With the Straits Times Index (STI) trading up by 36.79 points to close Tuesday (November 21, 2017) market session at 3,423.38, it seemed like last week’s all-week pounding down seems like yesterday’s nightmare for many investors who could be worrying about clearing out the decks early. However, Tuesday’s robust showing appears to validate the resilient nature of the STI as it seeks to reclaim or even move higher than the psychological 3,400 level.
Taking a look at the one-year daily chart of the Straits Times Index (STI), we saw both the 14-day relative strength index (RSI), and the momentum index is heading upwards, after a tenacious pounding down last week. We also noted that with the Tuesday market close of 3,423.38, it is not far from the all-time high of 3,431.07. There has been a reversal of the previous downtrend seen last week to the one that is now heading upwards.
Notable company-related news
The battle for top place online player in Asia continues with Tencent and Alibaba fighting to get a foothold of the internet market in both home and abroad. This is no only evident in the online space, but in the stock markets, both companies are vying for the share of the investors’ moneys.
In a Business Times (BT) article published on Tuesday, November 21, 2017, Tencent which is listed on the Hong Kong bourse rose to almost HK$420 on Monday, bringing it market capitalisation to HK$3.99 trillion at the close. Tencent closed Tuesday’s session at HK$430, another increase of HK$10.
We noted that Tencent stock rose to an all-time high of HK$439.60, with its 14-day relative strength index (RSI) standing at 83 which is heavily in ‘Overbought’ territory. The stocks overall momentum is also rising to significantly higher levels. The stock has a remarkable run this year and we would only think that the Chinese government could have some regulatory powers to halt the stocks’ ascent. Otherwise, there are no known parties that could halt the rise of the stock.
Alibaba is catching up
Not too far behind is Alibaba (BABA) which, like its peer, the stock is also roaring up, but not at an overheated pace as shown in the chart below:
With the exception of a three touches on the 50-day moving average (MA) line, first one in early August 2017 at US$151.70, the second one in end September at US$167.02, and final one in end October, the stock did not decline below the 50-day MA, and is quite resilient. BABA ended Monday (Nov 20) trading at US$188.
On the stock’s overall momentum, BABA has not been trading in the ‘Overbought’ levels and its momentum index has dipped slightly.
Tencent emerged the winner between the two
As shown in the chart above, the red trendline showing Tencent stock has outpaced BABA stock (shown by the yellow trendline). The stock (Tencent) is now one of Asia’s top market capitalisation companies. It is increasingly its reach to online spin-offs like China Literature, ZhongAn Online Insurance, and Sea Inc. among others.
Singapore market continues to be driven up by banks, real estate and technology shares
The three locomotives for Straits Times Index (STI) increase are driven by banks, real estate, and technology stocks. We take a look at the various indices to evaluate each sector.
The banking sector is currently reaching greater heights with the 14-day RSI hitting close to the ‘Overbought’ levels of 70. Likewise, the momentum is also rising, and with the latest upgrade of the sector coming from CIMB, and DBS Vickers recently published a comprehensive research report outlining that banks are expected to be one of the major beneficiaries as the latest economic forecast for Singapore has been raised from 2 – 3 per cent to 3 – 3.5 per cent.
Moreover, as the CIMB Research report points out, they believed that for next year (FY 2018), net interest income (NII) is expected to be driven by asset volumes, and yield spreads, with sector-wide loan growth. Moreover, with the expected strengthening of the US Dollar, it could lead to an increase in net interest margins (NIMs). The analyst also believes that growth in the wealth management, cards, and the digitalisation initiatives undertaken, cost-income ratio (CIR) is expected to trend downwards.
Real Estate Sector is still riding on higher prices, limited supply, increasing demand
The real estate sector is enjoying a comeback this year despite the ongoing property cooling measures that seek to curb speculative lending through the use of Total Debt Servicing Ratio (TDSR) that stipulates borrowers can only have 60 per cent loan capacity based on their total income.
Looking at the one-year chart above, we see that both the RSI and momentum has dipped a bit from the highs, and are now slowly climbing up. We think that the drop in investor enthusiasm could be more of taking profits after a huge run up around mid-July to the current month.
More importantly, for next year, we expect the collective sale fever is expected to continue, but not likely to be at a strong pace. We do expect that the latest measure on traffic feasibility studies by Land Transport Authority, and Urban Redevelopment Authority (URA), along with the expected rise in development charges (DC) might temper some of the enthusiasm among developers to aggressively bid for en-bloc sites.
Technology sector has a big run and is still going strong
The technology sector, namely Venture Manufacturing Corporation Ltd, and others have powered up the industry with the increased demand for computing, and device renewals. This year is probably one of the best run, including the latest 3Q2017 GDP report by the Singapore government that identified the electronics sector as one of the major drivers for Singapore’s economic growth. However, there are many sceptics out there that might cause some investors to be cautious as many economists think that the run-up in the electronics manufacturing might not have much upside and there is a question of sustainability in the growth.
