The Straits Times Index (STI) ended mid-week on Wednesday trading session at 3,397.21, and is down by 40.85 points. This follows a weekend of good news coming from the passing of the contentious US tax reforms in the Senate, and Monday’s release of a robust set of results from Singapore’s Purchasing Managers’ Index (PMI).
Looking at the daily chart of the Straits Times Index (STI), we noted that the index has took a slight reversal by moving below the all-time high of 3,462.78. The last time it broke the uptrend momentum was sometime in mid-November when the index closed at 3,341.30 as it touches the 78.8 percentile level of the Fibonacci Retracement chart shown.
If we were to use the mid-November drop as a gauge of the direction of the STI, there could be repeat of the same drop towards the 78th percentile line on the Fibonacci Retracement. However, if things turned out otherwise, the index could continue to stage another comeback with an uptrend. The short dip towards the 78th percentile line was temporary as we can see from the daily chart that it soon recovered and resume the upward trend.
Midas touch seems to go south
Midas, a Mainland-Chinese based manufacturer and trading entity for aluminium extrusion products used primarily for the rail transportation sector, saw its shares skidded rapidly downwards from of about S$0.22 to close at S$0.11 on Thursday, December 07. The peak to trough decline is about 50 per cent.
We noted that on November 24, 2017, SGX issued a trading query to Midas management on the sudden plunge of the stock price which ended the day at S$0.148 from the high of around S$0.20 and above a week earlier. In its response to SGX, management noted that it was not aware of any information not previously announced concerning the entity or its subsidiaries or associated companies that might explain the trading in the shares of the entity. The company has also reaffirmed it is in compliance with the listing rules spelt out in the listing manual of the SGX-ST, in particular, Mainboard Rule 703.
The plunge in the stock price following the trading query issued about two weeks ago puzzled quite a number of investors. A look at the stock chatroom discussion showed that many were disillusioned by the sudden plunge of the stock price, and some were discussing about possibility of accounting fraud. Despite all these market rumours, and constant hypothesizing, management has not came out to clarify the recent events. This worried a lot of investors who might choose to sell first, then decide later.
Is ComforDelgro seeing light at the end of the tunnel
ComfortDelgro Limited (CD) saw its shares plunged from slightly above S$2.00 to close the week at S$1.91 on Friday, December 08. Following the close of the regular market trading hours, management came out to say that they have acquired a 51 per cent stake in Uber’s Lion City Holdings for about S$642 million, with S$295 million in cash. The deal is subjected to regulatory approval.
According to press reports, Lion City Holdings operates Lion City Rentals, which has a fleet of about 14,000 vehicles that account for the bulk of Uber’s supply of cars in Singapore. Uber retains the remaining 49 per cent stake.
Questions about the deal’s effectiveness in reviving CD’s fortunes remains uncertain. Some thought that CD is a bit too late in the game as many private hire vehicle operators have cornered the market. Moreover, rival, Grab has dangled various incentives to CD drivers and commuters to the extent that many CD drivers have turned to private hire drivers that potentially yield them more benefits than costs.
Looking at the one-year daily chart, the stock has lost 11 per cent of its value since the beginning of the trading week. At S$1.91, we noted that the stock is still on a free fall mode and has not shown any price stabilisation. With the deal subjected to regulatory approval, the entire process might not be smooth. We therefore urge investors to stay tuned, and minimise the temptation to enter now. As for those who might still be holding onto the stock, we think that existing investors might want to cut loss or to wait for the formal regulatory approval to be granted. At this point, we are still uncertain about the regulatory approval process, the fairness of price paid for the acquisition, and the form of financing, namely the non-cash portion of the S$642 million price tag.
How did the STI end the week so far
The Straits Times Index (STI) closed the week at 3,424.64, up 36.5 points on Friday. For the week, the index is off by 0.7 per cent compared to the previous week, but is up by close to 19 per cent on a year-to-date (YTD) basis. There were a total of 1.47 billion shares worth about S$1.05 billion changed hands on Friday. This compares 1.57 billion shares worth about S$1.11 billion traded on Friday.
