Listless Trading for STI this week

The STI enters the last stretch of the month of May, and into early June with much dullness. It closed down 9.76 points or 0.3 per cent on Tuesday, May 30, 2017 at 3,204.79. The total trading volume was about 1.1 billion shares changing hands, and the total value was approximately $612.8 million. The three actively traded small-cap stocks are Addvalue Technologies, DISA, and Jadason Enterprises. All three counters appear to be leading volume leaders with Addvalue Technologies garnering 117.51 million shares crossing the wires, followed by DISA at 115.24 million shares, and Jadason 13.3 million crossing the wires.

Addvalue Technologies is in the business of providing satellite-based communication terminals, and solutions for various voice and Internet Protoccol (IP) – based data commuications. DISA is in the business of providing security solutions like its anti-theft security devices used in various Walmart USA outlets. These devices are known to be used for unlocking the items that has been purchased by customers. Formerly known as Equation Summit Holdings Limited, DISA also operates through E-waste/Recycling; Supply of Construction Materials; Energy Management Services; Technology, and other segments.

Finally, Jadason Enterprises is a printed circuit board (PCB) assembly manufacturer headquartered in Singapore. The company operates through Equipment and Supplies, and Manufacturing and Support Services segments. The three stocks, Addvalue, DISA, and Jadason were last traded at $0.057, $0.022, and $0.084 per share respectively on May 30.

Seeing corrections in bank stocks, and oil and gas (O&G) sectors

The bank stocks are represented by the FTSE ST Financials Index (shown in next page), and it appeared to have trended down, and consolidating at around 898 to 900. The index is currently down by 1.4 per cent from its all-time high of 910.77.

The Momentum Indicator appears to suggest that there is a lack of any visible push factors to drive the sector upwards. The valuation indicators measured by price-to-book (P/B) multiples appear to suggest that the three local banks are not relatively cheap as compared to their historical averages. DBS is trading at 1.14 times P/B, while OCBC is trading at 1.15 times, and UOB is trading 1.12 times P/B. All prices are as of May 31, 2017. All three banks have recently seen their price multiples moving up.

CIMB Securities recently put out a Strategy Note for 2H2017 noting that earnings of banks are turning more defensive in view of the impending normalisation of interest rates by the US Federal Reserve. The analysts are forecasting the likelihood of upgrades for the banks’ earnings, led by lower credit cost from FY2018 onwards. The key question, they noted, is whether Return on Equity (ROE) ratios can grow above 11 per cent in FY 2017 to FY 2018 or one must buy ahead into 2019 to re-rate the new valuations to the historical mean of 1.3 times P/B.

Note: One-year daily price chart of FTSE ST Financials Index (May 31, 2017)

Incidentally, Moody’s Investor Services recently lifted the outlook for Singapore’s banks from “Negative” to “Stable” citing the country’s improving economic conditions and stabilising commodity prices. Another factor cited by an analyst who was quoted by CNBC.com saying that non-performing loan (NPL) formation or the rate that banks get problematic assets is declining, and he expects banks to get less problematic assets in 2017 and 2018.

On economic growth and credit growth projects for Singapore, Moody’s expects Singapore’s real gross domestic product (GDP) growth to rise to 2.2 per cent in 2017, and 2.5 per cent in 2018. Credit growth is forecasted to rise to mid-single digits after being flat in 2016. The problematic loans to oil and gas (O&G) sector have also started to taper. DBS CEO, Piyush Gupta was also quoted after the bank’s earnings release last month saying that although he expects more bad loans, the worst was likely over.

As for housing loan growth, Moody’s noted that household credit growth has been constrained by macro prudential measures, and such loans are now dominated by secured loans, namely mortgages, which enjoyed low NPL levels of 0.4.

Bank Warrants also actively traded

In a SGX ‘My Gateway’ report dated May 31, 2017, it noted that total warrants activities among  the three banks rose by 13.7 per cent on a yearly basis. OCBC Bank’s warrants recorded the largest increase in turnover worth close to $1.5 million or plus 33.7 per cent. A summary of the bank warrants is as follows:

Source: SGX (May 30, 2017)

STI touched 3,200 support level earlier this week

Note: One-year daily chart of Straits Times Index (June 01, 2017)

At the time of writing this article, the Straits Times Index (STI) is up 14 to 15 points and trading at 3,225.43. at 9:34 am on June 01, 2017. On Monday, May 29, 2017, the STI briefly crossed the 100-day MA of 3,187.79 before resuming resuming its run back up. The index has also declined from its all-time high of 3,275.39 on May 15, and is largely dragged down by banks, and O&G counters.

