The Straits Times Index (STI) is reeling from the after effects of the expected 25 basis points (bps) hike by the US Federal Reserve. As of Thursday, December 14, the STI closed the day at 3,435.78, down 32.99 points or 0.95 per cent lower. This puts the year-to-date (YTD) performance of the index to a 19.3 per cent increase.
Looking at the daily chart of the STI, the uptrend looks intact despite the short drop of the index towards the extreme right-hand side of the chart. The 14-day relative strength index (RSI) continues to remain in the mid-range of ‘Oversold’ and ‘Overbought’ territory. This might suggest mild momentum.
Property sector in focus
The local real estate industry was front and centre of major news headlines, including the front-page news article published this week on The Business Times that discuss about new regulations requiring licensed real estate professionals to adopt a comprehensive process in detecting money laundering and terrorism financing acts.
Apart from that, the government is slated to launch six confirmed sites and nine reserve sites under the 1H2018 Government Land Sales (GLS) Programme. The total number of housing units that can potentially yield was estimated to be 18,000 units, and is largely unchanged when compared to 2H2017 GLS Programme.
The 1H2018 GLS Programme was not the sole news headline. Instead, the en-bloc sale fever continues with a couple of development sites, namely Derby Court in Bukit Timah, Parkway Mansions in Katong area, and Vista Park in Kent Ridge area were successfully sold to various developers, including the likes of Roxy Pacific, Sustained Land, and Oxley Holdings respectively.
The constant news headlines on property deals have somehow jolted market confidence and this is reflected in the rise in share prices of many listed counters, including the sector indices like the FTSE ST Real Estate Holding and Development Index.
Looking at the index, the overall trend is upwards, but there appears to be some consolidation towards the right most corner of the chart. This could suggest that the developer stock prices could be stalling, or waiting for more catalysts, including the further relaxation of property cooling measures.
We think that given the current business climate, and recent warnings by the Monetary Authority of Singapore (MAS) over the relatively high expectations among investors over property prices, the existing property cooling measures are likely to stay.
SIBOR rates are inching up
We would like to bring to the attention the trend line as exhibited by the 3-month Singapore Interbank Offered Rates (SIBOR) shown in blue colour. The 3-month rate has increased sharply from less than 1 per cent until July this year, when the rate hits one percent and above.
We think that investors and home buyers should pay close attention to the direction of the 3-month SIBOR rates as it forms a basis for the pricing of local home mortgages. If the rate were to spike further, the property market frenzy could be kept in check, or perhaps reach a market saturation point. This could dampen demand, and might cause further price volatilities on the stock price valuations.
How did the STI perform at the end of the week
The STI closed the week on Friday at 3,416.94, and is off by 0.2 per cent from the previous week of 3,424.64. The turnover on Friday saw 1.46 billion shares worth S$1.3 billion changed hands. This compares to 1.34 billion shares worth S$980.3 million on Thursday.
On the whole, the overall trend for STI is still up, and will likely remain so as we enter the final two weeks of 2017. Besides the property sector stocks we discussed earlier, other names like ComfortDelgro, and Midas took some of the limelight. The former rose as much as S$2.07 on Monday following the news on the partnership with Uber. However, enthusiasm soon worn off by the end of the week as the thought of high capital expenditures needed to sustain the partnership. ComfortDelgro stock closed Friday’s session at S$1.91.
For Midas, the management came out on late Tuesday to reaffirm that there has been no official announcement by the Chinese government to halt railway construction projects. Earlier on, the stock fell dramatically last week following market uncertainties over some of the measures the Chinese government has taken to halt the rapid construction of railway tracks. However, with the clarification by the company, the stock immediately sprung back to life and hitting as much as S$0.12 after the announcement. However, after a couple of days after the announcement, the stock price simmered down and was last traded at S$0.114 on Friday on a total volume of 14.7 million shares traded.
Hong Kong’s Hang Seng Index closed below 29,000 level
Hong Kong’s Hang Seng Index (HSI) saw a dramatic move on Friday when the index closed below the 29,000 resistance mark to end the day at 28,848.11. This is down by 318.27 points from the previous day.
The HSI is still displaying an uptrend despite the minor blip on Friday. The 14-day relative strength index (RSI) has started to dipped below 70, and could be a sign of investors taking a breather as they start to consolidate some of their earlier gains. We also think that the HSI is likely to maintain its momentum despite closing below the all-important gauge of 29,000 as there are still some positive sentiments in the HK markets following a string of Initial Public Offerings (IPOs) including the debut of ZhongAn Online Insurance, and China Literature.
The week also saw several market moving news including the latest industrial production figures from China, and the interest rate actions by the US Federal Reserve which impacts the Hong Kong dollar as it is pegged to the US Dollar.
