The last week of March, and the first quarter is almost over, and the Straits Times Index (STI) is getting more volatile, as individual and institutional investors are positioning their portfolios for a good quarter, or not to appear to lose badly. The so-called ‘window dressing’ season for investment portfolios is in full swing this week, and STI is on record to achieve its 9 to 10 per cent year-to-date (YTD) growth for the year till March 31, 2017.
The STI is on its winning streak for 1Q2017
Using the Fibonacci Retracement (FR) tool, we attempt to analyse the next directions for STI. We noted that the short-term momentum indicator shown in red (below the main chart) is starting to flatten out, while the STI chart is showing that the charts could be consolidating at around the 61.8 per cent retracement level at around 3,200 level. The chart is also not showing any major impetus or trends to move downwards, but there is always the risk that the index might not maintain its consolidating level of 3,200. If that happens, it could fall back to the 50 per cent retracement level of 3,048.14 points. If the index is unable to hold onto the support level, a further downside could range from 3,000 to 3,048.14, and investors should consider entering into the markets for bargains at those levels.
Banks top the most active stock names
The rise in short-term interest rates bode well for banks especially if they were mired in troubles happening within the oil and gas (O&G) sector. This is despite industry heavy weight players like DBS, OCBC, and UOB are laggards for the past few years. Moreover, with the hike in interest rates and various US Federal Reserve voting members hinting a hawkish stance in their various public appearances, it appears that there could be another interest rate hike in the horizon. This is also evidenced by the US Federal Reserve probability models for futures contracts traded on the Chicago Mercantile Exchange (CME) Group.
As of March 29, 2017, the indications for the May 03 Federal Open Market Committee (FOMC) meeting showed that committee members might vote on a potential aggressive interest rate hike of 75 to 100 basis points (bps).
Taking a look at the financials segment stocks as a whole
The FTSE ST Financials Index is showing an uptrend with the index currently standing at 865.37 as of March 30. The all-time high was 935.05 in April 2015, while the all-time low was 672.35 in February 2016. The all-time low was coincided with the liquidity crunch and the precipitous drop in the major China indexes that took place in early 2016.
If this index is a tradeable index, and analysing the momentum indicator below, it appears that one can potentially ride on the index and time the entries and exits using the chart.
In a related news, the Business Times reported this week that based on preliminary data from the Monetary Authority of Singapore, monthly total bank lending dollar volume grew 1.7 per cent in February 2017 to S$627 billion, up from $617 billion in January. The lift was mainly driven by stronger business lending which rose 2.7 per cent to S$377 billion and stronger lending coming from building and construction firms. Consumer loans also rose by 0.2 per cent in February to S$251 billion. So far, in reaction to the news, DBS Group stock was up 9 cents to $19.39, while OCBC was up 1 cent to $9.72, and UOB was up 7 cents to $22.09 at the time of writing this article on March 31, 2017.
Hong Kong markets on the tear
The Hang Seng Index (HSI) closed Friday, March 31, 2017 at 24,311.59, down 0.8 per cent intraday. On a weekly basis, the market fell 1 per cent, but on a quarterly basis, the HSI is up 9.6 per cent. The Hong Kong and Asian markets managed to get a peek into March-end China Purchasing Managers’ Index (PMI) which rose 51.8 in March, compared to February’s 51.6. In another data set containing 4Q2017 The change is relatively flat, but the index is still staying at above 50, and is the breakeven level for expansion and contraction.
Looking at the main chart, the HSI has topped the year at 24,656.65, and it does not appear that it can hold on to the peak levels. Using the Fibonacci Retracement tool, we noted that the index has broken down and it is just above the 78.6 per cent retracement line at 23,975.19. If the index manages to break through the 78.6 per cent line, and head lower, we think the next level to test the support is 23,439.62 on the 61.8 per cent retracement line. We do not think the correction is severe, but it does provide some indications of what a potential hike in US interest rates could impact industry players like bankers and real estate salesperson
The Average Directional Index (ADX), it is starting to take a downturn, and the positive and negative directional indicators (DIs) are starting to converge.
Going into April and the second quarter, I do not expect the HSI to significantly decline in value, but there could be occasional spirts of momentum investing in between which might cause some investors to exploit the price arbitrage.
Europe is on track to ‘divorce’ United Kingdom in 2 years’ time
Looking at the chart above on the EuroStoxx 50 stock index, the index scored its highs in late March at 3,484. Many investors are starting to look for undervalued markets like companies listed in the German DAX, and other major European markets. This is especially so given the protracted political upheavals in the United States, and the relatively high valuation of most of the companies in the US.
With the expected outperformance in the European financial markets, economists in the private equity group, KKR have also raised full-year GDP forecast for Europe from 1.4 per cent to 1.7 per cent, but is still less than the 2 per cent or so expected in the United States, and well below the global forecast of 3.4 per cent set by the International Monetary Fund. The latest estimates were reported on the website of CNBC.com. Despite the low GDP projections for Europe, the economists highlighted increased focus on fiscal rather than monetary policy, a move toward deregulation, an inflow of capital and heightened volatility driven by central bank stimulus as examples that might help to lift the European economy in the long-run.
