With exactly a month till end of 2017, the Straits Times Index (STI) proved to be building up some momentum to hopefully end the year on a positive note. The start of November 2017 on a mid-week saw the STI soaring by 17.53 points to close at 3,391.61. This brings the year-to-date outperformance for the index to 17.7 per cent. A total volume of 2.5 billion shares changed hands as compared to previous day on October 31 trading volume of 2.1 billion shares. The win/loss percentage on November 01, 2017 stands at 305 winners, and 158 losers.
A look at the STI chart during the mid-week
Looking at the daily change of prices, we noted that the index is picking up a huge momentum going into the final months of 2017. Despite some slight minor corrections where the index had turned below the moving averages of 50-day and 100-day for most of August till early October, the first up move happened around end of September where the index appeared to move up ahead, and never looked back.
Moreover, the rise in the STI is well supported by the rise in the overall momentum as shown by the index below the main chart. There is a clear uptrend and there appears to be not much obstacles to prevent the rise in trajectory.
We expect the index to rise along with momentum, and perhaps reaching the next resistance level of 3,500. All will have to depend whether there is a year-end rally, and how global crude oil prices perform. We think that as long as there is a sustainable rise in oil prices beyond the current average of about US$60 per barrel, it gives an approximate indication that global economic growth is expected to sustain.
We will also think the earnings growth and sustainability are major drivers for stock market values. We expect the banking, property, and technology counters to keep the market afloat, while the laggards like the oil and gas (O&G), and commodity sectors to provide some drag in the otherwise outperformance in the index.
How are earnings showing up so far
With about midway of the earnings season so far, we noted some of the quality counters listed on the STI main index performed reasonably well, including some the real estate investment trusts (Reits) counters. Though, counters like the Singapore Press Holdings (SPH) continued to lag due to their ongoing restructuring exercises, the first major bank counter like OCBC Bank saw major recovery including an earnings growth year-on-year (yoy) by 12 per cent in their 3QFY2017 financials to S$1.2 billion. OCBC Bank also managed to maintain a stable 1.3 per cent non-performing loans (NPL) rate.
Keppel Corporation, another major O&G counter on the STI also recorded impressive earnings results due to their multiple business lines including real estate, logistics, and services, among others. Those multiple lines helped to offset some of the shortfalls in their O&G business where earnings continued to experience challenges due to the various cutbacks in capital spending, and order cancellations.
We have seen Starhub and UOB reporting on Friday. During the latest quarter, Starhub reported revenue of $280 million and core profits of $76 million which was 10 per cent lower than last year’s (3QFY2016). According to a MayBank Kim Eng research report, there was a difference in its view on Starhub’s outlook, as compared to the consensus due their more aggressive handset subsidy assumptions resulting in only $9 million in core profit recognised for the current quarter (4QFY2017) against the consensus of $43 million. The Maybank analyst also built in his assumptions of a possible delay in iPhone X availability would delay what was inevitable. The Maybank Kim Eng analyst thus maintained his sell rating with a discounted cash flow (DCF) based target price of $2.17 per share.
On UOB, CIMB Securities research has assigned a ‘Hold’ rating with a 12-month target price of $25.40. The analyst saw that the 9 month FY 2017 net profit of $2.5 billion which was up 8 per cent yearly and was broadly in line with consensus and their expectations, forming 78 per cent of its full-year forecast. The CIMB analyst are quite positive about net interest margin (NIM) and loan expansion, but were slightly disappointed by the increase in non-performing assets (NPA) and specific provisions (SP).
How did both Starhub and UOB perform on Friday
Starhub share experienced sharp spike in price despite disappointing earnings
The stock price for Starhub has been trading flat to downwards, but on Friday, November 04, there was a sudden surge in the share price with a volume of close to 8.2 million shares changed hands. According to market sources, there has been a rush of institutional investors coming in to scoop up the shares.
UOB financial results did well, but fell a bit short of enthusiasm
UOB reported a robust quarter during 3QFY2017, but failed to impress when the stock was taken down by 8 ti 10 cents)
Looking at the chart above, we noted that there is an upward trajectory of the stock price since the beginning of the year. Despite a small drop in share prices, the stock is on track to end 2017 on a high note.
We are positive about UOB’s NIM expansion, and lower provisions set aside for losses, including those stemming from exposures to the oil and gas sector.
How did the STI ended for the week
The Straits Times Index (STI) closed Friday’s trading session at 3,382.31, and was a slight drop fr. This comes after various companies on the local bourse have announced their financial numbers, along with favourable economic figures, especially the manufacturing front, which is continued to rise above expectations.
For the week, earnings dominate the trading session as investors took into account management’s outlooks. A small-cap technology company, Micro-Mechanics scored big on their earnings results which drove the stock upwards to as much as $2.11 per share. Phillip Securities revised their 12-month target price from $2.00 per share to $2.50 per share on management’s positive outlook of the business
Any near-term correction happening soon
With only a month to go, many clients and investors have asked us whether this is a good time to take profits, or they should hold back until further signs of correction. However, we do not expect any significant market pull back between now till end of the year, unless there are signs of severe credit crunch which in this case, may not be given the amount of liquidity present in the system.
We are advising investors to do own’s due diligence personally as some companies do not disclose the exact circumstances surrounding any active trading of the stock. When faced with query from SGX, most of them would expressed the standard replies as not being aware of any unusual transactions, and reasons, among others.
