The major US stock market indices saw a 1 per cent fall in five months, with the Dow Jones Industrial Index (DJI) falling by almost 240 points to end the trading day on Tuesday (Wednesday, March 22, 2017) 20,668.01, while S&P 500 fell by about 29 points to end Tuesday’s session at 2,344.02. One of the chief concerns besides US health care reforms is the whole debate about where US interest rates are heading to. The speculation and uncertainties was largely absent by the end of the trading week last week after the US Fed has raised interest rates by 25 basis points (bps). However, exactly a week later, it somehow came back and is now hitting on the minds of many investors who are trying to make guesses on the rate directions.
How did the local bank stocks perform
With the three local banks, DBS Group Ltd, OCBC, and UOB Group Ltd dominating the benchmark FTSE ST Financial Index, it is no surprise that with a gradual pace of interest rate hikes as suggested by US Fed Chairperson, Janet Yellen during her post-meeting media conference last week, the interest rate margins for these banks are expected to come down. This mildly hawkish outlook results in a potential negative impact on the banks’ abilities to generate interest income from loans or service fee income.
As a result, one might notice that on the 4-hour chart of the FTSE ST Financial Index, the reading have dropped off a bit from 845.58 on Tuesday, to 845.19. The last peak was seen last week on March 17, 2017 where the index traded at 858.92 before it came down 852.26 on March 20, or a 0.78 per cent from the peak.
How did DBS stock perform
Taking a look at the performance of DBS stock, the stock price recorded a sharp drop on Wednesday, March 22, 2017 to trade at $18.68 – $18.70 per share range.
The ongoing Oil and Gas (O&G) industry woes, on top of a gradual trajectory in the direction of US interest rates have impacted DBS share price during Wednesday trading session. The stock fell by 33 cents, or 1.7 per cent to $18.68 at the time of writing this article.
Taking a look at the correlation between the daily one-year chart showing the DBS stock price and the FTSE ST Oil and Gas Index, we noted that the relationship appears positive. However, the problems within the O&G sector seems to be contained within the sector as shown in the extreme right hand of the chart (inverted red arrows), the gradient of the decline is not as severe for DBS as compared to the broader O&G index itself. This could mean that DBS is somewhat insulated, but not completely, to the ongoing issues that are happening within the O&G sector.
O&G woes are still in the spotlight
Looking that the FT ST Oil and Gas Index, one might notice on the extreme right hand side of the chart that the index has come off quite a bit (inverted purple arrows) from its major high of 407.3 to trade at around 376.3 at the time of writing this article. The past week has been focused on the US Chapter 11 bankruptcy filing by Ezra Group on March 19 which brought on the bad memories last June when its peer, Swiber Holdings filed for judicial management (JM) process.
The spectre from the Swiber episode last year still reverberate the entire O&G sector. With another fallen grace of a once darling O&G stock like Ezra, the focus has now switched to other players like ASL Marine, Pacific Radiance, Vallianz Holdings, and other small-cap firms which have close connections or dealings through contact work among each other. This week, two O&G business trusts, Rickmers Maritime Trust¸ and First Ship Lease (FSL) Trust were also featured in the news with Rickmers being given an April 15 deadline to submit its debt restructuring proposal, while for FSL Trust, auditors have flagged some going concern issues with the entity. Rickmers was suspended for trading as of Wednesday, March 22, 2017, while FSL Trust traded as much as 3.6 to 4 per cent down intraday at $0.131 per share at the time of writing this article.
Telecommunications stocks in the next spotlight
M1, the third telecommunications stock, announced late last Friday, March 17, 2017 that its joint venture partners, Singapore Press Holdings (SPH) Limited, Keppel T&T, and Malaysian-listed Axiata Telecommunications Limited were jointly taking a complete review of their holdings on the stock, but they maintained that they could not get any assurance that a deal might be brokered. The stock was halted on Friday evening prior to the news, and was the halt was immediately lifted after the announcement.
On the following Monday, March 20, 2017, the stock shot up by almost 4 per cent from the Friday closing price of $2.19 per share before retreating back to $2.17 by the end of the trading session. The volume of shares traded on Monday was about 10.5 million shares. However, most analysts not too sanguine about the short-term spurt in the stock price with OCBC Securities maintaining its ‘Hold’ rating, but not ruling out a potential takeover. They estimated that if a takeover were to take place, the likely valuation of M1 could be in the range of $2.27 to $2.62 per share based on a EV/EBITDA multiple of 8 to 9 times, applied to the average of M1’s financial year-end 2017, and forecasted FY 2018 EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortisation.
