The Straits Times Index (STI) crossed the important 3,300 this week, but is now in volatile territory. The STI was trading up all week till Thursday, October 19 when the index fell hard within an hour to the market close.
Sudden mark down in STI
Within the last hour of regular market trading on October 19, the STI fell quite significantly following a 500 over point drop in the Hang Seng Index (HSI) within ten minutes to the final bell at 4 pm local time.
A check with several news sources including the latest US pre-market futures have revealed certain negative comments made by China’s central bank on the possible sharp falls in asset prices, followed by the heavy selling of US stock futures culminated to the sudden change in the tides that have propelled major US and local stock indices to new highs during the last few trading days. The drop is also especially significant considering that the Dow Jones Industrial Average (DJIA) just crossed the 23,000 resistance mark a day earlier (Wednesday, October 18, 2017).
3Q earnings are expected to come in strong
As headlined by The Business Times front-page article dated October 19, 2017, many market observers are building up expectations for a robust third quarter earnings season, particularly when preliminary flash estimates for gross domestic product (GDP) during the third quarter edged up higher at 4.6 per cent on a yearly basis boosted by the manufacturing sector, along with higher electronics shipments and output during the last quarter, companies like Venture has been touted heavily as one of the core beneficiaries of the overall manufacturing growth.
However, certain economic data especially the non-oil domestic exports which came out this weak showing potential exhaustion after a huge run this year. This has caused many investors to take a pause and evaluate their previous high expectations. Many economists have not expected export growth to fall sharply, and a possible early end to the manufacturing growth story.
In this article, we shall take an overview look at the winning sectors like banks and technology, and compare with the laggards like the commodities, oil and gas sectors to evaluate whether sector rotation could be in the works. We noted that the property sector has become one of the beneficiaries from the sector rotation after a robust 3Q price data.
Financial Sector earnings outlook
In a Phillip Securities Research report dated October 20 on the upcoming earnings outlook for the three banks, the analyst was forecasting third quarter loans growth to be in the mid-single digits on a yearly basis, and net interest income to increase by 6 per cent. The analyst also cited loans growth on a yearly basis appeared to slow down in the second half as the growth was compared to a higher base last year. They expect business loans to strengthen along with global economic improvement, rising consumer loans as enbloc property sales gain momentum and public construction loans pick up after an expected hiatus.
How is the financial sector index outlook using charts
The FTSE ST Financials Index is at its all-time high based on the chart shown above. We note that there has been an exponential growth, along with higher momentum when we used the moving average convergence and divergence (MACD) diagram below to evaluate.
Moreover, the index is above the three moving averages and there could be more momentum building up on the three local bank stock prices. The first earnings report will be released by OCBC next week and is scheduled for Thursday, October 26. It will be interesting to get a first-hand look at the performance of the index.
Technology stocks like Venture, and UMS continue to run higher
With the technology stock boom currently taking place in the United States, the local markets have been beneficiaries of such spillover effects, namely for stocks that deal with life sciences, technology, and artificial intelligence (AI).
Venture Manufacturing is one such stock that has managed to diversify its operations into life sciences, and medical equipment businesses. They are still maintaining their core semiconductor manufacturing lines, but management recognised early that they need to revamp their business model to cushion the cyclical impacts arising from the nature of the industry.
Venture stock continues to climb higher
Venture currently trades on a historical 23 to 24 times earnings multiples with a dividend yield of 2.7 per cent. The company has a net cash position with minimal debt.
Looking at the one-year weekly chart of Venture, we noted that the stock mirrors like a growth stock, but has since came down a bit as investors start taking profits. The stock closed Friday’s trading session at S$18.21, down seven cents or 0.4 per cent. The stock scored a huge run and has surpassed many technical resistance levels. Most of the gains were attributable in part due to CEO buying shares at the open market in late September and early October. We think that if momentum were to continue to persist, the next resistance level could be the S$20 per share mark.
