Date: May 7, 2018
- Banks fell victim to “buy in anticipation, sell on news”; STI loses 1.9% over week
- Venture has been sunk by earnings worries
- The US FOMC kept interest rates unchanged
- Wall Street’s Friday rally came after weak jobs growth revived hopes of “Goldilocks’’ economy
Whether investors should “sell in May and go away” remains to be seen, but the heightened volatility of the past few months that has extended into May suggests that a better strategy might be to “buy into weakness and sell into strength” for the time being – or for the poetically inclined, “buy the dips, sell the rips”.
1. Performance of the banks
Then of course there’s “buy in anticipation, sell on news” which applied particularly to the banks following their earnings announcements. DBS stood out as providing the main focus. Ahead of its 1Q earnings announcement on 30 April, the stock rose sharply, gaining S$0.84 or 2.8% at S$30.84 that day. Its earnings of S$1.52 billion for the three months ended 31 March were 26% better than the same period last year and beat analysts’ expectations of around US$1.4 billion. Not surprisingly, analysts almost unanimously issued “buy” calls on DBS.
KGI for example, said it has raised its target price for the stock to S$34 (implying 1.8 times price-to-book value) whilst OCBC Investment Research weighed in with a S$34.60 target. KGI however, added that with the stock well-owned, investors’ focus has now turned to possible downside risks.
Apart from rising delinquencies from DBS’s consumer and SME book, we would be watchful of the technology supply chain, given rising trade tensions. That said, we are still in a healthy credit cycle
said the broker.
Heavy trading of DBS ensured daily volume stayed well above the S$1 billion mark. On Thursday when the stock traded ex-dividend and plunged S$1.33 or 4.3%, to S$29.28, the value of the 11.6 million shares done was S$344m, about 21.5% of the entire market’s turnover of S$1.6 billion. On Friday, volume done in the three banks amounted to S$395 million, about one-third of the S$1.2b done by the whole market.
UOB also felt the brunt of “buy in anticipation, sell on news”, shooting up S$0.70 to S$30.14 on Friday 30 April in tandem with DBS but then collapsing on Thursday and Friday last week after it reported a very decent 21% rise in 1Q net profit to S$978m. Like DBS, most broking houses responded with “buy” reports but despite these calls, the stock lost S$1.07 or 3.6% over the week at S$29.07.
With banks the main drivers, the Straits Times Index fell 68 points or 1.9% over the week to 3,545.38.
2. Venture Corp
Venture Corp, possibly the tech sector’s top performer this year, continued to come under pressure this week on earnings concerns. A few weeks ago, the counter traded close to S$30; on Friday, Venture fell S$0.15 to S$19.60, an approximate loss of 35% in about a month. The selling has come after Venture’s customer Philip Morris International reported slower-than-expected growth in sales for its IQOS heat-not-burn electric cigarette devices in Japan, prompting several brokers to lower their price targets for Venture.
3. The FOMC and US interest rates
Over in the US, the US Federal Reserve’s Open Markets Committee met last week and as expected kept interest rates unchanged. Furthermore, the accompanying statement did not give any indication that the Fed plans to raise rates further or faster than previously telegraphed. Despite this, Wall Street stocks underwent a rocky week – on Thursday for example, the Dow Jones Industrial Average plunged 400 points before rebounding to close with a nett gain of 5 points.
In the bond market the yield on the 10-year Treasury stayed around the 2.95% level after crossing the 3% mark at the end of April, whilst the 2-year’s yield hovered around 2.5%. On Friday the 10-year traded within a range of 2.91-2.97% before ending at 2.95%.
4. “Goldilocks” – for now
On Friday, news that the US economy last month added 164,000 jobs instead of the 193,000 that the market had expected helped revive talk of a “Goldilocks” economy, ie. one that’s not too hot and not too cold, just like the porridge in the children’s tale. If so, then it suggests the Fed will not be in a big hurry to raise interest rates.
Despite the interpretation by equity traders, in the federal funds futures market the probability of a June rate hike remained at 100%. As some observers note, the low unemployment figure of 3.9% indicates an economy at full employment, which could force the Fed to keep raising rates.
5. Looking ahead
As for what might lie ahead, DBS Group Research in its 3 May Singapore Monthly Strategy titled “Take a break, enjoy the game” said it has lifted its year-end STI target to 3,850 from 3,715 previously “on the back of recent strong earnings upward revision boosted almost solely by banks” but added that in the near term, the good 1Q results for banks are priced-in with the STI currently trading above 13.51x (average) 12-mth forward earnings.
But market to take a breather first. World Cup and stocks do not mix well. STI fell by an average of 8.6% in the two months between end-April and end-June during the past six tournaments. Trading activity tends to slow starting May. A healthy consolidation with the best market re-entry time in beginning July if history repeats. STI near-term resistance at 3650, support at 3500