STI weakened again in September, by 1.75%. We remain neutral on the market with STI year-end target of 3270. Attention has swung to Trump tax cuts and their ramifications. The odds of some tax cuts getting passed by the Republicans are fairly good, in our view, given the mid-term elections in November 2018. Politicians would need to deliver on some of their promises. There are various estimates on the effect of the Trump tax cuts and more importantly, deductions for capital spending – on US growth. The most optimistic estimate come from the US administration, namely a 1%-point uplift to US GDP. This sugar rush should benefit global growth. That said, we think a more significant influence will be the trajectory of interest rates. This fiscal impetus should provide cover for the Fed to raise rates in December. Even prior to the tax plan, the Fed dot plots were bandied around three rate hikes to 2.25% for 2018. The likelihood of this occurring has certainly crept up.
Turning back to macro data in Singapore, the external environment continues to be vibrant. PMIs are close to 3-year high with electronics PMI at 7-year high and exports are on pace for the fastest growth in 6-years. We believe this strength will eventually percolate down to better domestic demand. This would position Singapore banks for the triple tailwinds of rising rates (SIBOR now at 18-month high), strong loans growth (with an added boost from property sales) and vibrant capital markets (for the wealth management business). The event to note in October will be the MAS monetary policy statement. Despite the upside in economic growth, muted core inflation and a still subdued labour market, MAS is expected to maintain its neutral stance on SGD. Of less certainty is how much longer MAS will keep its neutral stance on a so-called “extended period”.
In September, we initiated coverage on Micro-Mechanics. Its know-how and precision manufacturing capabilities allow it to enjoy massive 60% gross margins and 30% ROE. It is our proxy for the present surge in semiconductor sales. Another company we initiated was Dairy Farm. We believe its earnings are back to growth, supported by margin expansion from more fresh products, private labels and a streamlined supply chain.
Echoing the recovery in Singapore exports, container throughput is similarly poised for 6-year high growth rates. We saw a large spike in the value of construction contracts awarded. This together with a reduced emphasis on pricing in awarding public projects should help sector margins. Property maintained its momentum with sales up 62% YoY in August. Sales volume is on track for its best performance in four years. Recovery in hospitality industry fizzled out as tourist arrivals eased in July. Nevertheless, RevPAR approached a 2-year high.
Technical Analysis: Straits Times Index – stuck in a range between 3274 range high and 3195 range low
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
September was another month bogged down with the Korea war scare as the US and North Korea exchanged heated words. North Korea stated that President Trump had declared war on North Korea and Pyongyang reserved the right to take countermeasures such as shooting down US bombers even if they are not in its airspace. The Straits Times Index (STI) remained depressed due to the escalating tensions between North Korea and the US. The STI was down -1.75% in September, and the price action suggests further downside if the 3189 critical support area gives way.
On the daily timeframe, more signs of weakness appeared after the 20-day moving average crossed below the 60 day moving average on 7 September while the 3195 critical support area held up once again proving its significance. We might see a range bound action between the 3274 range high and 3195 range low moving forward. Watch the range extremes closely as the breakout will dictate the next course of action. Keep in mind the weekly RSI is still in the midst of mean reversion off a recent overbought peak of 72 in July. Moreover, the average correction that follows after the overbought RSI mean reversion tends to drag the STI down by -7.7% suggests a bearish bias here.
PHILLIP SINGAPORE SECTOR UNIVERSE
Best performing sectors in Sep’17 were: Shipping, REIT-Hospitality and REIT-Industrial. The gains in shipping were from both SembCorp Marine (+9.7%) and PACC Offshore (+13.3%). REIT-Hospitality modest gains was led by OUE Hospitality (+3.9%). REIT-Industrial managed to chalk up some gain, driven by Keppel DC REIT (+3.1%). The Top 3 gainers under our coverage were Cogent (+24.2%), Micro-Mechanics (+11.8%) and SembCorp Marine (+9.7%).
Worst performing sectors in Sep’17 were: Transportation, Commodities and Consumer. In Transportation, there were losses across, with biggest from ComfortDelgro (-9.2%) and SATs (-4.6%). Commodities fell due to plantation counters Golden Agri (-5.1%) and Wilmar (-4.2%). The decline from Consumer was due to Dairy Farm (-5.1%) and Thai Beverage (-3.2%). Major Top 3 decliners under our coverage include ComfortDelgro (-9.2%), CapitaLand Mall Trust (-7.8%) and CapitaLand (-5.3%).
SUMMARY OF SECTOR AND COMPANY VIEWS