 31.62 points on Friday, January 20, 2017. This might suggest that there is a lack of any push to bring the STI higher.

The Average Directional Index (ADX) increased slightly from 25.048 in the beginning of the week to close at 28.196. However, the positive Directional Index (DI) fell from plus 33.923 in the beginning of the week to end at plus 28.61 at the end of the trading day on Friday, while the negative Dis rose moderately from minus 15.637 to minus 14.157. The DI movements could suggest that STI is still trending around the 3,000 level, and could take a while longer before there could be a sustained increase.

The peak level for the STI this year is 3,027.46. If the STI managed to break the 3,020 resistance level, we believe that that the next test is 3,025. However, if the STI fails to rise further, the next support level could be 2,950 or around the 50-day moving average (MA) line.

Overall, we are still not convinced that there is a true recovery in the local stock markets. So far, retail Reits like Capital Mall Trust (CMT), and commercial office Reits like CapitaLand Commercial Trust (CCT) have reported negative rental reversions suggesting the weak retail landscape. Although December 2016 exports in Singapore rose by 9.4 per cent and is mostly driven by manufacturing sector, but there are still uncertainties including an expected slowing economy in China this year (6.7 per cent overall Gross Domestic Product (GDP) growth recorded in 2016), uncertainties on a sustained European Union (EU) economic recovery, ‘Brexit’ jitters in the United Kingdom, and the insular trade policies by the new US President Trump’s administration.

We continue to maintain our 2017 STI target range of 2,800 to 2,900. Unless there is any meaningful recovery in the overall economy in Singapore this year and for the next decade at 2 per cent to 3 per cent per annum as indicated recently by Prime Minister Lee Hsien Loong, we might consider changing our forecast, but as of now, our estimates for the STI remained unchanged.

Hang Seng continues to move up

Source: Oanda Singapore

The Hang Seng Index (HSI) in Hong Kong closed at 22,885.91 on Friday, and is down by 164.05 points, or 0.71 per cent on an intraday basis. The average volume traded on HSI was around 1.58 billion shares. The overall trend is still upwards despite the ongoing heated race between two former legislators, Ms. Carrie Lam, and Mr. John Tsang who will be vying each other to replace the current outgoing Chief Executive, Leung Chun-ying.

However, ADX is seen falling drastically from November’s 57 to 58 points range to the 18 to 20 points range this week. This might suggest that the trading movement could be worn off quite soon. The decline in ADX does not seem to coincide with the better than expected overall GDP growth of 6.7 per cent for the whole of 2016 in China. We believe that with HSI being a key forward indicator of Hong Kong’s economy. Despite being one of the main beneficiaries for the massive capital outflows coming from the Mainland, there are still deep concerns on the fundamentals of China’s continued economic growth. There could also be concerns that such capital outflows coming into Hong Kong might stoke up inflation expectations, and property prices continue to rise till an extent that the Hong Kong Monetary Authority (HKMA) might run out of tools to slow down the so-called ‘hot’ money coming into the territory.

Overall, we expect HSI to remain bullish on a short-term basis. If the HSI managed to break the previous high of 23,150, the 24,000 level could be the next test. However, if the HSI is not able to reach the 23,400 level, we think that the next test of support is 23,000 level.

S&P 500 Index flattens

Source: Oanda Singapore

The S&P 500 index appeared to be seeing some flattish trend going into President Trump’s inauguration on Friday. The index closed at 2,271.31, up at 7.62 points or 0.34 per cent on a intraday basis. According to CNBC.com, telecommunications and materials were the leading advancers on Friday. The overall tone coming from President Trump appeared to be populist and protectionist in nature, with the American people in mind. An intraday look at S&P 500 index on Friday is shown below:

Source: CNBC.com

Although there was a sharp drop following the swearing-in ceremony of President Trump, the S&P 500 index managed to regain itself, and closed slightly higher than the previous close. A sustained upward momentum can only be determined when traders come back on next Monday.

Looking at the fundamentals of the S&P 500 index, the price earnings multiple has reached almost 25 to 26 times, and is regarded as relatively expensive compared to STI at around 12 to 15 times. Some of my clients have been asking me which stocks to pick from the campaign slogan of  “Make America Great Again”, and my advice to them is not to cherry pick sectors with the objective to time the market as there is still an uncertain degree to the direction of President Trump’s economic policies. Although President Trump has cited some fiscal policies he will be implemented including widespread tax cuts from 35 per cent to 15 per cent for corporates, to loosen some of the business regulations, we think that investors should do their homework and pick stocks that have reasonably good fundamentals, and are somewhat resilient.

We are hopeful that small-cap to mid-cap stocks in the water industries, such as American Water Works (AWK, US$71.93), Aqua America Inc. (WTR, US$29.65), and Pentair PLC (PNR, US$58.80) might benefit from a shortage of clean water resources, and infrastructure spending by the Trump administration to boost water supplies especially to states like California, and Texas which are often experiencing water shortages during the dry spells. We also believe that the sector is overlooked by many investors, and would suggest a diversified investment allocation through an exchange traded fund known as Guggenheim S&P Global Water Index ETF (CGW, US$29.05). The net expense ratio is around 0.64 per cent, and the year-to-date (YTD) growth is around 16 to 17s per cent. At $29.05 per share since Friday’s close, the ETF trades at a premium of around 0.3 per cent to its net asset value (NAV) of $28.95. A one-year chart of the CGW ETF is shown below:

Source: Schwab.com

How is our model portfolio performing

Source: My model portfolio (DairyFarm stock price in US$ has been adjusted to Singapore Dollars)

Our overall portfolio has increased by close to 2.4 per cent since its inception at the end of November 2016. We have not made any changes to our portfolio, and the fund performance is unchanged as compared to last week. As mentioned in my previous article, we are still monitoring closely the oil and gas (O&G) sector, namely Keppel Corporation ($6.17), Sembcorp Industries ($3.12), and small-cap player, Ezion Holdings ($0.415). These stocks continue to be in our watch list, and we are reasonably confident that crude oil prices are likely to be capped at around US$60 per barrel. A chart of the Brent Crude Oil prices is shown below:

Source: Oanda Singapore

What to look forward in the coming week

Some of the earnings news expecting for next week include Ascendas Reit ($2.41) 3Q results on Tuesday (Jan 24), Mapletree Commercial Trust ($1.455) 3Q results on Wednesday (Jan 25), followed by Keppel Corporation ($6.17) 4Q and full year results on Thursday (Jan 26).

Economic news include Singapore’s private residential, HDB and commercial property statistics on Thursday (Jan 26), and the advance estimate of US GDP for 4Q and 2016 on Friday (Jan 27).

Disclaimer: The views/analyses expressed by the author in this article are based on public information sources, and individual analyses. 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

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