STI enters into a slow start in the new quarter

The Straits Times Index started the new week and quarter ending Monday’s (April 03) trading day at 3,187.51, up from last Friday’s close of 3,175.11 or 0.39 per cent higher. The volume turnover on Monday was 2.3 billion units worth S$1.1 billion compared to Friday’s S$1.6 billion. It was a week filled with anticipation of the historic first meeting between China President, Xi Jiping and US President Donald Trump, and there were increasing tensions including threats of ‘trade war’ and protectionist tones coming from the US side. Investors are holding their vaults in order to study the situation carefully and this might have led to the slow market moves seen this week.

Straits Times Index still tracking higher despite slow start

Note: 3-year weekly chart of STI (As of April 05, 2017)

The Straits Times Index (STI) is currently trading down by 15 to 17 points to 3,160 range at the time of this article. Overall, momentum is also starting to track down, while the 14-day relative strength index (RSI) (not shown) is hovering on the ‘Overbought’ region of 70. So far, the only piece of local economic news has been the release of the purchasing managers’ index (PMI) reading which showed a 51.2 reading for March 2017 as compared to 50.9 reading in February. As for the electronics sector PMI, the figure came in at 51.8 in March, up from 51.4 in February.

Source: Tradingeconomics.com

In addition, preliminary private home sales number came in flat quarter-on-quarter (qoq) in 1Q2017, and another reading of the PMI by Nikkei Newspaper and IHS Markit showed another robust number at 52.2 in March, up from February’s 51.4.

Based on these economic readings, it appears that Singapore is on track for positive economic growth ahead, along with a gradual housing recovery. This might have led to private economists raising their overall forecast for 2017 gross domestic product (GDP) growth to 2.7 per cent. However, business confidence among many small and medium sized business (SME) owners is at negative 14 as of December 2016 as compared to minus 8 in September 2016.

Recently, I met a SME owner in the technology procurement business and a potential client of mine and he says that business conditions are weak. He cited that business costs are heading higher, including the upcoming hike in water tariffs in 2H2017, and the recent increase in electricity tariffs as some of the examples of how such measures impacted his business.

Through my conversation with this SME business owner, I can sense that this could be an indication that SME owners are facing constraints in terms of managing their business costs. Moreover, in recent reports, many construction firms are shutting down due to cash flow issues. In my view, these issues are quite serious as we enter into the next reporting season and Annual General Meeting (AGM) season where shareholders would get a chance to speak up, and query management on corporate governance, remuneration, and overall business performances.

Hong Kong markets came in red after long Qing Ming break

Source: Oanda Singapore (As of April 06, 2017)

The Hong Kong’s Hang Seng Index (HSI) ended Thursday, April 06, 2017 trading in the red with the index dropping 0.5 per cent to close at 24,273.72. Traders expressed concern over the US Federal Reserve trimming its balance sheet size by US$4.5 trillion, and most of them are also focusing the highly anticipated meeting between China’s President, Xi Jiping, and United States President Trump.

Taking a look at the one-year daily HSI chart above, we noted that the index is trending up, but has now come off a bit and consolidating 24,100 to 24,200 mark. On the 21-day Relative Strength Index (RSI), we noted that the index is well off its ‘Overbought’ region of 70, and is now in the 62 to 63 range.

Looking at the Average Directional Index (not shown), we noted that the trend has been turning negative downwards, and indicating a slowdown in momentum.

We think that these conditions do indicate that there could be some investors wanting to pull out of their capital, and stock market growth in general might likely to see many episodes of pullbacks, and rises. We believe that the Hong Kong investors are mindful about their risks, and they are trying to minimize their high exposures to equities alone.

EuroStoxx 50 reacting cautiously ahead of ECB meeting

Source: Google Finance, Yahoo! Finance (Intraday chart as of April 06, 2017)

As this article is being drafted, the European Central Bank (ECB) has just concluded its regular meeting on interest rates. ECB chief Mario Draghi reaffirmed his stance that the central bank would stick to the asset buying program, aka Quantitative Easing (QE) programme, and is set to continue until at least end of December, but at a reduced monthly rate of €60 billion from April. The ECB chief also kept the inflation outlook unchanged, and he reiterated that the inflation outlook remains conditional on a very substantial degree of monetary accommodation.

The initial remarks were taken negatively by investors as shown by the intraday chart which was last down by 13 to 14 points to 3,457.99 as this article was being drafted. Many market watchers expressed disappointment as there has been a trend of improving economic data, including higher inflation which is trending up judging by the March 2017 data shown below. This does not appeared to warrant a prolonged QE programme as suggested by other market watchers.