The pace of EuroStoxx 50 trend flows is likely to trend upward in general, barring any extraordinary circumstances like a sudden stock market crash, or the unexpected election results coming out of France, where the French people are due to vote in April. This will be followed by elections in Germany and Italy in 2H2017. The growing populist movements in the United States, and United Kingdom, which on Wednesday, March 29, 2017 invoke Article 50 of the Lisbon Treaty to formally start of process of negotiations of an exit from the European Union (EU) in two years’ time have caused investors to feel uneasy going forward. Should France follow the lead of other populist movements, the risk of dismantling of the entire EU is significant, and investors need to a keep a close watch of various developments to ensure that they are well hedged against such extreme outcomes.
Major US stock indices enter into their 10th anniversary of bull run
The so-called ‘Trump’ rally which started post November 08, 2016 Presidential Elections continue despite the unsuccessful healthcare reform bill passage early this week. Overall, the three major US stock indices all posted quarterly gains of at least 4.6 per cent, with the technology focused Nasdaq being the major outperformer with a gain of 12 per cent this quarter. Although the last day of the quarter saw major US markets turning lower, there has not been any major negative blow to market confidence including the failure to pass healthcare reforms. This is perhaps quite surprising for many investors as markets have quickly recovered and have resumed their pace of gains upwards.
Investors are increasingly worried that the stock market gains are increasingly getting narrowed, especially when the so-called ‘Trump’ rally wears thin. Looking at the Relative Strength Index of the widely followed S&P 500 stock index, we noted that even though stocks are not in the ‘overbought’ territory. There is a risk of investor complacency, and if markets should turn into a protracted long decline, and the US Fed is too slow to react, the combination of these two factors on top of global market unease might result in more volatilities and possibly causing instability similar to the scale seen in the 2008 – 2009 Global Financial Crisis (GFC).
For now, we expect the S&P 500 index to move higher, and possibly breaching the 2,400 – 2,450 index range. Our analysis is supported by the latest readings showing the Relative Strength Index (RSI) which has started to turn downtrend towards the 14 per cent mark, and is also the ‘oversold’ level. However, on a relative valuation basis, with S&P 500 index having a 23 to 24 times price-earnings multiples, we feel that it is getting expensive as compared to other global markets, including Singapore whose price-earnings multiple on an index-weighted basis is around 13 times.
We realised losses on Keppel DC Reit and Raffles Medical
We chose to take the bitter pill by selling off two of our underperforming stocks, namely Keppel DC Reit and Raffles Medical Group Ltd (shaded in blue). The resulting impact is a 4 to 5 per cent return we earned on our investment portfolio since inception at the end of November, as compared to the Straits Times Index (STI) benchmark of 9 to 10 percent during the same period. We are comfortable with not chasing returns in order to preserve shareholders’ wealth. Although we underperformed our benchmark, we believed that given our portfolio is targeted for long-term growth, and we will not be overly concerned by the short-term underperformance.
On the technical analysis (TA) part in analysing ISOTeam, we think that the company’s stock is starting to see some momentum, and though the stock has recently come down gradually, we are still quite positive of its long-term fundamentals, namely the recurring business that they currently owned, and the contracts which they are actively procuring. Besides local projects, they have also recently entered into the Myanmar market and that decision appeared to be driven by the untapped opportunities available in the country, and the potential returns that the company might generate for shareholders.
We are still keeping tabs in our watchlist for Keppel Corporation, db x-trackers EuroStoxx 50 UCITS ETF, MSCI Indonesia UCITS ETF.
What to watch out for next week
As the new quarter begins next Monday, we will be getting the flash estimates of the private and HDB housing statistics for 1Q2017, and we are expected slow price growth for both segments, but sales volumes are expected to increase given the various news reports of robust sales launches in several new private home projects like Park Place Apartments in Paya Lebar, Grandeur Park in Upper Changi Road, and Executive Condominium (EC) projects like InZ Residences in Choa Chu Kang, among others.
Other data investors might be closely watching are the Purchasing Managers’ Index in Singapore and abroad as well. China has just released its official, and private sector purchasing managers’ indexes this week showing continued expansion, despite having lower readings in March for the private sector than the month before. The Caixin/Markit Purchasing Manufacturing Index in March fell to 51.2, missing analysts’ expectations of 51.6 and down from February’s 51.7.
Other news releases are the latest meeting minutes from the US Federal Reserve Open Market Committee where investors will be scrutinising for any hints of the direction of the interest rate hikes, and US jobs report which is expected to show continued growth in employment numbers totaling around 235,000 and unemployment rate to stay flat at around 4.7 per cent.
Disclaimer: The views/analyses expressed by the author in this article are based on public information sources, and individual analyses. These views do not necessarily represent the views shared by my principal firm. Investors seeking to trade in the stocks mentioned in this article are advised to seek the opinions from licensed financial advisers.