With trade tensions at an all-time high between United States and China since last week, it appeared that there has been a time-out called by President Trump. In a Twitter post, the President appeared to be conciliatory towards his Chinese counterpart, President Xi when he called for an end of the ongoing trade disputes. The US President tweeted that “China will take down its trade barriers because it is the right thing to do.” Furthermore, the President added, “Taxes will become reciprocal and deal will be made on Intellectual Property. Great future for both countries.” He then went on to reiterate US friendship with China and both countries shall remain as friends no matter what happens with their disputes on trade.
Such remarks which were made after various criticisms against the US are unsurprising as we indicated earlier in our previous week’s blog post that the it is the typical personality of President Trump that he will ‘hit hard’ on the negotiating table, then seek for compromise later.
Regardless, with the day-to-day uncertainties faced by investors nowadays, the roller-coaster appeared to take a toll on the markets with the Straits Times Index (STI) barely in the positive territory on a year-to-date (YTD) basis.
Looking closer at the one-year daily chart above, we noted that the Straits Times Index (STI) has on Monday (April 09, 2018) bounced off its lows of 3,338.96 last Wednesday when the Chinese launched counter tariff measures against US goods and services. The index closed on Monday’s session at 3,449.96 or close to the 3,500 psychological level, the 61.8 percentile level on the Fibonacci Retracement chart shown above.
Likewise, the 14-day relative strength index (RSI) is turning upwards towards the mid-way 50 level, albeit high tensions and nervousness among traders. As this article is being written on Monday, April 09, US stock index futures are in the ‘green’ with the Dow Futures up 200 points, while the S&P 500 Index Futures up 18 to 19 points.
Has US become insular, while China is adopting more open trade policies
China’s President Xi Jiping announced during the annual Boao Forum in Hainan Island on April 10 that his government plans to open up its economy and reduce tariffs on imported automobiles. That message provided a reassuring calm to a week of uncertainties, and that has sent Asian stocks moving higher with the Deustche X-Trackers MSCI Asia Pacific ex-Japan Hedged Equity ETF (DBAP) moving higher as well.
However, one of the main crux for the disagreement between the US President and China is the unfairness being felt by Americans over the trade relationship with China. The whole issue is somewhat centred over trade fairness where the tariff rate charged on Chinese imports is being levied at a lower rate (2.5 per cent) in US as compared to American imports in China (25 per cent). Moreover, the Americans are taking issue with the mandatory requirement for technology transfers by firms operating in China. The Americans are placing emphasis on this matter as it concerns a lot regarding the protection of intellectual property (IP) rights, and the potential impacts of these IP rights being ‘stolen’ by the Chinese.
China’s Balance of Trade
As one might have noticed, the Chinese are enjoying a trade surplus to a tune of US$337.4 billion as of February 2018. Although the trade surplus is not showing any consistent pattern of increases, the trade balances are in the positive territory. This is unlike the US Balance of Trade as shown below.
US Balance of Trade
As shown in the chart above depicting the trade balance in US, a contrasting comparison is being played out when compared to the Chinese trade balance. In the above chart, it shows a rising trade deficit each moth to a point of close to US$5.76 trillion as of February 2018. The data is one of the mostly cited statistics used by US political leaders in justifying their disagreement with the global partners over trade fairness. The data, along with other pieces of economic information has been used by policy makers, including the anti-trade politicians and activists in speaking out against the benefits associated with open markets.
However, there is more data which disprove the myths surrounding free trade including costs benefits, technology collaboration opportunities, and higher productivity growth due to economies of scale. In the heat of the exchanges, few politicians recognise the benefits of trade, and instead hit out against the supporters of free trade.
Trade tensions aside, any local corporate news?
Good question. A lot of focus has been more the trade showdowns between US and China, other corporate news this week includes ComfortDelgro Ltd’s latest acquisition spree on an Australian non-emergency medical transportation provider and a local bus company. What is surprising or maybe unsurprising is both acquisitions were announced in a single week after the formal announcement weeks ago about Grab and Uber merging together.
The Australian acquisition announced early in the week was worth A$30 million (S$30.2 million) and is worth 4.6 times the earnings before interest, tax depreciation and amortisation (EBITDA). ComfortDelgro currently owns and operates public scheduled bus services in New South Wales and Victoria, and taxi services in Western Australia. The company, National Patient Transport (NPT) owns a fleet of 144 vehicles providing a range of healthcare transport services to major metropolitan hospital networks.
The second acquisition involves the S$10.25 million acquisition of Singapore’s AZ Bus Pte Ltd. The company owns 94 buses, along with charter contracts and associated drivers.