M1 is the thought to be to the industry weakest competitor if the fourth telco, Australia’s TPG Telco were to enter the market in the 2H 2017. Like fellow peer, Starhub, they do not have a diversified coverage. Moreover, apart from TPG Telecom, other players like the Mobile Virtual Network Operator (MVNO) player, Circles.Life has launched an aggressive data-focused plan in early March, and MyRepublic, another internet provider, was noted by OCBC Research that they are planning to launch a similar MVNO service. Credit Suisse said that there was limited upside from a potential general offer for M1. Credit Suisse also favours a potential ‘marriage’ with Starhub which in their view, could have real upsides. But, the broker maintained that it thinks that the investment horizon has to be long-term.
Taking a look at the above one-year daily chart of M1, we noted that there was a short spike in the price of M1 stock price to around 8 per cent following Friday’s (March 17, 2017) announcement by its joint shareholders that they were going to undertake a joint review of their stakes. However, when the news have been absorbed with several analysts feeling unimpressed by the attractiveness of the deal unless there is a tie-up with fellow competitor, Starhub, the stock price has since retreated slightly to around $2.15 - $2.16 per share, but still higher than the pre-announcement price of around $2.00 per share.
SGX welcomes a new Catalist stock debutant, Kimly Limited
Kimly Limited, a coffee shop operator with 64 food outlets and 121 food stalls across many heartlands of Singapore launched its first initial public offer (IPO) of 3.8 million shares for the public and priced the IPO issue at $0.25 per share two weeks ago. At the close of the IPO exercise on March 16, 2017, the company received 14,828 valid applications, and the stock subsequently was listed on March 20, 2017 at a debut price of $0.55, more than double the IPO price of $0.25 per share.
The opening day saw massive volumes with many investors trying to jostle for a stake or for those investors who were fortunate to be allocated the IPO and were trying to unload the shares for a profit. The closing volume on March 20 was around 108.5 million shares, but the stock price later retreated back to $0.44 per share, or a 76 per cent increase from the IPO price.
Since then, the stock price has not strayed beyond the $0.40 to $0.50 range, and as of March 23, 2017, the stock price was hovering around $0.49.
Kimly’s fundamentals are relatively strong and the company was in a net cash position according to its prospectus. The company is also owned partly by a unit of Temasek Holdings, Heliconia Capital Management, via its agreement with Vanda 1 Investments. The ICH Gemini Asia Growth Fund, managed by ICH Gemini, was also an investor.
Hong Kong stocks are still going strong
The Hong Kong Hang Seng Index (HSI) saw modest gains this week, and was seen dropping by 0.1 per cent to 24,308.63 at the end of the morning session on Friday, March 24, 2017. Despite the triple digit losses seen in the US Dow Jones Industrial Index (DJI) this week, the HSI performed relatively alright despite coming in flat this week.
Other reasons as quoted by Reuters.com saying that some analysts are worried about the postponement of the health care bill which was supposed to be tabled in US Congress on Thursday has cast doubt on President Trump’s ability to deliver his promises of tax cuts and infrastructure spending. Other sectors including resource stocks and property stocks led the declines on Friday. Reuters.com also reported that property stocks were impacted by other reports that China’s biggest bank card provider, UnionPay has moved to tighten regulations over how mainland customers can use its debit and credit cards to purchase houses in Hong Kong.
Another reason for the lack of market direction is probably the distraction coming from the upcoming Hong Kong elections this weekend (March 25, 26, 2017) to select the next Chief Executive to replace current head, Leung Chun-ying. Ms. Carrie Lam, the supposedly favoured candidate by the Mainland Chinese government is pitted against the pro-democracy faction’s favourite Mr. John Tsang, who was the the former finance secretary, and retired judge Mr. Woo Kwok-hing. Both Ms. Lam and Mr. Tsang are leading neck to neck, and any major surprises on the election outcomes are expected to move the local financial markets.
European markets are trending higher
The benchmark EuroStoxx 50 index was last recorded at 3,452.18, up by 31.48 points, or 0.92 per cent, and is not far from the 52-week high of 3,452.26 level on March 21, 2017.
A little bit background of EuroStoxx 50 index, and this index is one of the leading blue-chip benchmarks for the Eurozone, and covers 50 leading blue-chip European stocks from 11 Eurozone countries including Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.