Looking at the one-year daily chart of the FTSE ST Technology Index, it appears that the pace of increase is quite steady with no visible changes in both the RSI and momentum index on the bottom of the chart. We think that there could be a measured response from investors who might also share the views of the economists.
How did the STI ended for the week
The Straits Times Index (STI) closed off the trading week 18.98 points, or 0.55 per cent higher on Friday at 3,442.15. For the week, the index is up by 1.8 per cent, thus bringing the year-to-date (YTD) performance to 19.5 per cent.
Among the blue-chip stocks, Keppel Corporation rose the most by 2.1 per cent, followed by DBS Group Ltd which saw its stock rose by 1.5 per cent. Singtel, which recently lost its highest market capitalisation crown to DBS, declined 0.3 per cent, followed by COSCO Shipping which is still reeling from its acquisition move with Cogent Ltd, rose 13.8 per cent.
Overall, trading volume was flat with 2.6 billion shares changing hands, along with the total value of transactions standing at about $911.9 million. The ratio of winning and losing stocks is about 243 for the former, and 172 for the latter. We think that part of the flat trading could be the ongoing shopping spree happening on Black Friday, and traders could be distracted. However, we also note trading volumes typically drop at the end of the week to minimise potential adverse news over the weekend which might result in volatile trading conditions come the new trading week.
Looking at the weekly chart of STI, and using Fibonacci Retracement (FR) analysis, we noted that the present level of 3,442.15 on the index, the STI has broke several technical resistance levels, and it is aiming for the 3,500 key resistance level.
However, should it failed to reach the 3,500 or there is a market correction, the STI could do as low as below 3,200.
We also note that both the RSI and momentum index continue to suggest that investor interest is still there, despite the RSI showing ‘Overbought’ conditions.
At this point, we think that STI still has room to rise, but increasingly, there will continue to be scepticism, and we advise investors to continue with their dollar cost averaging strategies, and not be too over-levered.
Hong Kong’s Hang Seng ended higher despite China’s unease over recent upside
Hong Kong’s Hang Seng Index (HSI) closed higher on Friday by 158.38 points to end at 29,866.32. Earlier in the week, HSI hit 30,000 for the first time, and it was reported that the head honcho of Henderson Land Development Co. Ltd will be making donations worth HK$1 billion. Mr. Lee Shau Kee, dubbed as Hong Kong’s “Warren Buffett” had promised in his 2010 autobiography that he would donate HK$1 billion when the HSI surpassed 30,000 points, and it was the level before the Global Financial Crisis (GFC) in 2008. He also pledged to donate the sum each year the index stayed above the level.
Looking at the index, the HSI continues to be significant in the ‘Overbought’ territory with the 14-day RSI showing a 79.26 reading. Moreover, the moving average convergence divergence (MACD) diagram below continues to climb higher. Despite the rising HSI, its market price-to-earnings (P/E) ratio remains low at about 13.6 times, and dividend yield of 2.9 per cent, according to Reuters news reports.
Friday’s market action was dominated by the banking sector which attracted investors who believed that the crackdown on shadow banking by the Chinese regulators might benefit financial names like Bank of China (BOC), and ICBC.
The Hang Seng tumbled late in the week as the Chinese government issued tough regulations on shadow banking, while also criticising the hype up among securities firms over the recent run-up in the best performing Chinese stock, that of Kweichow Moutai Co. Ltd.
In a Bloomberg News report, the Shanghai Stock Exchange (SSE) has penalised a local securities firm, Essence Securities, for failing to provide evidence for the estimated increase in ex-factory price, which compares with the current RMB 819 per bottle. This was according to an earlier exchange notice cited by Sina.com. The increased market intervention by the Chinese government spooked many investors who sold down their shares. Moutai closed the week at RMB 630.04, far off from the all-time high of RMB 719.96
Kweichow Moutai has been a darling stock for the past year with many Chinese households increasingly buying their rice wines for own consumption, and has now been classified as a consumer staple rather than a consumer discretionary product. This means that consumers treat rice wine as part of their household spending requirements, and are needed in each Chinese household.
The evidence of more Chinese government’s interference in the financial markets was also apparent when Bloomberg News reported that it will be stepping up enforcement online lenders are increasingly facing pressure from regulators as they seek to expand their client base. According to the news article, Alipay, China’s leading mobile payments player, will enforce a cap of 24 per cent interest rate charged by lenders. This follows after an internal investigation that showed that some lenders on the Alipay platform charged rates that exceed the legal limit and using the so-called ‘inappropriate’ methods to collect debt.