The momentum indicator shown below has also started to decline since May 11, and the 14-day relative strength index (RSI) is also kept subdued at around 53 to 55 levels. An ‘Overbought’ market is denoted by a reading of 70, while an ‘Oversold’ market is denoted by a reading of 30.

Overall, we think that the STI is currently in consolidation mode, with not much sideways movements are expected. As we entered a lull period before the current quarter ends, STI could be vulnerable to bouts of more volatility, and investors do need to consider tighten their stop-loss or adjust their profit realisation limits. This could help to mitigate any extreme moves to the overall investment portfolio values.

Hong Kong’s Hang Seng is still on an upsurge mode

The Hong Kong Hang Seng Index (HSI) is posting its fifth week of gains since April 25, and was last traded at 25,722.35 at 9:53 am on June 01, 2017. At this level, the index is now 19 to 20 per cent up from its all-time low of 21,488.82 towards the end of last year. The Fibonacci Retracement level of 100 per cent at 24,718.21 was breached on May 09, and was only barely few weeks ago.

The HSI has surpassed many expectations of a major correction following the recent sovereign debt ratings downgrades on Mainland China, and Hong Kong by Moody’s Investor Services.

Note: One-year daily chart of Hang Seng Index (HSI) (June 01, 2017)

On Wednesday, May 31, China released its official Purchasing Managers’ Index (PMI) and it came in at 51.2, slightly than the 51.0 expected, and 51.2 in April. The rise in the manufacturing PMI in May was largely driven by activity in China’s steel sector which saw the Steel sector PMI reading of 54.8 in May from 49.1 in April. Several analysts think that the growth of the steel sector during the month of May was largely driven by infrastructure spending, and Australian and New Zealand (ANZ) Banking Corporation is forecasting infrastructure spending to drive overall 2Q2017 GDP growth to 6.6 per cent, higher than the official 6.5 per cent target.

In contrast, the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) which was released the next day on June 01, 2017, fell to 49.6 in May, lower than the 50.1 forecast by analysts, and lower than April’s 50.3.

China’s official services PMI which was released together with the manufacturing PMI, showed a rise to 54.5 in May from 54.0 in April.

The Caixin/Markit PMI is much focused on the small and medium sized enterprises (SMEs) which bear the most cost burdens, while the official PMI largely focused on the state-owned corporations.

The market ended trading on the first morning session of the trading day largely flat at 25,749, and many market watchers cited the subdued trading conditions due to overstretched positions, and traders are sitting out in anticipation of a potential US rate hike in June, and some are waiting for news of potential inclusion of Chinese equities in the MSCI Indices.

EuroStoxx 50 Index is on consolidation mode

Source: Stockcharts.com (One-year daily chart of EuroStoxx 50 index)

The EuroStoxx 50 index ended the month of May 2017 at 3,554.59, and is off by around 2.6 per cent from its all-time high of 3,650 in early May after newly elected French President, Emmanuel Macron was sworn into office. The 14-day RSI is also trending down and is now close to the mid-pont reading of 45.57, thus suggesting neutral momentum.

The Moving Average Convergence and Divergence (MACD) Index is also trending downwards, thus suggesting that there could be investors realising their profits gained post French elections, cautiousness ahead of European Central Bank meetings, and General Elections (GE) in United Kingdom on June 08.

The British Pound has also whipsawed ahead of next week’s GE in UK. It is one of the key events that is much like the climax that was brought on when Britons cast their votes on UK exiting the European Union (EU) a year ago this month.