How did ComfortDelgro’s stock price perform
So far, based on the chart and price performance on April 11, investors seem to view the two acquisitions positively as the stock price has climbed out of the S$2.00 zone to end 2 cents higher or 0.96 per cent at S$2.10 per share. The two acquisitions are considered small and easily digestible. Many market watchers think that ComfortDelgro’s management is possibly taking a wait-and-see approach as the Competition and Consumer Commission of Singapore (CCCS) is evaluating its proposed tie-up with Lion City Rentals (LCR) which was formerly an entity owned by Uber. As the joint tie-up with Uber through the use UberFlash app is about to phase off on April 15, it is expected to be a negative event for ComfortDelgro after only having to launch the app and tie-up a few months ago with much fanfare.
Genting is another stock riding on expected volume rises
The stock price of Genting Singapore has recently moved significantly since its post reporting lows in March. From a stock price of close to S$1.20 per share before the earnings announcement, the stock was beaten down to close to S$1.05 per share, and has since been trading on the upside to close to S$1.13 due to a recent wave of generally positive research reports on the counter.
In a report dated April 05, 2018 by UOB Kay Hian, the analyst noted that with the sizeable discount in the share price since its peak, the valuations have become attractive at 7.6 times of 2018 Enterprise Value to Earnings before Interest Taxes Depreciation and Amortisation (EV/EBITDA).
The brokerage house expects valuations to trend up due to the stable Singapore operations, and the expectations coming from the successful bidding for Japan’s integrated resort (IR) concessions. The analysts are also positive on potential moentisation opportunities for the non-gaming properties. UOB Kay Hian has a 12-month price target of S$1.30 per share on the counter. The stock closed at S$1.18 per share on Friday, April 13.
How did the Singapore market fare at end of the week
The Straits Times Index closed at 3,501.30, up 32.69 points, or 0.94 per cent higher on a mix of generally good economic news on the homefront, namely the tightening of monetary policy, and the improvement in overall gross domestic product (GDP) during the first quarter of 2018.
Unsurprising, Friday’s closing driven by a lower trading volume of 1.39 billion shares worth S$1.25 billion. This compares to 1.6 billion shares worth S$1.13 billion traded on Thursday. There were no specific reasons for the low trading volume, except the usual weekend effect where investors will tend not to place any overnight trades as there could be unexpected events which might not allowed one to react in a timely fashion to capitalise or to hedge against their trade exposures.
Looking closer at the one-year daily chart of the Straits Times Index (STI), we noted that the index is on a short technical rebound from its previous lows at around 3,360. Using Fibonacci Retracement analysis, we noted the index is now on the 78.6 percentile level and has now surpassed the psychological level of 3,500 points.
Though, at current levels of 3,500, it is still off from the all-time high of 3,611.69. However, we think there is support for the index to close higher this year. Several brokerage houses, including Phillip Securities has maintained its year-end target unchanged at 3,900. RHB Research has a short-term target of 3,574 points.
The index is currently up 2.89 per cent on a year-to-date (YTD) basis, and 1.7 per cent on a weekly basis.
Sharp moves on the Singapore Dollar
Following the latest policy moves on the Singapore Dollar by the Monetary Authority of Singapore (MAS) on April 13, 2018, the USD/SGD exchange rate was jolted with sharp moves to the downside to end at S$1.312 to one US Dollar. In an announcement by the de facto central bank, the committee felt that the local economy is likely to remain on a steady expansionary path in 2018. However, upward pressures on the core inflation measures are expected to persist over the course of 2018 and beyond due to an improving labour market.
Although MAS kept the Singapore Dollar nominal effective exchange rate (S$NEER) at zero percent, with no change to the width of the policy band, it decided to increase slightly the slope of the S$NEER policy band, from zero percent previously. The committee added that the latest policy stance is consistent with a modest and gradual appreciation path of the S$NEER policy band that will ensure medium-term price stability.
Looking at the one-year daily chart of the USD/SGD chart, we noted that there has been a consolidation of the exchange rate at around S$1.30 – S$1.31 to one US Dollar. Moreover, the 14-day relative strength indicator (RSI) has remained relatively flat at about 47 levels. We assume that most traders/investors have taken into account the potential weakness of the US Dollar, and might have slowed down their short bets on the US Dollar. Traders are also aware that the continued pace of interest rate rises by the US Federal Reserve might continued to provide some support for the US Dollar, thus they might be hesitant in putting too many bearish bets on the US Dollar.
