As this article is being written, the STI is heading to its biggest ending of the quarter. The index is up 40 to 42 points intraday to close at 3,258.65 points as of 1700 hrs, June 29, 2017. A total of 1.65 billion shares were traded at the close, but is about 18 to 19 per cent decline from the 2.02 billion shares traded a day earlier. The total value traded on June 29 was $1.1 billion, and is flat compared to yesterday. The win/loss percentage is 310/155.
Taking a look at the STI chart, the trend is showing an advance, and has now cleared above the 50-day moving average (MA). With the all-time high of 3,275.39, the market close of 3,258.65 is not too far off from the market peak. However, the momentum appeared to be on a flat line to slightly up. We think that without a boost in trading volume, the rise in the STI might not be sustainable in the long-run.
Notable market news this week
With a lot of mergers and acquisitions (M&A) going on including Japanese-focused business trust called, Croesus Retail Trust (CRT) takeout by private equity group, Blackstone for S$900.60 million or S$1.17 per share in cash. The deal, if it managed to get approved, will see unitholders receiving a distributable income of up to S$31.3 million. This translates to about 4.06 Singapore cents per unit. Blackstone is also able to get exposures immediately to CRT’s 11 malls which are valued at S$1.5 billion spread across Tokyo, Osaka, and other prefectures such as Hokkaido, Hiroshima, and Fukuoka. Many analysts have touted the stock positively and advised unit holders to accept the offer.
The total volume traded for CRT skyrocketed to 22.4 million shares with the stock price ending Thursday, June 28 at $1.185. This is up from the $1.17 cash offer from Blackstone.
In the meantime, the Business Times reported on July 01 that another bidder, publicly-listed GK Goh has entered into the fray expressing interest in CRT through the accumulation of equity interest of up to about nine million units or S$10.6 million in CRT. The share price it paid averaged about S$1.177 per share.
Other notable news include the significant plunge in the stock price of Talkmed Limited, a company specialising in providing specialised cancer treatments. One of the reasons cited by management after the company lifted the temporary suspension on the name was due to eight-month suspension meted out by the High Court on Dr. Ang Peng Tiam who is one of Singapore’s best known cancer specialists and CEO of the company. After a close to ten percent plunge in the stock price, the company managed to recover and stayed relatively stable on Friday at $0.67.
Looking at the one-year daily chart, we noted that there is a protracted decline in the stock price of Talkmed Lmited following the eight-month suspension meted out to Dr. Ang. Although there is a significant correction, and there could be investors trying to pounce onto the opportunity to buy at such low prices, we think that investors should be mindful of future litigation risks against the company, and the management on the whole. We think that this situation is unlikely to be a one-off situation. We shall keep our readers posted.
Apart from the negative news impacting Talkmed, the ongoing tussle for Global Logistic Properties (GLP) is in focus. According to a Business Times (BT) article this week, the management have narrowed one bidding group led by Blackstone and Warburg. The final date of the submission was on Friday, June 30.
Whoever gets the prize trophy in GLP will allow the acquirer to gain exposure to the entity’s vast array of warehouses in China, Japan, Brazil, and the United States.
Looking at the above chart, we noted that following rumours of a potential botched offer from the acquirers sent the stock reeling down, and forcing the company to call for a halt. Following that, the company came out to say that a deal could be reached by the end of this week, and the July 01 Business Times article noted that the bidding party from Warburg Pincus and Blackstone were thought to be the favourites, apart from the group led by current CEO, Ming Mei, along with a consortium comprising of Vanke Group, and Ping An Insurance, among others.
Hong Kong’s market got a shot in the arm from MSCI
Hong Kong’s Hang Seng Index (HSI) ended the month and quarter at 25,764.58, down 200 points on the day on possible portfolio window dressing, and the possible spillovers from the weekend’s 20th anniversary of the handover of the territory from United Kingdom to Mainland China.
For the month, Hang Seng rose 0.4 per cent, its sixth month of straight gains.
Looking at the chart above, we noted the index is now seen as consolidating its gains at the 25,760 to $25,800 mark, with the momentum index below showing a gradual decline. Though it is at the sixth-month since its technical ‘breakout’, we think that the rocket fuel needed to boost index gains is gradually losing steam, albeit a continuing uptrend. We caution investors who might be planning to enter or exit prematurely because of a lack of a concrete signal on which direction that the index might head to. We will continue to monitor and update readers accordingly.
During the week, the HSI have also seen the continuation of some gains as its local-listed Hang Seng Investment Index Funds Series – H-share Exchange Traded Fund (ETF) (2828:HK) rose higher following the inclusion of 222 ‘A’ shares on the Mainland China’s stock exchanges to the Morgan Stanley Capital International (MSCI) indexes. Many market watchers welcomed the move as the Emerging Markets (EM) segment has been ‘deprived’ by the lack of recognition of China’s economic standing. The latest inclusion was a significant move as MSCI, the index creators, have on various occasions rejected China’s ‘A’ shares entry on concerns over the liquidity of the China’s onshore markets, the foreign exchange controls, and tradability of the Mainland shares overseas.
Going forward in 2H2017, we think that with the ongoing uptrend in the HSI, continued capital inflows from Mainland China and the markets being awashed with ample liquidity, HSI could register record highs. However, we think that if there should be any external market shocks including the funds withdrawal, a potential US President Trump’s impeachment, and/or a black swan event, investors could get burnt. At this point, it might be advisable for investors to remain invested while keeping a close watch on the markets. They should also adopt good risk management techniques to minimise huge losses while preserving their capital.
