The Budget 2017 announcement delivered by Finance Minister, Heng Swee Keat has opened up a lot of opportunities for investors to pick selected sectors to tap into the potential growth. They include the health care, technology, telecommunications, banking, infrastructure, and property-related sectors among others. The laggards have so far been in the commodity space, namely the agriculture related counters like Golden Agri Resources, Bumitama Agri, and Wilmar International. Noble Group bucked the overall downward trend in the commodity space, and gained about 11 percent intraday to end at $0.255 per share on Wednesday, February 22, 2017 on a volume of about 260,000 shares traded. This came after Noble’s management disclosed Sinochem Group is in active discussions with management for a controlling stake in the company, and the company recently completed a $1 billion revolving borrowing base facility. However, it ended the week lower when more allegations of liquidity issues were brought up by its nemesis, Iceberg Research.
Summary of Budget 2017 and sectors to watch
Among the various sectors to watch we would watch post Budget 2017 are the technology and healthcare sectors. You may ask why these two sectors? We believe that the technology industry could thrive given the increasing moves by the government towards a digital economy. For the medical services industry, we think that with a rising ‘silver’ population, the demand of healthcare services would likely thrive. Moreover, the percentage of spending on healthcare by the government has been one of the top priorities and this year’s Budget is no different from previous years.
Taking a look at the FTSE ST Health Care Index
Looking at the FTSE ST Health Care Index, the chart seems to be trending downwards on the intermediate (50-day moving average) and long-term (100-day moving average) time ranges. However, the short-term (20-day moving average) trend line is moving upwards. This might indicate that there are some investors who could be awaiting for valuations to correct itself as price earnings multiples for the sector are hovering around historical averages of around 30 to 40 times.
We think under such situations, investors might want to wait for further signs of confirmation before entering into the sector. One of the reasons that there are no discernible trends that we can derive from the chart on whether the sector is moving upwards. Second, the sector is largely dominated by a few large cap healthcare players like Raffles Medical, and IHH.
Overlapping the Raffles Medical and FTSE ST Health Care stock charts
Interestingly, both the Raffles Medical and the FTSE ST Healthcare Index charts have somewhat positive correlations. This could be interpreted as an investor who might have a bias towards the healthcare sector can technically buy Raffles Medical stock in order to participate in the risks and rewards of being in the healthcare sector exposure.
However, valuations for Raffles Medical do not come ‘cheap’. According to SGX Stockfacts, the price earnings (P/E) multiple for the company is around 36 times, with a price-to-book (P/B) around 3.8 times, and dividend yield around 1.39 per cent.
Technology Sector – The move towards a digitalised economy
The latest Budget announcement has adopted most of the recent Committee for the Future Economy (CFE) findings which include among others, the move towards a digitalised economy. The focus towards technology could be seen as a right step by the government in advancing the growth of Singapore’s economy.
Based on the chart above showing the technology index, it appears that prices are consolidating at around 237 to 240 levels. The Average Directional Index (ADX) is also showing the same trends, except it is on a downward trend. However, short-term trajectory is likely to head upwards if we were to read from the 20-day MA (denoted as green line).
Comparing Venture and FTSE ST Technology Index
Based on the chart above, it clearly shows that Venture is outperforming the benchmark and surpasses many expectations.
Venture displayed quite a strong uptrend despite it hefty valuations. One of the reasons for the upmove in Venture, apart from the Budget has been the rate of funds buying the stock, including banking, and property stocks.
For Venture, the price growth is also supported by volume growth which helps to drive the stock upwards. In the immediate term, we are looking for $9.70 to $9.80 in the event of some pullback. However, if the stock continues to rise, an immediate resistance that we would pencil in is $10.45, and this is supported by the ADX indicator below showing that rise in the Average Directional Index (DI).
Commodities are laggards for the week
The commodity sector took a battering this week, with Noble Group being impacted the most after Iceberg Research published another critical comment on the proposed equity stake by Sinochem, expressing doubts over whether the negotiations are successful. Noble Group is scheduled to report on Monday, February 27, 2017. The main focus to look out for when Noble Group reports are the progress of its asset-lite model, and management’s continued focus on turning around its negative free cash flow issue, among others.