So, the question on most investors’ minds is why European markets are staging a major comeback since 2016. Has anything changed? For one thing, the European Central Bank (ECB) under chief, Mario Draghi has maintained his unchanged stances over the possible lifting of the quantitative easing (QE) policies as the recovery has not yet translate into a durable and self-sustained pick-up in inflation. In a March 15, 2017 statement, the committee noted that the recent sharp uptick in headline inflation was mainly caused by energy and food price inflation, but medium-term outlook for headline inflation is largely unaltered. The underlying inflation pressures continued to remain subdued as unutilised resources are still weighing on wage and price formation (Meaning full capacity growth is not yet maximised). Overall, the ECB expects continued stable economic expansion over the next three years, with annual growth rates of between 1.6 per cent and 1.8 per cent. Moreover, the downside risks around the growth outlook have become less pronounced, albeit remaining to the downside.
Based on these remarks, the Eurozone is not expected to see any major economic crisis. However, with populist movements emerging in France, Italy, and elsewhere in Europe, investors are highly concerned about the potential repercussions to continued market confidence. However, stepping back and looking at solely the fundamentals of the Eurozone area, the market price-earnings multiples are around 14 times forward, and average yield is around 3 per cent. With subdued inflation, coupled with stable economic growth, the European markets are something which investors might want to keep an eye on.
S&P 500 continues to defy sceptics
The S&P 500 index fell a bit by 2.49 points or 0.11 per cent intraday on Thursday, March 24, 2017 at 2,345.96, but looking at the one-year stock chart above, the index might come to a peak, and limited gains can be earned from the stock markets.
Meanwhile, the Average Directional Index (ADX) is now on a downtrend, signaling potential negative trends ahead. The S&P 500 dropped nearly one percent on March 22 on concerns to getting consensus and agreement among several US Republicans to vote ‘yes’ to the reforms laid out by the White House for the replacement of the ‘Affordable Care Programme’.
Going forward, we believe that market moves of more than 1 to 2 per cent either direction would not be seen as major surprises. The US markets are trading at above 20 times earnings multiples, and are unlikely to show major outperformances with the continued strength of the US Dollar, and the inward domestic policies outlined by President Trump. We will watch cautiously on the US trading activities in the next few months. As of now, the President needs to get the healthcare reform bills settled first. However, the President has indicated that he will continue to move on to tax reforms if the healthcare bill is not settled. But, the question is whether lawmakers will continue to work with the White House given its failed impasse of the healthcare bill.
How did our investment portfolio performed
Our investment portfolio which was started at the end of November 2016 has gained a total return of 8.56 per cent year-to-date (YTD) as of March 24, 2017. Compared to the STI benchmark returns during the same period, our fund outperformed the index by 38 basis points.
The major outperformers in our portfolio include Dairy Farm, and PNE Industries, while laggards continued to be Keppel DC Reit, and Raffles Medical, which underperformed our expectations with a negative 1.6 percent for the former, and a negative 4.7 per cent for the latter at the present price levels of $1.205 for Keppel DC Reit, and $1.41 per share for Raffles Medical Group.
We continue to monitor the two ETFs, db x-trackers Euro STOXX 50 UCITS ETF, and the db-x-trackers MSCI Indonesia UCITS ETF, on top of Keppel Corporation, Ezion, and UMS Holdings. We think that with the latest new contracts for drilling jacks for Keppel Corporation, strong positive free cash flows for Ezion, and continued investor interest in UMS Holdings along the entire semiconductor space, particularly with the recent news reports that Singapore’s manufacturing sector for February 2017 rose by an overwhelming 12.6 per cent, we will be closely monitoring these stock picks for strategic entry points.
What investors should watch for next week
The local economic news will be dominated by readings for producer price index (PPI) for February, and trade prices (Import and Export prices) for February on Wednesday, March 29, followed by bank lending dollar volumes for February. Economists are currently forecasting a yearly change of the PPI to be 16.5 per cent as compared to January 2017’s yearly change of 14.5 per cent.
Over in US, investors will get to see the impact of higher interest rate environment impacts the nation’s home prices with the monthly S&P/Case-Shiller Home Price Index on Tuesday, March 28, followed by pending home sales figures for February. The US Conference Board gauge on consumer confidence will also be closely watched, and it comes out Tuesday. The projections are guiding for a bullish reading to 113.8 for March, as compared to 114.8 in February.
This is also the week where several US Federal Reserve speakers, including Dallas Fed Chief, Robert Kaplan, and San Francisco Fed President, John Williams who will be commenting on the latest Fed announcement and their thoughts on future interest rate moves.
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.