European markets fell following Draghi’s remarks on monetary policy
European markets were spooked during the last week of the quarter when European Central Bank (ECB) President Mario Draghi that the central bank is not yet ready to scale back its quantitative easing (QE) programmes. Draghi was quoted by CNBC.com that he thinks that the current stimulus needs to remain in place as inflation dynamics remain “more muted than one would expect”. Though the central bank remains working towards its monetary goals, it thinks that the policy needs to be persistent, and there is a need to be prudent in how it adjusts its parameters to improving economic conditions.
Indeed, it was taken to mean that the ECB is not prepared to tighten the monetary policy now despite the ongoing signs that inflation is picking up since last year as shown in this Euro Area inflation rates chart:
In reaction to the Thursday, June 29 speech by Mr. Draghi, European equity indexes, namely the EU-wide stock index, Stoxx 600 Index fell hard, and closing below the 50-day moving average (MA) line to end at 379.37 on Friday, June 30.
We note that the Stoxx 600 index is on a downtrend, with the 14-day relative strength index (RSI) hovering around the ‘Oversold’ region of 30 to 31. We think that there could be a market correction after a six to seven-month rise in the overall index. The speech by Draghi was thought to mean that monetary conditions are accommodative, and should give a boost to economic activities. However, it could also mean that economic conditions have not yet recovered, and there is still a need for continued monetary stimulus to get things moving again.
Going forward, we think the European equity markets might continue to be unsettled with ‘Brexit’ talks still ongoing, and inflation might not have crossed the threshold rate of 2 per cent. However, other mixed signals that are pointing towards economic recovery include the rise of Business Confidence in June, followed by the general increases in the manufacturing and services Purchasing Managers’ Indexes (PMI).
US stock indices cheered on passing of banks’ stress test
US stocks rose higher on Friday to end the quarter at new highs despite the rough and tumble in the technology and energy sectors seen during the month of June. The closing market numbers are as follows:
On a chart basis, if we were to look at the S&P 500 chart, the overall trend is still rising with the index well above the 50-day MA despite some declines during the week. The 14-day RSI reading at 49 is also showing some stability, and does not appear to be pointing towards any sharp moves.
We noted that part of the slight increase in the S&P 500 index towards the last trading day of the quarter was also due to the news that major US financial institutions were cleared by the Federal Reserve for their capital returns programmes. The central bank had earlier allowed buybacks and dividends from the 34 banks it reviewed during the second phase of its annual stress test. CNBC.com noted that it is the first time in the seven-year history of the tests implemented following the Global Financial Crisis (GFC ) in 2008 – 2009 that all the banks have passed the stress test.
However, it bears to a question, in our opinion, do those stress tests need to be tighten further? It is a difficult question to answer as management of these financial institutions need to weigh in on the demands of shareholders, and clients who placed moneys with them. In any case, the major ETF or the SPDR Financial Sector Index Fund (XLF) for the US financial sector rose sharply following the news.
Going forward, for 2H2017, we think that financial markets will be tested for its resilience though politics, and how the economic numbers play out. We think that the last month’s rate hike could be seen as the Fed is determined to stick to its goal of normalisation of interest rate, but the pace and timing is still an ongoing debate among market players. With the targeted goal of working down the US$4.5 trillion worth of US Treasury and Agency securities, the Fed is not prepared to let financial markets get its way in determining their rate setting goals as shown in the latest Federal Funds Futures pointing to a 97.5 per cent probability on the 26th of this month (July) that a rate hike of 100 to 125 basis points is expected.
How did our model investment portfolio fare
The model investment portfolio was set up November 30, 2016, and seven months since inception, it achieved a positive gross total return (dividends and capital appreciation) of 9.2 per cent, as compared to the benchmark Straits Times Index (STI) of 10.7 per cent during the same period. Our top three best performing stocks in total return basis continue to be PNE Industries (+18.8 per cent since inception), followed by Venture Corporation Limited (+18.3 per cent since inception). The banks also did quite well with DBS Group Holdings achieving a 18.2 per cent outperformance since inception, followed by OCBC Bank Group Ltd with a 18.8 per cent return since inception, and UOB with a13.3 per cent since inception. Our laggard stocks are ISOTeam (negative 11.4 per cent since inception), Sembcorp Industries (negative 2.2 per cent since inception), and Singtel (+0.2 per cent since inception).
There are also some stocks on our watchlist that we are currently monitoring including Keppel Corporation, Ezion, Hai Leck, Nordic Group, Boustead, and a non O&G company which we have not formally identified, but will reveal it in our upcoming monthly newsletter.
What to watch out for next week
Next week is the start of a new quarter and the second half of 2017. There are various local economic news due to be released including the new home sales data by URA where we think that it might be filled with various seasonal factors including school holidays, and lack of new showflat openings.
We are also going to be getting an additional reading on manufacturing numbers including those coming from semiconductors, and precision engineering. The official forecast for manufacturing PMI is for a slightly drop of 20.8, Foreign exchange reserves data will also be out.
Over in China, the private sector Caixin manufacturing PMI will be released and the forecast is calling for a slight dip of below 50 at 49.6. 50 is the breakeven point for expansion and contraction of output.
In the United States, many investors would be eagerly anticipating the release of the monthly employment figures for June. The forecast calls for 138,000 new jobs created as compared to 177,000 last month. The unemployment rate is forecast to remain flat at 4.3 per cent. Other data including the manufacturing PMIs from Institute of Supply Management (ISM) will also be released.
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, and trading representative. For a free financial health check/discussion, please contact firstname.lastname@example.org, or +(65)9721 3987.