O&G woes hit Straits Times Index hard

If one were to think that last week’s so-called ‘fire and fury’ trading session was merely heated rhetoric between US President Donald Trump and North Korean President Kim Jong Un, this trading week was dominated by something more closely to investors’ minds, the ongoing oil and gas (O&G) woes, especially with Ezion unexpectedly announced a temporary suspension to their stock trading while they proceeded to hold more talks with their creditors.  As the article was being written on Thursday, August 17, the three banks’ stocks are trading mixed with DBS Group Limited trading up 12 cents at S$20.51, OCBC trades lower by 7 cents at S$11.12, and UOB is trading down 15 cents at S$23.58.

Thought was a O&G survivor, but then again….

Ezion Holdings Limited, a lift-boat operator has traditionally known for its prudent management style, and was widely touted by many investors as one of the financially strong corporations among a sea of several O&G ‘dropouts’ like Swiber, Nam Cheong, and Ezra. However, when the company unexpectedly announced its stock suspension on Monday, August 14, things start to go downhill.

Source: Phillip POEMS Trading Platform (One-year daily chart of Ezion Limited, August 08, 2017)

The chart above shows the one-year daily chart of Ezion Limited. We note that the chart does not show any favourable upturn or potential upside reversals for the stock as the chart precipitously heads down further.

Although the stock did breach above the 50-day moving average (purple line) in mid-July, peaking at S$0.28, the stock failed to head higher, and instead went downhill till the last trading day on August 08, 2017 at S$0.197.

On Monday, August 14, Ezion came out with a press release announcing that it will be suspending its stock trading on SGX as they need some time to continue its debt negotiations with its creditors. It came as a shock for many investors as many have not expected the management to take the final resort suspend the stock. However, prior to the stock suspension, there were signs that the stock could not hold its act. First is the chart above, and second, there were several articles published by various press agencies that the company was engaged in restructuring talks with creditors. Those were some of the hints that  might point to a 50/50 chance of management being able to untangle itself from the various debt deadlines.

Apart from the stock suspension announced on August 14, the company published its latest 2QFY2017 financial results which showed revenues for 2QFY2017 ending June 30, 2017 falling by 19.5 per cent year-on-year to US$67.4 million and net profits attributable to shareholders suffering a loss of US$2.6 million. The cash from operating activities turned negative at minus US$2.4 million with a notable increase in payments to trade creditors at around US$30.5 million.

Banks were heavily impacted by Ezion’s woes

Source: Phillip POEMS Trading Platform (One-year weekly chart of the FTSE ST Financials Index, August 18 2017)

We note from the above one-year weekly chart of the FTSE ST Financials Index, the index appears to be coming off from the peak of 958.71 recently, albeit a continuing uptrend pattern.

Looking in depth on one of the affected banks, DBS Group Limited which was said to me one of the main principal local bankers for Ezion, the one-year weekly chart of the bank seems to be suggesting that the stock has come off slightly from its all-time highs of S$22.25, and looks to start trending downwards, though is still not in correction mode.

Source: Phillip POEMS Trading Platform (One-year weekly chart of the DBS Group Limited, August 18 2017)

Since Tuesday’s (August 15, 2017) drop across all the board for all the three local banks, DBS Group Limited, OCBC, and UOB Group, DBS has lost about 2.6 per cent from Monday, OCBC is down by about 2.1 per cent, and UOB shed its gains by 1.3 per cent during the same period.

Although declines might not seem much, investors are aware of how the fragile the situation especially with the non-performing loan (NPL) ratios on their books which are heavily exposed to the ongoing O&G industry woes. As of now, most of the NPLs looked stable at less than 2.0. However, should there be a cascading fallout of O&G firms across the industry, the investors’ faith in the banks will be severely tested.