Looking at the chart above, we noted from the 14-day relative strength index (RSI) that there has been various near touches on the higher-end of the ‘Overbought’ region of 70, while momentum remains quite stable.
Looking at trend line, the STI has crossed above the critical 3,400 level, but we expect that it will still subjected to more volatility, as the 3,400 level is a resistance level. The Fibonacci Retracement analysis shows that the index is above the 78.6 percentile level, and will likely stay above this level as the year closes out.
The Hang Seng Index broke below the 50-day line
Hong Kong’s Hang Seng Index (HSI) joined other regional bourses in an all Asia-Pacific market rally by closing in the positive territory at 28,639.85. The index was up 336.66 points for the day, but was down by 1.5 per cent as compared to last week. A significant trend was also observed when the index broke below the 50-day moving average (MA) line at 28,766 points. We noted that there was also an earlier brush on the 50-day MA in late September 2017, but it later proved to be a false signal.
We think that the HSI will still be on track to move higher to test the 30,000 level. However, this is not likely to be an achievable target as we think the expected uplift of the US Dollar following the conclusion of the final round of the US Federal Reserve meetings for 2017, and China’s government step-up in market surveillance might cause stock investors to stay cautious.
The trading session on Friday was largely lifted by the sharp rebound of Tencent after the stock price fell on concerns over the Chinese government crackdown on online lenders.
Looking at the chart of Tencent Holdings, we noted that the stock staged a sharp technical rebound after the price plunged from the all-time high of HK$439.60. The stock price closed Friday’s session at HK$394.00.
Similarly, the 14-day RSI and momentum indicators staged a rebound off their major lows. The RSI indicator is showing the stock being sold down heavily, and was just off from the pivotal 30 level indicating the stock is ‘Oversold’.
A check on the news feeds showed that following the markets close on Friday, both Tencent Holdings and Spotify announced that both have agreed to swap stakes in their music businesses. According to a Techcrunch.com report, the deal involves Tencent Music Entertainment (TME), the Chinese firm’s subsidiary that manages its music streaming and karaoke services, will make an undisclosed minority investment in Spotify through new shares. Spotify will buy a similar undisclosed stake in TME. Additionally, Tencent will make its own investment in Spotify by purchasing secondary shares from existing backers.
The deal was seen as positive for both Tencent and Spotify as the latter prepares itself for an initial public offering (IPO) exercise soon. The latest deal will also see Spotify owning a minority stake in TME, and both Tencent and TME will hold minority stakes in Spotify.
China’s inflation levels remained subdued on all fronts
On Saturday, December 09, Bloomberg.com reported that China’s factory inflation moderated last month with a 5.8 per cent rise in prices in November as compared to 6.9 per cent in October. The consumer price index (CPI) for November climbed 1.7 per cent, and was less than the median forecast of 1.8 per cent.
The article noted from an economist who said that the reasons for the drop in both the producer price index (PPI) and consumer price index (CPI) were mostly due to base effects for the former, and the overall decline in food prices for the latter.
European markets rose on Brexit talks breakthrough
The pan-European Stoxx Euro 600 index rose by close to 0.8 per cent to close Friday’s trading session at 389.25. The rally among the major European financial markets on Friday came after the United Kingdom and the European Union (EU) have finally broke the deadlock with the final agreement on issues ranging from land border with Republic of Ireland, and the rights of EU citizens living in UK post Brexit, among others. The agreement paved the way for the next set of discussions that will see UK leaving EU by 2019.
Looking at the one-year weekly chart itself for the Stoxx Euro 600 index, we noted that the 14-day RSI is still hovering at the mid-level at and has not changed much since July 2017. This might indicate some stability as investors are growing more positive on the fundamentals of Europe.
The moving average convergence and divergence (MACD) is also showing a slight uptrend and possibly signalling a growing interest in investing in European stocks. The Cyclically Adjusted Price-Earnings (CAPE) ratios showed the average P/Es among the largest member blocs of EU to be in the average 20 times multiple levels. This could be high as compared to Russia which has a CAPE multiple of about 5.6 times.