However, we acknowledge that the markets have already risen past expectations, including the Straits Times Index. There have been strong monetary flows into property, and financial services companies given that monetary conditions have started to tighten, but interest rates aren’t likely to shoot up due to the competitive banking landscape. However, many expect the government to review the current property cooling measures after the last easing in March where the sellers stamp duty (SSD) has been reduced. This will depend on whether the latest round of housing recovery will create more risks to the system.
Hong Kong markets continue to climb
Hong Kong’s Hang Seng Index (HSI) ended the trading week at 28,603.61, up 0.3 per cent intraday. The index is now 50 to 51 per cent higher than the lows of about 19,000 in February 2016. The index benefited from the uptrend in US stock markets, along with fund inflows from Mainland China. We learnt this week that a record breaking real estate transaction was brokered in the Chinese territory involving a penthouse that was sold for about HK$1.0 billion. This is perhaps a testament on the amount of liquidity present in the monetary system, along with the Mainland Chinese inflows that helped to propel the HSI to stratospheric levels.
Looking at the one-year weekly chart of the HSI, we notice that since last market trough in the beginning of 2017 which has a reading of 21,500, the index has climbed significantly to the extent when a ‘Golden Cross’ (50-day moving average cuts abobe 200-day MA) in the June-July 2017 period.
The new month saw the Chinese Purchasing Managers Index (PMI) for both the public and private sectors released. The official PMI number came in at 51.6 for October, and was short of what was expected at 52.0. According to Reuters.com, one of the reasons for the shortfall was both production and demand fell due to the week-long public holidays and slowdown in industries that were cutting excess capacity and pollution. However, with a projected economic growth of 6.5 per cent expected for the whole of 2017, the Chinese government is seen determining to see that it reaches or if possible, exceed the forecast.
European markets continued to soar
The Stoxx Euro 600 index displays quite a strong momentum upwards, and this is reflected by the 14-day relative strength index (RSI) which at 66 is close to the ‘Overbought’ region of 70. Also, the Moving Average Convergence Divergence (MACD) diagram below is also showing an uptrend on the right most part of the diagram.
With the Catalan independence fight stretching to threats over extended jail terms by the independence leaders, European investors begin to wonder if unity is enshrined in the system. However, it appears that the markets are taking a stride and the index was hardly bothered by the political woes in Europe.
US markets continue register higher gain
At 2,587.84, the S&P 500 stock index is breaking series of records to the extent that there has not been any look back since the start of 2017. The 14-day RSI is showing bullish uptrend with a reading of more than 70, while the MACD index below is also showing an uptrend with a good momentum.
The latest week also showed economic data showing 261,000 new jobs created in October. Economists polled by Reuters expected a gain of 310,000 jobs. The report also showed average hourly earnings remaining flat for October. Also, the nomination of current US Federal Reserve Governor Jerome Powell as the nominee chairman to replace the current leader, Janet Yellen, helped to soothe the market concerns that the continuity of market friendly policies is expected to continue.
There has also been some relief that the tax reforms by the House of Representatives will get passed. The proposed plan would permanently lower the corporate tax rate to 20 per cent. It would also keep retirement savings through cutting mortgage interest deductions in half. It also lowers the tax rate on repatriated cash to 12 per cent.
On the earnings side, Apple Inc’s 4QFY2017 revenue came in at US$52.6 billion as compared to US$50.7 billion. The 4Q adjusted earnings per share (EPS) came in at US$2.07 as compared to US$1.87 per share consensus estimate. The 4Q iPhone sales came in at 46.7 million as compared to 46 million a year ago.
Apple’s stock price
We noted that Apple Inc. (AAPL) stock’s momentum is increased. At US$174.26, the stock scored an all-time high this year. At the last done price, the trough to peak increase is about 67.4 per cent from exactly a year ago.
How did our model investment portfolio perform
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 86.7 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 16.4 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 Nordic Group (up 47.4 per cent since end June 2017); followed by Cogent (up 41.4 per cent since January 2017), and Mapletree Logistics Trust (up 26.6 per cent since November 2016).
Incidentally, Cogent reported that it has agreed to enter into a voluntary takeover offer price of S$1.02 per share from China’s Cosco Group. At the halt for trading, Cogent was last traded at S$0.99, while Cosco traded at S$0.30 per share.
The model equity portfolio did experienced a shortfall coming from Sheng Siong (down 3 per cent since June 2017); followed by SATS Ltd (down 0.8 per cent since end December 2016).
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.
Calendar of Events
A couple of important earnings reports to look out for including DBS, Genting Singapore, CapitaLand, and City Development. A lot of build -up expectations for these stocks and entry timing strategies that seek to profit from the various strategies.
Local Economic Calendar
An important data to look out for is perhaps the retail sales information scheduled to be released next Friday, Nov 10.
Some of the key Chinese data including inflation rate, and balance of trade. This will help both parties, government and people to understand how each factors impact the economy.
One of the most significant data released next week in US is the University of Michigan Consumer Sentiment, where many expects to see October numbers clocked in at 100.7,
In summary, always stay alert of changes in market conditions. With a lot of built-up expectations coming in to raise prices, cut corporate taxes, if pays one’s risk tolerance before leaping into it.
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