UMS is another high momentum stock
UMS is another technology stock that has been in the news this week after an intraday climb of almost nine per cent before it ended close Thursday’ session at S$1.085. On Friday, the stock was trading up by another one cent to close at S$1.09 on a volume of 7 million shares traded. We think that there could be room for more growth, but things to take note might be its high dependence on one customer, the US-listed Applied Materials (AMAT) which is also its vendor. The seemingly over concentrated vendor relationship might backfire if AMAT were to withdraw from the partnership. However, that has not been the case, and both continued to work together in various projects.
We noted that UMS has a technical breakout recently after falling to almost S$0.875 per share. The latest closing price came on a busy trading session on Thursday, and the company was also being queried by SGX. The company replied saying that it did not know anything, and disclosed that it will be issuing bonus shares soon.
We noted that the momentum oscillator is suggesting increase in trading activities, along with a technical breakout in effect. We wouldn’t be surprised the stock could test the S$1.15 resistance in the immediate term, and possibly S$1.20 in the next six to eight months. This is provided that the momentum carries the stock price through.
Oil and Gas Sector starting to see a technical breakout
In the above chart, we noted that there has been a strong momentum, along with a technical breakout seen at the extreme right-hand side of the FTSE ST Oil and Gas Index chart above. This has been a long-time coming after oil broke below US$100 per barrel since 2014 to as low as US$23 per barrel. The latest chart below showed that Brent Crude Oil prices have generally recovered to around US$57 to US$60 per barrel, and is similarly showing a technical breakout situation.
Another reason for a rise in crude oil prices are mainly attributable to geo-political situation including tensions in the Middle East after the United States has vowed to disregard the Iran Nuclear peace treaty which was signed last year during the Obama administration, and Iraqi soldiers storming to retake Kirkurk, Northern Iraq from the pro-independent Kurdistan forces. Kirkurk is a major oil drilling region in Iraq, and such hostilities have fuelled the rise in oil prices.
Commodity prices are still lagging
We noted in the above chart that commodities in general has not kept up pace with what was happening in the oil and gas sector. We noted that a major part of commodity prices is economics, or supply and demand. There have been several severe weather formations including hurricanes in the United States, droughts, fires ravaging in Northern California, and the current typhoon (Typhoon Lan) happening in Japan. However, such weather phenomenon have not impacted supply of commodities, and is now being reflected on the Commodity Index where price momentum has fallen a bit from the ‘Overbought’ region.
Hang Seng Index recovered from a 500 over point dip by end of the week
The Hang Seng Index (HSI) closed Friday’s trading session up 328.15 points at 28,487.24. Stocks in general climbed higher after fears receded following Peoples Bank of China governor, Zhou Xiaochuan’s comments about the Chinese economy being at risk of falling into the so-called ‘Minsky’ moment.
A ‘Minsky’ moment is named after US economist, Harvey Minsky, whose name bear the economist definition of a sudden collapse of asset prices that follows a long period of growth, sparked by debt or currency pressures.
Many market observers think that investors have generally misinterpreted Mr. Zhou’s comments as the ‘Minsky’ moment was part of his analysis of systematic financial risk and is not about the current state of the Chinese economy. Some thought that his comments were probably his choice of terminology to caution the next generation of central bank leaders. Mr. Zhou has confirmed that he will likely be retiring soon.
The asset writedown on Thursday has also attracted mainland investors into Hong Kong markets in search for bargains like Chinese banks, technology firms like Tencent, and insurance companies like Ping Ann. Nearly all the sectors saw major recoveries from the drop on Thursday.
European indices continue to climb despite a short drop on Friday
From the one-year weekly chart shown above on the pan-European Stoxx Euro 600 index, we note that price momentum is still present as shown in the MACD index below, and the 14-day relative strength index (RSI) shown above. Although the RSI reading is at around 60, a tinge of bullishness remains.
The political landscape in Europe has taken some turns after a close election fight in Germany, the uncertainties over the outcome of the ‘Brexit’ talks with the United Kingdom, falling poll numbers in France where current leader and President, Emmanuel Macron faces volleys of voter disapproval of his job performance, and now the potential breaking up of Spain. Many investors are expressing some concerns, though earnings growth is still intact for most European corporations.