STI and its relationship with the O&G sector

Source: Phillip POEMS Trading Platform (One-year daily chart of the Straits Times Index (STI) and the FTSE ST Oil and Gas Index, August 18, 2017)

We note that there appears to be convergence reaching soon for both the Straits Times Index (STI) (yellow colour) and the FTSE Oil and Gas index (blue colour) on a daily chart comparison. Interestingly, the daily chart appears to show some positive correlation between both STI and the FTSE Oil and Gas Index. It could perhaps explain why the Straits Times Index has been falling this week as a result of Ezion’s stock suspension.

STI tapers off year-highs

Source: Phillip POEMS Trading Platform (5-year weekly chart of the Straits Times Index (STI), August 18, 2017)

We noted that the Straits Times Index (STI) is starting to taper off from its year highs where it reached at around 3,349. However, we hesitate to conclusively call the market the bottom yet as the relative strength index (RSI) is still hovering at its highs of around 59, and there is still some legroom to go before the index falls further to. Until the index falls to falls below the 100-day moving average (MA) line of 3,231, we will continue to monitor.

Hong Kong’s Hang Seng Index continues to display resilience

Source: Stockcharts.com (One-year weekly chart of the Hang Seng Index (HSI), August 18, 2017)

Despite the pullback in several major global indices, Hong Kong’s Hang Seng Index (HSI) continues to trend upwards with the last recorded level of 27,344.22 as of Thursday, August 18, 2017. We also note that the RSI is currently at or close to the ‘Overbought’ levels of 70. There has not been any major pullbacks yet for HSI.

Chart overlays of Singapore’s Straits Times Index and Hong Kong’s Hang Seng Index

Source: Phillip POEMS Trading Platform (One-year daily chart comparisons between Hang Seng Index and Straits Times Index, August 18, 2017)

In terms of chart performances, we note that Hong Kong’s Hang Seng Index (HSI) (yellow colour chart) is outperforming the Singapore’s Straits Times Index (STI) (red colour chart), and even though both indices are displaying a downtrend, Hong Kong’s HSI is still doing slightly better that Singapore’s STI. However, we don’t think the correlation is perfect as the peaks and troughs of both indices took on different directions at around mid-July 2017 when the HSI starts climbing higher, and steeper than Singapore’s STI.

Apart from the Mainland Chinese money flows into Hong Kong, companies such as Tencent Holdings continues to outperform in earnings growth and share price performances. The stock jumped 1.9 per cent higher to close at HK$324.60 on Thursday, August 17, 2017, thus cushioning some of the heavy sell down of the index. We note that the stock price for Tencent has almost tripled since last December

Source: Phillip POEMS Trading Platform (One-year daily chart of Tencent Holdings (0700 HK), August 18, 2017)

A short rebound for Europe but fail to hold for long

Source: Stockcharts.com (One-year daily chart of StoxxEuro 600 Index chart, August 18, 2017)

This week, European markets, despite its distant location away from the ongoing tensions in the Korean Peninsula, continued to be impacted by terrorism fears, and ongoing ‘Brexit’ talks with the United Kingdom. However, with the Jackson Hole Symposium taking place in the third week of August, there was talk among European market participants that the European Central Bank (ECB) chief Mario Draghi might push the Quantitative Easing (QE) tapering decision till 2018 latest. There was also previous speculation that Draghi might start winding down the QE stimulus efforts by the end of this year.

What does European data on inflation and employment look like

Stable EU-zone inflation as of July, but less than targeted 2 per cent annual rate

Source: TradingEconomics.com

Falling EU-area unemployment is a good sign

Source: TradingEconomics.com

With terrorism concerns rising especially with the overnight attacks in Barcelona, Spain that were thought to be linked to the Islamist terror group, ISIS, European markets opened the day on Friday, August 18, 2017 down with major European indices trending lower.

Source: CNBC.com (August 18, 2017)

European travel and leisure sector stocks, including Airlines like Easyjet, Ryanair, and Lufthansa were trading downwards by 1.3 per cent each, according to a CNBC.com article roundup on the European markets open.