Source: Xe.com (Weekly chart of British Pounds (GBP) to US Dollars, June 01, 2017)

As noted earlier in describing the whipsaw nature of the British Pounds, the weekly chart shows that pre-election polls have caused several swings in the currency and it is no different from the Brexit votes last June when the poll watchers got most of their forecasts wrong as the final vote outcome shows a large proportion of Britons voted to seek for an exit out of EU. This time round, following the terrorist attacks last week in Manchester, Britons are deciding the fate of their Conservative Party Prime Minister, Theresa May, and whether they can trust her government in orchestrating an ideal ‘soft’ exit from EU. However, in recent weeks, polls seemed not to find many conclusions, thus resulting in several knee jerk reactions among investors.

On the direction of the Euro currency, the European Central Bank President, Mario Draghi was heavily criticised this week for his continued dovish tones despite the recent positive showing of the economic data, and gradual inflation upticks, though has not yet crossed the 2 per cent threshold level.

Speaking this week to a European Parliament committee on economic affairs, the ECB President argued that extraordinary monetary policies are still needed in order to raise inflation. Draghi was quoted by Reuters.com as saying, “For domestic price pressures to strengthen, we still need very accommodative financing conditions, which are themselves dependent on fairly substantial amount of monetary accommodation.”

Looking at the inflation trends in the EU region, the inflation growth trends have been mixed, but over the past one year, the trend is still heading upwards.

Source: TradingEconomics.com

Draghi’s critics pointed out that the ECB should instead stepped up its efforts in gradual monetary policy normalisation quickly given that economic performance so far has not shown much signs of a downhill when annualised GDP growth rate was last recorded in March 2017 at 1.7 per cent, slightly down from the 1.8 per cent in 4Q2016. Unemployment rate, though high, continues to maintain at a steady rate of 9.3 per cent in April.

These indicators, including inflation and unemployment, should at least convince ECB that the Euro Zone economies are gradually recovering. The EuroStoxx 50 is also trending higher as optimism among investors over the recent European elections have prompted them to take a closer look at Euro area companies. However, the uncertainties over Greece’s continued debt woes, Brexit, and direction of interest rates continue to inhibit any major moves made by investors.

S&P 500 Index continues to stage upmoves despite disappointing data

The US S&P 500 Index managed to stay afloat despite the disappointing economic numbers like the US unemployment numbers which were published on Friday, June 02, 2017. The Labour Department released the latest manpower figures which showed the US labour market added 138,000 jobs in May, and unemployment  rate inched lower by a tad from 4.4 per cent to 4.3 per cent. The annualised hourly earnings rose to 2.5 per cent.

The stock market reaction to the less than expected US employment performance was muted as many of them thought that a one month disappointment in the US jobs figures is not likely to sway the US Federal Reserve’s decision to hike interest rates on June 13 – 14. Besides, there are some sectors that saw strong wage growth and others didn’t.

At the end of the trading day on Friday, June 02, 2017, the stock index figures are summarised in the following table:

Source: CNBC.com

Overall, the Nasdaq was one of the strongest performers among the rest of the leading US stock indices driven by the likes of Facebook, Amazon, Netflix, and Alphabet (parent company of Google) (FANG) stocks. As one might notice in the following chart, the Nasdaq Composite Index saw an upsurge ahead of the two other major stock indices (Dow, and S&P 500).

Source: CNBC.com, Factset (5 minute chart as of June 02, 2017)

One of the major Nasdaq-listed stocks that has been a standout this past week is Amazon (AMZN) whose stock price crossed the US$1,000 per share mark. A chart showing the rise in stock price is as follows:

Note: One-year daily chart of Amazon stock price (June 02, 2017)

If anyone of you would have noticed that on the chart, there was a ‘Golden Cross’ signal where the 50-day moving average (MA) line crossed the 100-day MA somewhere in mid-February 2017 when the stock price was at around US$836 to US$837 per share. This signal as most chartists would say indicates an overall bullish trend ahead for the stock, and true to the words, the stock price scored an amazing run, and was last traded US$1,006.77 on June 02.

There is no doubt that the e-commerce giant exists in many facets of our daily lives including the books, and periodicals we read, down to the groceries, food, health supplements, and collectibles, among others we have come to associate with Amazon.

With Amazon now trading at these relatively toppish manners, the question is whether the stock is trading expensively. According to data from Bloomberg.com, AMZN trades on a trailing twelve month price-earnings ratio of 188.95 times, with a one-year cumulative total return of 38.24 per cent. At these levels, we think that stock chasing at such high price levels might not benefit most investors. We will be monitoring the stock going forward.

