With the Lunar New Year holidays around the corner, global markets appear to take a breather from the massive market sell-off last week. As this article is being written on Valentine’s Day, the Straits Times Index (STI) is up 9 – 10 points at 3,425.51, but it is below the highs of 3,600 levels achieved in January this year.
Looking at the one-year STI chart above and on the extreme right-hand side of the chart, we noted that there appears to be a technical rebound from the lows of 3,300 levels reached last week. The 14-day relative strength index (RSI) is also staging a rebound from the ‘Oversold’ levels of close to 30.
Bank stocks are on the tear
On Wednesday, February 14, we have the remaining two local banks, OCBC and UOB Group reporting their earnings. OCBC reported a jump of 19 per cent of their full year 2017 earnings to S$4.15 billion with dividends per share (DPS) of 19 Singapore cents.
For the latter (UOB), it announced full year earnings of S$3.39 billion for the full year 2017, with total dividends of 65 Singapore cents declared. This comprises of 45 cents per share, and a special dividend of 20 cents per share.
OCBC and UOB both ended Thursday’s shortened trading session at S$12.78 and S$27.04 per share respectively.
Financials index shows rebound
Looking at the one-year weekly chart of the FTSE ST Financials Index, we noted that there has been a rebound in the index following a sharp decline to close to 1,000 points on the chart. However, despite the short drop in the index last week, the overall trend of the weekly chart continues to show an upward sloping chart. This could suggest that there is still room for local financial stocks to rise.
According to SGX’s Market Updates, all the three local banks (DBS, OCBC and UOB) registered an average 27 per cent net profit growth in 4QFY2017, bringing their combined FY 2017 net profit to S$11.9 billion. The three banks share prices have also rallied comparatively strongly with an average 4.7 per cent YTD price gain as compared to the flat performance by the MSCI World Bank Index.
Earnings growth by sectors in 2017
As noted in the chart above, the information technology (IT) sector dominates the overall sector growth at 107 per cent in total returns (capital and dividend returns), followed by materials, and banks, among others. The only laggard among the sectors that registered no growth is the Energy sector. However, that could change as crude oil prices start to climb out of multi-decade lows.
The latest earnings performance by SGX and Catalist-listed companies are somewhat in line with the listed global multinationals especially the US S&P 500-listed counters.
As shown in the chart above, the total revenue growth for most S&P 500 companies rose 8 per cent during the final quarter of 2017, and is expected to range between 4 to 8 per cent going forward. However, earnings are growing at double-digit pace of 10 per cent and above going forward.
How did the local markets perform on Thursday
The Straits Times Index (STI) closed out Thursday’s brief trading session at 3,443.51, up 40.65 points. This is an increase of 1.9 per cent over the previous week. The 14-day relative strength index (RSI) below the chart is also showing a nice rebound to close to the middle of both ‘Oversold’ and ‘Overbought’ territories of 30 and 70 respectively.
The latest week’s performance of the STI has also climbed out from last week’s negative showing with a year-to-date (YTD) performance of positive 1.19 per cent.
Overall, trading volume has been staying on an average pace at close to 1.1 billion shares worth S$1.04 billion being traded on Thursday. There were 272 winning counters compared to 123 lagging counters.
The major standout companies among the STI component stocks were Starhub and Thai Beverage. The stock prices fell 10.14 per cent and 6.6 per cent to close at S$2.57 and S$0.86 per share respectively. Starhub posted a sharp 74 per cent fall in 4QFY2017 net profits to S$14.1 million due to a 9.3 per cent increase in expenses, including cost of sales, and staff costs which rose by 15 per cent.
Top line growth in Thai Bev also fell 2.6 per cent to 45.6 billion baht during 1QFY2018, as private consumption in the domestic beverage market increased at a slower-than-expected pace despite the end of the official mourning period for the former Thai King.
Thai Beverage registered a 1QFY2018 earnings of 2.91 billion baht (S$122 million), and is down 62.3 per cent as compared to last year. The decline was mainly due to non-recurring business acquisition costs of 2.35 billion baht stemming from its four acquisitions which were completed during the first quarter. One of them was with the Vietnamese-based Saigon Beer-Alcohol-Beverage Joint Stock Corp., or Sabeco where management paid more than 109.9 million Vietnamese dong (S$6.53 billion) to acquire a 53.59 per cent stake.
Overall, as the local stock markets are trending towards gradual course of recovery, there will be occasional bouts of volatility which is healthy as long as fundamentals continue to drive share price growth. We urge investors not to be reactionary in their investment decisions. Instead, investors should take a pause, stay calm, and evaluate companies based on their sustainable earnings growth.
Hong Kong markets are showing rebounds
Hong Kong’s Hang Seng Index (HSI) is showing a major rebound with the index closing at 31,115.43, or 599.83 points higher. Looking closer to the one-year weekly chart, despite a long red candle bar showing a significant drop in the index last week, the overall trend is still up with the 14-day RSI rebounding above the mid-point of 50.
According to Reuters.com, Thursday’s shortened session was driven by the financial services sub-index which rose 3 per cent, followed by the property sub-sector which rose 2 per cent.