A summary of the European markets close is as follows:
Overall, we think that with the latest breakthrough in Brexit talks, an air of overhang is removed for now, and investors can start to focus more on earnings fundamentals. However, we think that monetary actions coming from the European Central Bank (ECB) will likely be on the major agendas among investors looking for certainty as they start to evaluate the various European markets for value and growth opportunities.
US markets rose on robust jobs figures
Following last weekend’s breakthrough in the US Senate over the passing of tax reforms, the major US stock indices, including the S&P 500 stock index continued to break record highs, and is on track for the best showing for 2017. At Friday’s level of 2,651.50, the index is about 25 to 30 per cent higher than the start of the year.
Looking at the one-year weekly chart of the S&P 500 index, we noted that even thought he 14-day RSI has continuously showed an ‘Overbought’ situation, while momentum has also heighted moves. We expect this uptrend to continue towards the end of 2017, but would like to keep our opinions open following the conclusion of next week’s US Fed meetings.
A summary of the closing numbers for the major US market indices on Friday is as follows:
Friday’s market action was also driven by the pre-market release of the monthly jobs figures for November. The report showed that the US economy added 228,000 jobs with the unemployment rate holding steady at 4.1 per cent. According to CNBC.com, economists polled by Reuters expected a gain of 200,000 jobs.
The average hourly earnings, a closely watched indicator by the US Federal Reserve and economists, rose 0.2 per cent for November and 2.5 per cent for the year. Economists were forecasting a monthly increase of 0.3 per cent and 2.7 per cent for the year.
Heightened expectations for a US Fed rate hike next week
With less than a week to go before the closely watched US Federal Reserve Open Market Committee (FOMC) meeting, the latest FedWatch Tool from CME Group indicated that the probability of a rate hike of 25 basis points (bps) is now 90.2 per cent as compared to 94.2 per cent on Friday, December 08, and 96.7 per cent a week earlier on December 01. Though the probability fell on December 09 as compared to previous readings, we think that at 90 per cent or above probability level, this is as good as a near certainty that the US Federal Reserve is going to hike interest rates next week.
Post-rate markets, how will markets shape up
We expect the markets have already priced in the effect of a rate hike by the Federal Reserve. However, the plans for next year like whether we will likely see at least three more rate hikes for 2019.
We think that the upward momentum is likely to stay intact post December 13/14. However, uncertainties continue to linger on including those who are actively seeking for common standards for the new change in capital buffers. There could be financial and non-financing companies who come out specialise in their own industry of something outside the industry.
This could reinforce the case for continuing stay in the US financial markets.
How did our model 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 86.6 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 17.9 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 36.8 per cent since June 2017), and Mapletree Logistics Trust (up 25.1 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 Hai Leck (down 4.3 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
A closely watched economic indicator for Singapore will be the final details of the unemployment report for 3Q. We think that anything that might come in worst than ever, the Monetary Authority of Singapore (MAS) will next meet on April 2018 to determine the extent of the monetary policy. While we do not expect major surprises, we think the central bank might continue to pursue a zero appreciation for the Singapore Dollar, and not tighten.
With the inflation numbers out of the way, next week’s economic data will be plentiful for investors to monitor including China’s industrial production figures slated to be released next Thursday, followed by China retail sales figures. Incidentally, the retail sales figures are scheduled to be released after a big shopping day scheduled for December 12, also known as ‘The Big 12-12’ where internet powerhouse, Alibaba, Tencent, among others will open their e-commerce sites for a full day of shopping. The December 12 event is touted by many as the biggest shopping season before Christmas and after Singles Day in November.
Following the release of US job figures, the closely watched two-day US Federal Reserve meeting starting on December 13 is top of the agenda for investors as many have already built their expectations for a 25 bps rate hike.
Other important economic data releases next week include inflation numbers, and retail sales.
In summary, we expect markets to continue their ascent as we close out 2017 soon. However, for next year in 2018, there could be surprises coming along the way including heightened prospects of a market correction as some investors would like to hope for. The market correction concerns will still be carried over to 2018. However, as things stand now, most major stock indices are likely to continue their upward momentum unless otherwise.
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