US pulling out of Paris Climate Accord

Another significant event we noted this week is the US President Trump indicated his intention to pull the nation out of the Paris Climate Accord. We think that the coal, and other energy intensive industries might benefit. But, it is also not surprising that many corporations including Silicon Valley, the oil majors like Exxon Mobil, and Chevron, car makers who have indicated their willingness in adhering to the major points in the reducing carbon emissions, will also benefit. This is despite some sectors, like the oil majors who might be beneficiaries from the latest outcome, but are now embracing the majority of the so-called ‘green’ activists.

Taking a look at the PowerShares Global Clean Energy (PBD) exchange traded fund (ETF), we noted that the index is on a uptrend, with the 14-day RSI at nearing the ‘Overbought’ levels of 70.

Note: One-year daily chart of PowerShares Global Clean Energy ETF (PBD) (June 02, 2017)

However, on the other end of the spectrum where some of the sectors, like the coal industry, who might benefit from the latest pullout by US on the Paris Climate Talks, there appears to be a short-term rebound in the ETF price on Friday, June 02, 2017. The ETF we are referring to is the VanEck Vectors Coal ETF (KOL) which has a downtrend in the charts, and saw a late bounce this week. It closed on June 01 at US$12.77 per share.

Note: One-year daily chart of VanEck Vectors Coal ETF (KOL) (June 02, 2017)

Overall, we think the latest pullback in US over the climate change talks might not spell much disaster as other high pollution emitters like Europe, China, and India are embracing the major specifications spelt out in the accord. Singapore is also adhering the specifications from the Paris Agreement.

How did our investment portfolio perform

Our model investment portfolio has generated an overall gross total return of close to 10.4 per cent since its inception at the end of November 2016. This compares to the Straits Times Index (STI) benchmark return of 11.5 per cent during the same period. Our best performing stock is still PNE Industries (32.4 per cent total return), followed by Venture Corporation (25.7 per cent), and DBS Group Holdings (16.7 per cent). Our biggest laggard stock is ISOTeam which suffered a 8.9 per cent decline since March 31 when we took the stock on.

Note: Our model investment portfolio (June 02, 2017)

We are keeping a watchlist of stocks to look out for including Keppel Corporation, Ezion Holdings Ltd, Hai Leck, Boustead, and Nordic Group. We think the oil services sector is undervalued; especially those companies whose cash flows are positive seemed to be undervalued. We think that if one were to aim for long-run returns, and undertaking value investing as part of a long-term investment strategy, the oil and gas (O&G) sector though still at their major troughs, could potentially reap rewards provided an investor does his/her homework thoroughly sieving out those O&G entities with strong positive free cash flows, and those that are facing credit crunches.

Market events to take note next week

There will be some local economy related events next week starting with the release of the Nikkei Purchasing Managers’ Index (PMI) which is forecasting a reading of 50.6. A reading of 50 is the neutral point between expansion and contraction. The official PMI for May 2017 released on Friday, June 02 showed a slight drop off in PMI reading at 50.8 from April’s reading of 51.1. On Wednesday, June 05, the government will release the official estimates of foreign exchange reserves.

China will also be releasing the consumers’ price index (CPI) and producers’ price index (PPI). CPI for May is forecasted to increase by 0.2 per cent on a monthly basis, while PPI is expected to remain at 6.3 per cent.

The European Central Bank (ECB) will hold its monetary policy meeting on June 08, along with Britons heading to the polls for their country’s general election (GE) which will seek to affirm current Prime Minister Theresa May’s resolve to leave the EU, and her social policies after almost a year in office.

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
I am in my mid-to-late 40s, married, and am thankful for my wife for all the things she has done. We do not plan to have kids, but are blessed with the simple lifestyle that we truly cherished with each other. I used to be from the financial services industry, having spent 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. I am currently working as a market analyst with a Singapore-based agrochemicals company. I have a deep interest in equities trading/research and analysis, data analytics, real estate, REITs, forex, and digital currencies. I don't consider myself as an avid writer, but I hope to learn as much possible. I am a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. I hope to complete my CFA examinations within the next five years. I value all the feedback provided by fellow readers and bloggers. Please provide any feedback on the work I did. Thank you readers.