Although the Lunar New Year festivities might have driven Asian investors to drive stocks higher, we think that earnings growth also plays a part in fuelling investors’ sentiments. As this article is being written, some of the markets including Japan and Australia are also seeing stock prices rise in tandem with overnight rise in US stock prices. According to CNBC.com, Japan’s benchmark Nikkei rising 1.69 per cent as the Japanese Yen came off at 106.18 per dollar after hitting a 15-month high in the earlier session.
Sharp rebound in European markets
Looking closely at the weekly chart of the pan-European StoxxEuro 600 index, there has been a slight rebound from the deep market rout. Moreover, the index has breached below the 50-day moving average (MA) trend line of 385.42. This could be a knee jerk reaction that might attract those investors seeking to buy the dip.
The 14-day RSI is also showing a slight rebound towards the mid-point of 50, and the moving average convergence and divergence (MACD) index is also showing a slight recovery in momentum.
In a Reuters.com article, it was quoted that on an overall basis, fourth-quarter earnings from European companies are expected to increase 14.6 per cent from 2017.
Overall, European economy is expected to do well in 2018 with the European Commission (EC) expecting a 2.0 to 2.5 per cent growth in 2018 and 2019. The optimism is the result of stronger cyclical momentum in Europe, where labour markets continue to improve and economic sentiment is particularly high, and a stronger than expected pick-up in global economic activity and trade.
Sunshine in US markets after market storm last week
With the passing of a bout of rapid sell down last week, the US financial markets are currently experiencing some signs of recovery as the S&P 500 index roared 1.2 per cent to hit 2,731.20 at the close on Thursday. The market-weighted index is also on track for its best weekly gain since 2013.
The extreme right-hand side of weekly chart depicting the S&P 500 index is also showing a rebound from last week’s selling with about 9.5 billion shares traded. The 14-day RSI is also seen making a sharp bounce off the mid-point of 50. Despite the heavy selling last week, the index continues to trend higher than the 50-day MA.
A closer look at the closing US market numbers on Thursday is as follows:
The main highlight of the trading day was the US producer price index (PPI) which rose 0.4 per cent in January after coming off unchanged in December. In the twelve months ending January 2018, the PPI rose 2.7 per cent after rising 2.6 per cent in December. The consensus estimates by Reuters had the forecast of the PPI rising 0.4 per cent in January and increasing 2.5 per cent from a year ago.
The rise in the US PPI appears to have an insignificant impact on Thursday’s trading session which were dominated by rises in bank stock prices, and the so-called FAANG stocks including Facebook, Amazon, Apple, Netflix, and Alphabet Inc. (Google’s parent company). However, the rise in PPI has increased expectations that inflation will gain steam in 2018 even though its correlation with consumer prices has weakened.
Volatility has also declined, but is unlikely the end of it
The recent rise in the global stock market prices, and a gradual to calm among investors, the CBOE Volatility Index (VIX) has also taken a tumble from the extreme readings of 50 seen last week. However, we do not expect the index to fall by a lot as there could be more opportunities for sharp rises, particularly with higher expected inflation and interest rates that might cause investors to take a step aside, and instead place their bets on volatility.
S&P 500 valuations have started to rise from lows
Following last week’s broad market selling, the trailing and forward price-earnings (P/E) multiples of the S&P 500 index has also started to rise a bit with the trailing 4Q P/E slowly rising to 20, and the forward P/E to gradually rise to 16.9 times.
Overall, global markets have returned to much rational manner this week following bouts of rapid selling and panic. However, we think that investors should not be too complacent as we have seen the intensity of the sell off, and how complacency can turn against one self if over-confidence sets in. It does pay to regularly rebalance your investment portfolio, and take profits when the threshold level has been breached or to cut loss if the stock has been persistently stuck at low levels with not much hope of revival. Investors are advised to regularly review and rebalance their portfolios to minimise portfolio volatility and maintain the stability of the portfolio returns.
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 85.38 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on December 31, 2017. This compares to the total return of 20.11 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 (up 52.6 per cent since end June 2017); followed by Ascendas Reit (up 9.4 per cent since November 2016), and SATS Ltd (up 8.1 per cent since December 2016).
The model equity portfolio did experience a shortfall coming from Singtel (down 11.9 per cent since December 2016); followed by Sheng Siong (down 7.6 per cent since end June 2017), and Straits Trading Company (6.9 per cent since end June 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 March 2018.
Upcoming Earnings News next week
Some of the key STI component stocks reporting next week include Sembcorp Industries, Wilmar (Thursday, February 22), and Genting Singapore (Friday, February 23). A closely watched player in the oil and gas (O&G) sector, Sembcorp Marine is expected to report on Wednesday and one of the key highlights will be its order book, and upcoming contracts.
Economic Calendar for the week
One of the key economic reports to look out for in Singapore will be the interest rates as the MAS has pencilled the core inflation forecast in 2018 to be in the range of 1 – 2 percent. The current forecast for January 2018 core inflation rate is 1.32 per cent .
There are no economic reports in China next week as markets take a break for the Lunar New Year holidays
One of the key economic reports to watch in US for next week is the existing home sales figures for the month of January where the consensus estimates calls for the sale of 5.54 million homes last month as compared to December 2017’s 5.57 million home sales.
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