China’s industrial production for November came in at 6.1 per cent year-on-year (yoy) increase, and is down from the 6.2 per cent in October, according to the country’s National Bureau of Statistics. Economists were expecting an in-line number of 6.1 per cent. According to Barron’s magazine, many analysts think that the data is further evidence that China’s economy might have peaked in the first half of the year, having grown by 6.9 per cent yoy in the first and second quarters. The official forecast for 2017 from the Chinese government continues to remain at around 6.5 per cent.
On the monetary side, the Hong Kong Dollar saw some declines in value as the Hong Kong Monetary Authority (HKMA) sought to buy HK Dollars in order to maintain the exchange peg of HK$7.75 to HK$7.85 per US Dollar. The currency fell 0.06 per cent on Friday to HK$7.8130 per US Dollar. According to the South China Morning Post (SCMP), this decline was the worst showing since November 17.
European stocks fell in concert with their US counterparts
The pan-European Stoxx Euro 600 index closed a tad lower on Friday by 0.2 per cent with most sectors and major European stock indices falling despite the the European Central Bank (ECB) keeping interest rates unchanged on Thursday, while raising overall growth forecast to 2.4 per cent in 2017 and 2.3 per cent in 2018. This is up from 2.2 per cent this year, and 1.8 per cent in 2018.
Moreover, ECB President Mario Draghi noted in a statement that “The Governing Council expects key ECB interest rates to remain at their present levels for an extended period of time, well past the horizon of the net asset purchases.” The ECB’s interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at zero, 0.25 and minus 0.40 per cent respectively.
However, the extended monetary easing programme by ECB did not translate to much enthusiasm for the markets as shown in some of the major European stock indices.
Despite the drop in the European stock prices, Reuters reported on Thursday that the think tank, the Ifo Institute has upgraded the German economy, calling for a 2.6 per cent expansion in 2018. This was an increase from their previous projections of 2.0 per cent in 2018. The increase in the growth forecast came at a time when German Chancellor, Angela Merkel is still trying to form a coalition government after the past six months since the general election. Retuers noted that it the revised growth estimate is confirmed, this would be the highest since the 3.7 per cent registered in 2011.
One of the possible reasons for the upgrade in growth was companies are shrugging off from the ongoing political fallout, and are much focused on generating strong domestic demand. With 2018 looming around the corner, we think that Germany could be one of the companies making a comeback despite the various ongoing government issues in Germany.
US markets rose despite tax reforms uncertainties
The US stock markets continued the ascent despite some brief moment of uncertainties last week over the passing of the tax reforms in the US Senate. The S&P 500 index gained 0.9 per cent on Friday to close at 2,675.81, boosted by rises in the financials, consumer staples, healthcare and technology sectors. The rise also came about following the conclusion of Wednesday’s US Federal Reserve meetings where the Federal Funds rate was hiked by another 25 basis points (bps) to 1.25 to 1.5 per cent.
Looking at the one-year weekly chart, we noted that the S&P 500 index is in still showing no signs of any pullback with the 14-day RSI showing continued ‘Overbought’ conditions at a reading of 83.43, and overall momentum as exhibited by the Moving Average Convergence and Divergence (MACD) continuing to run higher.
A summary of the closing US market indices is shown below:
As the final two weeks of 2017 draws to a close, and certainty over the pace of the interest rate hikes in 2018, the passing of the tax reforms remains crucial to monitor closely. The measures are still pending for a final vote in the US Senate next week, and investors would be watching closely on the various developments. Most market watchers agreed that the tax reforms will be passed after making some amendments. However, if things do not go smoothly, US markets could be subjected to more jitters.
How did our model investment portfolio perform this week
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 86.8 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 17.6 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 Cogent Holdings (up 44.3 per cent since end January 2017); followed by Nordic (up 43.4 per cent since June 2017), and Mapletree Logistics Trust (up 30.0 per cent since November 2016).
The model equity portfolio did experience a shortfall coming from Sheng Siong (down 6.1 per cent since June 2017); followed by Straits Trading Company (down 5.3 per cent since end June 2017), and Sembcorp Industries (down 4.1 per cent since January 2017).
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.
Economic Reports to look out for in the coming week
Apart from the tax reforms bill scheduled to be passed by the US Senate next week, other key economic numbers to watch include existing home sales for November where an expected 5.52 million homes are expected to show up, as compared to 5.48 million homes in October. The data will be released on Wednesday.
On Thursday, the final 3Q gross domestic product (GDP) figures where an expected 3.3 per cent growth rate is expected following 2Q’s number of 3.1 per cent.
On Friday, other key economic indicators including durable goods orders, personal income and personal spending figures will be released. The US new home sales numbers will also be released by the Commerce Department.
With most of the economic events and earnings news have reached to a climax, investors will soon be looking at 2018 for new market directions. We are not expected any major surprises, but still watching things like the ongoing Bitcoin fever might impact financial markets as a whole, especially when prices are at exceedingly high levels. The concerns which most investors might have are the potential spillover effects which could impact the overall soundness of the financial systems. It does pay to watch closely the developments of the Bitcoin craze and regulatory actions.
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