Phillip Singapore Monthly May 2018: When yield and USD rise May 15, 2018 1076

Market: STI was up 5.4% in April. This was led by financials, which now account for around 40% of the index. This makes STI the most leveraged to the financial sector, vs the 15-20% weights for US and European indices. The macro highlight of the month was the crossing of the 3% Rubicon by 10-year US Treasuries. This – or 3.05% to be precise – technically signifies the end of the 35-year bull market. A rise in bond yields can be greeted positively by equity markets when it flags higher growth expectations. The more pertinent issue is not yields but underlying inflation. It is runaway inflation that we believe is the larger worry, where central banks need to aggressively respond. It was positive that despite hitting its 2% inflation target, the Fed said this target (not cap) could run “symmetrically”, which is to say inflation has equal chances of moving in either direction. We still do not believe inflation will rise dramatically when money supply and velocity remain at multi-year lows.

To us, a more worrying is the USD’s unrelenting rally. Its rise could persist as growth differentials narrow, especially after Europe’s speed bump in economic growth. Another reason for USD strength is the interest-rate differential. We simply have one central bank – the Fed – ending QE while the other two – ECB and BOJ – are still running theirs. A rising USD hurts emerging markets, especially countries that borrow in USD without corresponding USD sources of revenue. Countries which face such a precarious mismatch include Brazil and Turkey. Both currencies have shed 8-9% in the past three months. Closer to home, the Indonesian rupiah is under pressure even after currency intervention by the central bank. The other perennial risk of USD strength is a possible resumption of uncontrollable capital outflows from China. This could rekindle devaluation or deflation fears.

In Singapore, electronic stocks were massively sold down. A number of names were down around 25%. The main trigger was an expected peak in the growth rates of smartphones and consumer products such as e-cigarettes and smart lighting. Absent this sector, we are left with financials and property. We think oil & gas is interesting, but its resurrection could come only at a later stage. While oil prices have rebounded, upstream companies are still hesitant to spend. Wall Street has been rewarding those that have displayed their newfound capex discipline.

Recommendation: Our bottom-up STI target of 3,900 (8% upside) is left intact. Banks should take the lead in stock-market performance. We raised target prices for all three following 1Q18 results. We are Overweight on property stocks as take-up of new launches continues to surprise positively. Developers that can launch earlier will be able to lock in outsized gains. REITs and other yield stocks are beginning to look more appealing. Rising interest rates have largely been priced in, the relative strength of the Singapore dollar is attractive while the domestic economy is gathering steam. Singapore announced GDP growth of 4.3% for 1Q18 – a pleasant surprise since this beat the prior quarter’s 3.6% YoY expansion. Next-generation companies with differentiated products/services is another segment we favour. We have started coverage on one, Y Ventures, and look forward to recommending more.


PHILLIP ABSOLUTE 10 – Our top 10 picks for absolute returns

Source: Bloomberg, PSR. Phillip Absolute 10 performance assumes equal weight to every stock in the portfolio. Any change to Phillip portfolio is only conducted at month end. Performance of the portfolio and STI does not take into account gains from dividends.


Portfolio Review:

Our inaugural Phillip Absolute 10 Model portfolio began in January. It started well with a rise of 4.9% in January. Banyan Tree and CapitaLand led gains in January. DBS has been a significant contributor to our performance with a gain of 15% for the period of Jan-Feb18. We then switched to OCBC in March due to higher upside to our target price and a beneficiary of higher interest rates (in particular through insurance business). Dragging our YTD performance has been Asia Pay TV and Micro-Mechanics. We still like Asian PayTV for the yield and utility-like nature of the cable business. Micro-Mechanics was caught up in the recent sell-down of all electronics stocks. Our preference for Micro-Mechanics is their ability to carve out a very profitable, 50% plus gross margin, and relatively recurrent business in semiconductor supply chain.

Technical Analysis : Straits Times Index – Bearish Engulfing Bar rejection off the 3611 resistance area

STI Weekly Chart                                        Current Sentiment: Bearish

Source: Bloomberg, Phillip Securities Research Pte Ltd

Red line = 20-period moving average, Blue line = 60-period moving average, Green line = 200 period moving average

April was a remarkable month for the Singapore equity market as the STI was up a whopping +5.4%. To put things into context, the S&P 500 index was up marginally by +0.40% while the Hang Seng Index gained +2.38% in April. All in, with the sharp rise in price action in April, we expect to see some near-term correction in the STI as the current price action is showing some weakness at the 3611 resistance area, which was the January 2018 high. Price did briefly break above the 3611 resistance area in the week ended 04/05/18, but the bullish follow-through was weak. As a result, the STI closed below the 3611 resistance area and actually closed at the week’s low. Thus resulting in the formation of a Bearish Engulfing Bar rejection off the 3611 resistance area in the week ended 04/05/18 signalling for a correction next. Moreover, looking at the Relative Strength Index (RSI) reveals a possible bearish divergence scenario if the 3611 resistance area stays intact shown by the diagonal lines in the chart. In January 2018, the RSI hit an overbought condition high of 74 while the STI formed a high at 3611 points. Fast forward to today, the STI broke a new Higher High (HH) in the week ended 04/05/18 at 3641 points while the RSI formed a Lower High (LH) point at 62 signalling for a bearish divergence. Hence, with the current bearish price action rejection off the 3611 resistance area and a RSI bearish divergence, expect the STI to head into a correction next to test the 3500 psychological round number followed by 3430.

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About the author

Profile photo of Paul Chew

Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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