Over the course of next few months, investors would be paying close attention on monetary policy decisions from the European Central Bank (ECB) in determining its guidance and potential timeline to normalise interest rates. Also, other economic-related data, inflation levels, and manufacturing figures are some of the critical information that investors and policy makers will be interested in as they consider the potential moves by ECB.
US markets continue to stage higher following a more than 100 points drop earlier
When examining closer the one-year weekly chart of the S&P 500 Index, we noticed that despite a nearly 100 point plunge in the major US stock indices on Thursday following PBOC governor’s comments on the so-called ‘Minsky’ Moment, most US investors came in feeling confident, with many picking up stocks at sometimes bargain prices.
There are also news that the tax cuts legislation is likely to be passed in Congress for President Trump to sign into law. This bodes well for many US corporations, including the small and medium sized enterprises (SMEs) as tax cuts are contentious subjects among some members of the Republican Party and many in the Democratic Party as such tax cuts are usually viewed as benefiting the wealthy.
It was also coincidental that Thursday, October 19, 2017 was the 30th anniversary of ‘Black Monday’ where the major US stock indices fell hard. However, by Friday, the vast majority of US stocks are retraced back from their earlier losses.
US stock valuations are one of the most expensive
In terms of valuations, the price-earnings (P/E) ratios for both S&P 500 and Dow Jones Industrial Average (DJIA) are at around 19 to 21 times, which in historical terms, are quite expensive relative to other markets like Singapore’s SGX market at around 12 to 14 times historical earnings.
Are investors increasingly concerned about the sharp rises in US asset prices
One of the key gauges of measuring fear is the implied volatility index or (VIX).
The stock market volatility is at its lowest so far at 9.97, and this could mean potential overconfidence among investors when making their investment decisions. We think that this is risky if complacency starts to set in, and should there be a deep market correction, volatility would rise unexpectedly, causing asset prices to deteriorate, and asset price freezes cannot be ruled out.
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 85.6per 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 14.5 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 43.4 per cent since end June 2017); followed by Cogent (up 33.6 per cent since January 2017), and Mapletree Logistics Trust (up 22.2 per cent since November 2016).
The model equity portfolio did experienced a shortfall coming from Sheng Siong (down 6.1 per cent since June 2017); followed by SATS Ltd (down 2.5 per cent since end December 2016).
We decided to sell off Soilbuild Business Space Reit after a disappointing quarter where there is an apparent deteoriation in earnings, and increase in premature breaks in tenancy agreements, namely one with NK Ingredients, and the other with KTL. We decided to exit the position at the price of $0.675 per share at a loss of 6.3 per cent from what we purchased earlier in June 2017.
For now, apart from Soilbuild Business Space Reit, 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.
Local earnings results for next week
The upcoming blue-chip related earnings to focus are SGX, and OCBC Bank on Wednesday, October 25, and Thursday, October 26, respectively.
Local economic data to be released for next week
The Monetary Authority of Singapore (MAS) is also scheduled to release its final Macroeconomic Outlook report for the year during the week. The report is expected to provide details on potential risk areas, including interest rate, home loans, and business loan risks, among others. Investors may want to get a perspective of how the overall local economy is performing, and what are the potential risk areas to focus on.
China Economic Data next week
With the recent China National Party Congress where many Chinese leaders, including President Xi Jiping have voiced concerns about potential runaway home prices, it is perhaps timely for investors to take a look at the upcoming house price index scheduled to be released on Monday, October 23. The Chinese government has been trying to control the rapid rise in housing prices, and the upcoming data should provide some background on its effectiveness so far.
Key US economic data out next week
Some of the key economic data in US to watch out for including durable goods orders, new home sales, and advance estimates of third quarter gross domestic product (GDP) figures.
In summary, investors do need to monitor on position sizing, setting tight stop-loss limits, be aware of the current state of the economy, and try to actively adopt risk management activities to limit potential exposure in an increasingly uncertain market environment.
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