STI hits the 3,000 mark – Should we pop open the champagne

The Straits Times Index (STI) hit the 3,000 level mark this week on Tuesday, January 10, 2017 to close at 3,006.02, and the headline news on the front cover of the following day’s (Wednesday, January 11, 2017) The Business Times read “STI surge pass 3,000 points to 14-month peak”. There is definitely a key psychological barrier to break, but would it sustain throughout the months ahead? Should investors jump onto the bandwagon and make conclusions that now is the time to get into the local stock markets.

Positivity among investors

In my profession, I can sense that there is certainly some excitement among local stock investors, even those who have stayed on the sidelines waiting for such a day to happen. My clients have been asking me which are the good stocks to follow, and many of them do not want to miss out on the action.

My advice to them is over enthusiastic clients is simple. Do your homework before jumping into any stock. You do not want to end up buying high, and selling low. There is no value-add in doing such an act that might jeopardise your retirement goals. One has to be diligent, observant and be patient during entry and exit points. There is no room for error in investing and staying rational is one of the key attributes for stock market success, though it is easier said than done.

Should we then plunge immediately into the stock markets

This question is always a difficult one to address, partly because hitting a key psychological mark often brings along with several days or even weeks of scepticism before the index moves along. However, I am still maintaining my 2017 STI target range of 2,800 to 2,900 despite the good start to the year. Here’s why.

Looking at the above diagram, STI closed at 3,025.07 on Friday, January 14, 2017, and was up by 32.07 points intraday, or 1.07 per cent higher. This brings the year-to-date performance since the start of 2017 to 4.94 per cent. However, I plotted some channel lines, and noted that there six stock market peaks, and three trough periods in 2016. The most prominent peak-to-trough period was in April 2016, when the index closed at 2,960.78 towards the end of the month, and fell to 2,734.47 in mid May. The peak-to-trough percentage difference is around 8 per cent. As for the rest of the peak-to-trough periods, the difference is around 2 to 3 per cent. The question is are we going to see another 8 per cent peak-to-trough period, similar to April 2016, or a milder change in the range of 2 to 3 per cent?

The market seems to have outran itself within a short period. However, I think investors do need to be cautious on taking excessive risks at this point. Although there are no holding back against optimism in general, but with the herd mentality that many stock investors seem to be going through their minds when the STI broke the 3,000 mark, I am quite cautious and would want to adopt a contrarian approach in managing my investment portfolio.

The local stock market has been mired with issues, including, China’s stock market plunge in the initial months of 2016, oil and gas (O&G) debacles involving the now defunct Swiber, along with other small to mid-cap O&G names, then two episodes of systems breakdowns at SGX, and last but not least, the shadow of the October 2012 ‘penny’ stock crash is still fresh on many investors’ minds. The psychological breakthrough of 3,000 is certainly cause for some optimism, but getting too excited, and reacting irrationally to stock prices might be detrimental to one’s financial health.

S&P 500 round up

Source: Oanda Singapore

The S&P 500 stock index seems to be flatten off at around 2,270.4. At Friday, January 13, 2017 market close, the index was up 4.2 points, or 0.18 per cent intraday to close at 2,274.64. The chart show that on a 20-day, 50-day, 100-day moving averages (MAs), the three lines appeared to have converged at around 2,270 level, suggesting that investors might be hesitant in putting up any additional capital, given its potential 'rich' market price-earnings (P/E) multiples With the inauguration of President-Elect Donald Trump next Friday, along with the major earnings reporting season, and the World Economic Forum (WEF) in Davos, Switzerland, the upcoming trading week will promise some excitements among investors.

As mentioned in our last week’s weekly market roundup, I said that the next support level 2,202.19 on the 50-level mark. At 2,274.64, it is not far from the next support level. The comments made by President-Elect Trump on trade duties, and tariffs imposed on nations that do not adhere to common trade rules might cause traders to stay on the sidelines while awaiting for further clarification. In addition, many stock investors are evaluating the first 100 days of the Trump Presidency, and I do expect more volatilities ahead.

How will the US Federal Reserve act

On the US monetary policy front, investors do need to pay attention to the language and determined whether the US Fed will go ahead with the three rate hikes for 2017. The first Federal Open Monetary Committee (FOMC) meeting for 2017 is scheduled to be held  February 01, 2017, and already traders are increasingly betting for at least a 50 to 75 basis points (bps) hike in the Federal Funds rate. The chart below shows that an overwhelming 97 per cent probability of a rate hike for the February 01 meeting has been factored in by traders.

Source: CME Group

However, fast forward about eleven months later till end of 2017, the probability of a 50 to 75 bps interest rate hike shrunk to around 7.2 per cent. This might suggest that the US Fed might not be aggressive in hiking rates after all given the general economic slowdown, and the uncertainties over whether President-elect Trump might follow through with with fiscal expansion goals.

Source: CME Group

Hang Seng Index market roundup

Source: Oanda Singapore

The Hang Seng Index (HSI) is currently undergoing a major breakout since December 2016 with the trough to peak change of around 6 to 7 percent. However, the stock market rise is inconsistent with the slowdown in the local economy where it grew a mere 0.6 percent on a quarterly basis in 4Q2016. I would also think that the HSI rise could be one of the destinations of the capital inflows coming from Mainland China as Chinese investors seek avenues to repatriate their capital elsewhere apart from the the home country.

I also think that with a generally slow economic environment, the risk of the Hong Kong Dollar peg against the US Dollars might be increasingly questioned. The Hong Kong Monetary Authority (HKMA) Committee will be careful in inserting any language that might suggest any de-pegging actions  taken, as it might cause more volatilities in the Hong Kong Dollar. Moreover, the capital outflows from China has resulted in Hong Kong’s financial sector  benefiting from such capital injections from the Mainlanders. However, with a general global economic slowdown, the relevance of an overvalued Hong Kong Dollar will be put in focus by the HKMA.

How did my model portfolio performed during the week

Source: My model portfolio (Note: Dairy Farm US$ stock price has been adjusted for foreign currency differences)

Based on the market close on Friday, January 13, 2017, my overall portfolio increased by 2.4 per cent since inception in end November 2016. I continue to maintain my stock picks without adding any stocks. However, I am increasingly keeping a lookout in the oil and gas (O&G) sector, namely Keppel Corporation ($6.12), Sembcorp Industries ($3.11), and small-cap Ezion Holdings ($0.42).

Ezion Holdings recently got an upgrade rating to a ‘Buy’ by OCBC Research on January 13, 2017. The report cited studies by Wood Mackenzie (a prominent O&G forecaster) showed that capital spending by exploration and production (E&P) companies will total US$450 billion in 2017, up 3 per cent as compared to 2016, coupled with declining breakeven costs. Although OCBC analysts generally expect a challenging quarter for Ezion with continuing impairments, but they believed that most of the negatives have been priced in. They upgraded the stock with a fair value of $0.54 per share for 2017.

I also believe that the recovery of crude oil prices, coupled with a down beaten industry since the beginning of 2016, the O&G sector is one industry to watch for any signs of further recovery in 2017.

Disclaimer: The views/analyses expressed by the author in this article are based on public information sources, and individual analyses. 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

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