Source: Tradingeconomics.com, Eurostat

S&P 500 is trending in a consolidation mode

Source: Yahoo! Finance (One-year daily chart as of April 06, 2017)

The S&P 500 index is currently bordering the 50-day MA at 2,345.72 with the 21-day relative strength index (RSI) easing to 53.78, which is slightly above the mid-point of the reading of 40 (Oversold), and 70 (Overbought) regions. The Moving Average Convergence Divergence (MACD) diagram showed a negative divergence of minus 1.91 and this could mean a negative momentum trend for the index. Indeed, during the peak of S&P 500 index on March 01, 2017, trading volume was around 4.35 billion. Since then, trading volumes have declined to about 2 to 3 billion daily.

The week has been marked by ups and downs for the US markets with the ADP Private Payrolls data showing a robust figure of 263,000 jobs created, well above the consensus of 187,000 jobs. However, when the data came out on Wednesday, April 05, US markets were dampened by the release of the US Federal Reserve minutes for the March meeting which pointed to the potential shrinking of the Fed’s balance sheet for conducting the quantitative easing (QE) programme. This action could mean a massive sale of assets, exchange traded funds (ETFs), collateralised mortgage debt obligations, and agency debt obligations like Fannie Mae or Freddie Mac mortgage debt issuances. Those statements dampened market sentiment with major US markets ended in the red on Wednesday.

Over the week ending Thursday, April 06, 2017, the S&P 500 index fell slightly by 0.11 per cent to end the day at 2,357.49. At the time of drafting this article, US stock market futures are reacting negatively to an earlier news that President Trump has ordered the launch of 50 Tomahawk cruise missiles into Syria as punishment for the country’s recent chemical weapons attack on innocent civilians, and the official US payroll numbers which is expected to show an increase of 235,000 jobs created, and unemployment rate to keep steady at 4.7 per cent.

How did our model investment portfolio performed

Note: Our model investment portfolio values (As of April 07, 2017)

Our portfolio came in at around 3.5 per cent on a $100,000 initial portfolio value since inception at the end of November 2016, while the benchmark Straits Times Index had a return of about 9.4 per cent during the same time period. Since the elimination of Keppel DC Reit and Raffles Medical Group at the end of last quarter, along with the addition of a new stock, ISOTeam Ltd, we manage to hold on to our positive gains for our stock picks so far. We are fairly bullish with the existing stock picks that we currently hold. Our largest gain in terms of total returns in the portfolio is Dairy Farm with a 26.4 per cent return since we held at the end of December 2016. The stock has fallen quite a bit from the peak of US$9.25 to the current price of US$8.85. We think that the price drop could be attributed to profit taking. We also think that the company has sound fundamentals, and is expanding throughout the region.

We have also added additional names to our watchlist. If regular readers of my weekly market summaries are following me, some of you may know that I have maintained an existing watchlist of a few counters namely Keppel Corporation, Ezion, db x-trackers Euro Stoxx 50 UCITS ETF, db x-trackers MSCI Indonesia UCITS ETF, and UMS Holdings. I have also just added some names including Boustead, Wee Hur and Mico-Mechanics. I am eyeing on timing, and price corrections for most of these names. I am also positive about their strong fundamentals.

What to look out for next week

Next week, April 10 to April 14, 2017 is a short week with Good Friday on April 14. However earnings season for the quarter ending March 31, 2017 will formally kick off with SPH Reit reporting on Monday, followed by Soilbuild Business Reit and Singapore Press Holdings on Wednesday.

On the economic front, retail sales figures for the month of February will be released. The current forecast calls for a month-on-month (MoM) increase of 2.1 per cent. On Thursday, April 13, we would be getting the highly anticipated semi-annual monetary policy decision from the Monetary Authority of Singapore (MAS). Most of the economists quoted in a Business Times article this week saying that central bank officials might keep the closely-watched Nominal Effective Exchange Rate (NEER) unchanged despite the recent positive PMI numbers, and other economic indicators which might suggest a slight turnaround of the overall local economy.

On Good Friday, the advance estimate for Singapore’s GDP growth for 1Q2017 will be released, and consensus forecasts are looking for a quarterly decline of 1.3 per cent, as compared to the previous 4Q2016 of positive 12.3 per cent.

Over in US, inflation figures, including the Producers’ Price Index (PPI), and Consumer Price Index (CPI) would be  released, followed by retail sales, and business inventories.

Indeed, lots of earnings and economic data to follow. I would advise investors to keep close watch of their portfolios and try not to over-react on certain news. It pays to understand what is behind the news, and always maintain a long-term focus. One should not succumb to short-termism at the expense of long-term returns. Have a safe trading week.

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.

This article is written by Tay Hock Meng (Peak Hour), a licensed financial advisory consultant. For a free financial health check/discussion, please contact taysg76@gmail.com, or +(65)9721 3987.

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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