The war trump card is unleashed
As we are in the topic of weakness in the US Dollar, President Trump has other ways to prop up the home currency through the use of his so-called war threats, namely the tariff wars, and now the Syrian War. For the latter, it is not exactly a war per sake, but a barrage of missile attacks being unleased with the assistance its coalition partners, France, and the United Kingdom on Syrian President Bashar al Assad’s chemical weapons manufacturing facilities. The attack took place right after the close of regular trading on Wall Street on Friday evening (April 13, US time).
We expect that the strikes might impact the global markets negatively, while propping up the US Dollar (safe haven currency), oil and commodities prices. However, I would emphasise this is only an expectation, and one should always do due diligence on any counters they seek to invest in.
Moreover, based on Bloomberg.com reports, the coalition partners do not have plans to launch more attacks beyond Friday’s response. However, the partners will be monitoring the actions by the Syrian regime, Russia, and Iran on whether they will abide with international law, and not resort on using chemical attacks on the Syrian people.
The temporary halt in the attacks might also impact the markets in another way, so we would advise investors to continue monitoring the events, and make the appropriate decisions.
US stock markets closed lower on the day, but higher on the week
The US markets closed lower on Friday led by declines in bank stock prices as Citigroup, JP Morgan and Wells Fargo were the first US banks to report their first quarter earnings numbers that surpassed analyst expectations, but most of their earnings numbers have been priced in, hence the downward shifts in the stock prices of these banks.
Taking a look at the sector bank ETFs called SPDR S&P Bank ETF (KBE) as shown below, we think that, based on the chart pattern, there has been an increase negativity response to the sector, though interest rates are rising which will generally provide a lift to their interest margins. We think that the latest drops in stock prices of many US banks might be the potential decline in loans generation due to the lack of demand for loans as rates rise. However, many banks are generating other non-interest related fee income like investment banking income to sustain themselves.
The S&P 500 index is still on the recovery phase
Although the index traded down by 0.3 per cent to end Friday’s session at 2,656.30, it is up on the week by 2 per cent.
Looking closer at the index, there appears to be attempts to climb out of the all-time lows of close to 2,600 and heading towards the 50-day moving average (MA) line as denoted by the blue colour line. On the 14-day RSI, the index is also at the mid-range of ‘Overbought’ and ‘Oversold’ levels.
Interest rates are trending higher
Following the release of the US Federal Reserve minutes for the March 20-21 meeting, all the members present during that meeting expected both the economy to strengthen and inflation to rise “in coming months”. The report quoted in its summary, “Participants generally saw the news on spending and the labour market over the past few quarters as being consistent with continued above trend growth and further strengthening in labour markets.”
With zero dissent, and an unanimous agreement to hike rates by a quarter-point to a target range of 1.5 per cent to 1.75 per cent, the next meeting on June 13 will be another key event to watch for the second rate hike. The Federal Reserve has guided the markets for three or possibly four rate hikes in 2018.
A summary of the probabilities as measured by the Federal Funds Futures prices where the June 13 meeting is calling for an expected 99.5 per cent probability for another 25 basis points (bps) hike:
Summary of the closing US market indices
Going forward for US markets, there are expectations that the major US indices will resume the climbs, while interest rates are set to rise further. The combination of these two developments have not dampened US consumer confidence as shown by the University of Michigan Consumer Confidence Index which has been consistently above 90, though for the month of March 2018, the down shift in the bar chart has been caused by some weather disruptions:
How did our model investment portfolio perform
Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio returns this week have shown a major outperformance of 85.47 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 20.52 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 43.4 per cent since end June 2017); followed by Ascendas Reit (up 14.5 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 10.8 per cent since December 2016); followed by Straits Trading (down 8.2 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 June 2018.
Upcoming Earnings News next week
Some of the key quarterly earnings reports to look out for next week include Keppel Corporation and its S-Reits affiliates who will be reporting early the week. There is probably more interest shown on parent company, Keppel Corporation especially with the graudal resumption of rig orders, and order books.
Economic reports to follow by country
One of the key economic data releases includes China’s GDP Growth, as the government has guided financial markets for an overall 6.5 per cent GDP growth in 2018.
Some of the key US economic data releases for next week include retail sales data, and several US Federal Reserve Bank officials.
To sum up the whole article, the entire investment universe presents many uncertainties, however one thing is for sure is if you choose to put your investable assets to the bank, it will be a slower climb in terms of compounding. But, if you care to put into a diversified portfolio, your risks and returns are spread out.
Have a good investment week ahead.
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