For Wilmar International, it reported a seven-fold rise in 4Q2016 to US$560.8 million, led by stronger performances across all segments, including its plans to expand the oilseeds, and grains capacities in China after restrictions on oilseeds and grains processing for foreign companies were lifted. Other positive news include growth in prospects in sugar, consumer business (rice and flour), and specialty fat business. It is also targeting a 5 to 10 per cent growth in Fresh Fruit Bunches (FFB) output growth for 2017.
The financial results for Wilmar’s 4Q2016 were also impacted by the recognition of deferred tax assets for its Indonesian operations. However, most analysts maintained their hold/neutral ratings due to the negative sugar contributions expected in 2017, and the absence of any deferred tax assets going forward.
How did STI performed for the week
With two more trading days to close before we close out the month of February 2017, the Straits Times Index (STI) continued its march upwards and ending at 3,117.03, and was 20.54 points, or 0.65 per cent lower. For the week, the index is up by 0.7 per cent, and this takes the year-to-date (YTD) performance to a positive 8.2 per cent.
Using the Fibonacci Retracement, we notice that the STI has breached several support levels, and is on an upwards trajectory. We think that if the STI is able to breach the 3,141.28 resistance level, the next level to watch is 3,150. However, should this level not breached, the next support level to watch is 3,059.40 which is the 70 per cent retracement level.
The Average Directional Index (ADX) appears to show more positive directional movements (DIs), and we think that there could be continued support for the index to move higher. However, with global uncertainties, and US Fed rate tightening moves coming in the months ahead, investors are advised to continue adopting risk management techniques, and to minimise taking any large one-sided trades.
Uptrend move intact for Hang Seng Index
Hong Kong’s Hang Seng Index (HSI) fell on Friday by 0.6 per cent and ended the trading week at 23,965.70, and looking at the one-year daily chart, the ‘breakout’ shown in the index appears to be continuing. The short-term, measured by the 20-day moving average (MA) shown in green colour, is more steep as we hit the resistance level of 24,193.17.
Reuters reported that one of the key factors for the downturn of the HSI on Friday was due to declines in the commodities space; several investors chose to wait out, and not wanting to trade.
Based on the Fibonacci Retracement chart, an upmove is intact with 24,193.17 being the resistance point. The prices have also attempted to hit the upper end of the index, and are likely to breach the resistance level soon. If it does break the resistance level, the next upmove to watch is 24,250 points.
S&P 500 Index stages a sharp upmove
The S&P 500 stock index rose sharply higher to end at 2,367.34, a 3.53, or 0.15 per cent higher for the day when trading closed on Friday. The US markets are still experiencing many of President’s Trump’s business friendly policies, and earnings growth for many American companies. However, trading volume is still weak, and this might suggest that sizeable upmoves in the major US stock indices could be stalling.
The ADX is also running on the upside with the positive DIs outpacing the negative DIs. President Trump is expected to provide greater details of his tax policy this week on Tuesday, February 28, 2017. The Trump administration’s tax and trade policies would be keenly followed as he would give an address during the joint session of the Congress.
What to watch out for in the coming week
With the financial reporting season for 2016 winding down soon, there are several mid to small-cap companies are due to report their earnings in the coming week starting with Noble Group ($0.225) which is scheduled to release their earnings on February 27. Ho Bee Land ($2.28) will also be reporting on Monday, Feb 27). The only STI component stock that is set to report earnings this week are the Jardine Group of Companies. They include Dairy Farm (US$8.50), HongKong Land (US$6.82), Jardine Matheson, and Jardine Strategic. They are reporting results this Thursday, March 02, 2017.
How did our investment portfolio performed
Our investment portfolio has so far achieved a return of 6.1 percent since inception at the end of November 2016. This compares to the benchmark STI return of 7.3 per cent during the same time frame. Our top two holdings, Dairy Farm, and Cogent Holdings Limited delivered the most returns since they were added on. Both are up 21.4 per cent, and 14.3 per cent respectively. Our laggard stocks are Keppel DC Reit and Raffles Medical Group Ltd.
Currently, the banking stocks, DBS, OCBC, and UOB constitutes a large proportion of our portfolio and we are looking to reduce the weightage to around 30 per cent. We are generally positive about the three banks due to a rising environment. However, we are mindful that regular rebalancing of the investment portfolio is necessary to minimise any outsize moves to the portfolio and form part of the common risk management practices undertaken as a fund manager.
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.