The downtrend in European shares were also being impacted by what was happening in the United States and President Donald Trump’s controversial comments on white supremacists’ attack over the weekend in Charlottesville, Virginia, and the exodus of several business executives from the various business councils he has set up. President Trump eventually closed down the councils.

US markets suffered losses for the week despite key White House staff departure

The key indices, the Dow, S&P 500, and Nasdaq all registered weekly declines of 0.35 per cent, 0.18 percent and 0.09 percent respectively.

Source: CNBC.com (August 19, 2017)

According to CNBC.com, US markets recovered some of its early market open losses when NBC News confirmed earlier reports that one of President Trump’s White House advisors, Stephen Bannon has resigned from office. A report from Axios also confirmed Bannon’s exit from the White House. The traders at the New York Stock Exchange cheered the news that Bannon was out of the administration.

Source: CNBC.com (30-minute chart of the Dow Jones Industrial Index, August 18, 2017)

Did Bannon’s exit solve all uncertainties in the US markets

We think that the answer might be no as upcoming issues will still take centrestage including the winding down of the US Federal Reserve’s balance sheet, the state of US economy, and the debt ceiling issues, among others.

Source: Stockcharts.com (One-year daily chart of the S&P 500 large cap index, August 18, 2017)

We noted from the one-year daily chart of the S&P 500 index, there appears to be breach of the 50-day moving average (MA) line downwards for at least two times. We think that the index is trying to test the lows during this past week, as there have been eight previous attempts over the past year that the index has gone below the 50-day MA.

Looking at both the RSI index (above), and the Moving Average Convergence and Divergence (MACD), the S&P 500 index appears to be falling, with RSI showing a close ‘Oversold’ situation, and the MACD chart below showing the 12-day crossing the 26-day line on the way down.

Volatility (VIX) starts shooting up and ending the session at 14.36 due to concerns over President Trump’s administration, his remarks towards the white supremacists in Virginia, and the potential roadblocks ahead in getting bills passed by US Congress.

Source: Stockcharts, one-year chart of Volatility Index (VIX), August 18, 2017

Where to go from here for US stocks

A couple of US stocks fell on Friday, namely from the retail sector, notably Wall Mart, Costco, JC Penny, and Macy’s, among others. We think that the retail sector is expected to be impacted by the booming e-commerce and the need to embrace change.

 How did our model portfolio perform

Note: Model equity portfolio performance as of August 18, 2017. For illustration purposes only, and information is not verified by third party. Past performance is not necessarily indicative of future performance. Please seek the advice of your qualified licensed financial adviser before any investments are undertaken.

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 80.2 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 11.9 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 Mapletree Logistics Trust (up 19.7 per cent since Nov 2016; followed by Cogent Holdings Limited (up 16.4 per cent since January 2017), and Ascendas Reit (up 12.3 per cent since November 2016).

The model equity portfolio did experienced a shortfall coming from Sheng Shiong (down 8.6 per cent since June 2017); Sembcorp Industries Limited (down 5.4 per cent since January 2017); and Hai Leck (shortfall of 5.2 per cent since June 2017).

Given the portfolio is at its month-end, we are not planning to make any changes or do any rebalancing for the portfolio. We shall review the overall portfolio at the end of August 2017.

Upcoming economic events in Singapore

Source: TradingEconomics.com

With last week’s robust non-oil exports data, close attention will be focused on Singapore’s core inflation levels, and industrial production data which will be released next week. The pace of the Singapore Dollar strength and likelihood of an unchanged monetary policy during the upcoming meeting in October rests on how well the Singapore’s economy is performing. The Monetary Authority of Singapore is monitoring events both domestically and internationally to gauge its next moves.

Internationally, we will have the upcoming Jackson Hole Symposium organised by the US Federal Reserve Bank of St Louis. There will be a whole host of central bankers speaking, and several key note speakers including Fed Chairwoman Janet Yellen will be closely watched for her remarks on US monetary policies.

Earnings reports next week

Source: The Edge Magazine (Issue #793, August 21 – August 27, 2017)

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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