With step-up enforcement online lending, along with the recent criticism over securities firms on the mainland, we think that the Hang Seng Index (HSI) could be subject to more volatitilies in the next few months.
European stock markets gyrate over political woes in Germany
With the ongoing concerns over the formation of Germany’s government after a historic election outcome that saw Chancellor Angela Merkel losing the majority, and has to try to seek other coalition parties to ensure a continuance. That effort in trying to form a government was unfortunately being hampered by disagreements over the type of government. The political uncertainty spilled over to European financial markets, thus causing some upheavals.
Meanwhile, favourable economic reports on Friday showed business climate in Germany improved as the so-called Ifo Business Confidence Index rose at an all-time high in November despite the ongoing political uncertainty.
Looking at the chart above showing the one-year weekly trends in the Stoxx Euro 600 index, momentum as shown by the 14-day RSI, and the MACD charts indicated flat to positive moves. We think that the index is at risk of heading below the critical 50-day moving average (MA) line of 379.77. If it does manage to hold out, the next level to monitor is 400, provided that there is a successful conclusion of the ongoing talks with the Social Democrats in Germany. However, should it be otherwise, the index could fall beyond 370.
S&P 500 index crossed the magic milestone of 2,600
The S&P 500 stock index marks Black Friday with a bang as it crossed the 2,600 level after surpassing the previous 2,500 level two months ago. It was and has been a roaring year for US financial markets following the election victory of President Donald Trump exactly a year ago, followed by easy monetary conditions, and earnings growth among many US corporations.
Though there are hiccups here and there, namely Russian interference in US politics, various cases of sexual harassment involving executives, and celebrities, the ongoing debate over tax reforms, gun shootings, debt ceiling concerns, and staff turnover issues within the White House, financial markets largely ignore them, and instead focus on earnings growth.
Looking at the one-year weekly chart of the S&P 500 stock index, we note that there has been an unprecedented rise in the index, even though market indicators like the 14-day RSI, and the MACD chart suggests that the market, as a whole, is in ‘Overbought’ territories. The saying goes, “Buy high, sell even higher” seems to be mantra that sticks in the minds of investors.
At the close of Friday’s short trading session, the US markets rose broadly, with retail stocks like Macy’s being among the day’s best-performing sector. A summary of the closing numbers is as follows:
With the Christmas mood among investors, they came in, like the many shoppers in US, buy up stocks during a limited trading session. CNBC cited analysis done by research firm, Adobe Analytics noted that US consumers spent more than US$1.52 billion online as of 5 pm on Thanksgiving. Others thronged out in the cold weather, braving the wait in order to secure that perfect gift. Many expect Black Friday sales could lift consumer confidence.
For the week, US markets were driven by the increasing growth of the tech sector as technology stocks, as a group, rose 1.8 per cent for the week, followed by bullish bets on the victory of the new tax reforms currently undergoing review by the US Senate. The tax bill earlier passed the consent among members of the House of Representatives.
How did our model stock investment portfolio perform
Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio return this week has shown a major outperformance of 86.7 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on July 01, 2017. This compares to the total return of 15 per cent for the Straits Times Index (STI) during the same time period.
The top three holdings in total return terms (dividends plus capital gains) include Nordic Group (up 47.4 per cent since end June 2017); followed by Cogent (up 44.3 per cent since January 2017), and Mapletree Logistics Trust (up 25.1 per cent since November 2016).
The model equity portfolio did experience a shortfall coming from Straits Trading Company (down 5.7 per cent since June 2017); followed by Sheng Siong (down 4 per cent since end June 2017), and Singtel (down 2.4 per cent since December 2016).
For now, we are not planning to make any changes or do any rebalancing for the portfolio. We shall actively monitor the model portfolio till end of December 2017.
Line-up of economic data for next week
After a big run-up in Singapore’s GDP during 3Q2017, investors would be closely watching for prices on the trade front which is scheduled to be released on Wednesday, November 29. This will be followed by bank lending figures which will conclude November’s round up of data releases.
Following the clampdown on polluting-heavy industries during the month of October as leaders of the 19th National Party Congress gathered in Beijing, November’s Purchasing Managers’ Index numbers are expected to be the major highlight for the week. Investors will be keen to know if China’s economic growth forecast of 6.5 per cent for 2017 is on track despite the crackdown.
Over in US, investors will be closely monitoring some key economic data figures including new home sales, GDP growth, personal income and spending.
In summary, the global markets are expected to continue end 2017 on a bright note unless the US Federal Reserve decides to postpone interest rate hikes, or there are hiccups over negotiations to increase the US debt ceiling levels. These two events will be closely monitored by market pundits as the month of November passes, and heading to the final month of 2017.
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