The Federal Reserve is trimming its monthly bond purchases to $75b from $85b. Previously there was fear of such tapering but now, markets cheer this move. This may be for reasons like 1) Less easing means that the value of the USD is preserved, 2) Uncertainty with regards to this issue is lifted, 3) Sell in anticipation, and buy on news. Let me explain point 1 since it is more technical and the rest are self-explanatory.
In past few days, flow data shows 1) a reversal to inflow into USD, 2) inflow into US Bonds, 3) outflow on US stocks. This may be in anticipation of tapering. Tapering means less money supply so USD will be stronger. Bonds have corrected a bit during the Stock market rally so to preserve the value of the USD, bonds make a better investment than stocks for now.
Why selling of US stocks and now US stocks jump after the tapering news? The reason here can be that US stock outflow was due to non-US investors as I have highlighted before. So, when the value of USD is now better preserved (less downside), non-US investors reload their US stock holdings in the short term.
What does it mean for traders and investors like us?
Further rally may be in the making. The Fed said its benchmark interest rate is likely to stay low “well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below” the Fed’s 2% goal. This means that hot money will continue to support the market and sentiment is positive for now. Any negative sentiment shall provide a healthy dip and opportunity for others to buy. The positive sentiment from the US is likely to affect developed markets (Europe, Japan, HK, SG) more. “2 weeks – 2 month – timeframe” positions on index component stocks may be optimal as we hold through to Yellen’s stepping into office.
Thursday, 19 December 2013
Friday, 13 December 2013
Commentary: Bits and Pieces of the Market Jigsaw
There are many bits and pieces of information that can form a clearer picture of the market outlook that I would like to highlight to everyone. These are organised in terms of time horizon.
Tactical (1week – 1 month)
USD shows a rebound. This means that non-US investors have less reason to sell their USD assets. Pullback in US stocks have been attributed to selling by non-US investors so if the trend does not persist, downside is limited. On the flipside, the buyers on the sell-down were likely to be US investors. This shows a certain level of confidence they have in their own market. Another point here is the discussion on the budget. This affects the supply of and value of USD and must be observed more carefully.
Strategic (1 month – 6 months)
Cheap money remains abundant and shall continue to inflate asset prices. This is in contrary to Bill Gross’ investment outlook. The reason why I would audaciously beg to differ is because our investment horizon is much shorter than PIMCO. Cheap money not only comes from the US but Japan and China as well. Look at how Abenomics is affecting the Japanese economy driving short term price inflations and now fuels the need to increase Japanese income. In China, the government is supporting various labour intensive industries like Shipbuilding so as to maintain employment and income levels. Also, Chinese manufacturing is slowly moving into IndoChina (Vietnam, Cambodia, Laos). This means that Chinese money moves out of China this way as well.
At a time when business confidence is just returning there is no reason why central banks would increase interest rates or the Fed do tapering if it still has the means to maintain a loose monetary policy.
Mergers and acquisitions have been picking up recently all over the world. In my opinion, business men are taking the opportunity to consolidate weaker competitors because they are optimistic. This is important because earnings projections now are likely to be inaccurate. P/E will get lower when earnings increase. Certain companies with incredibly high P/E due to a slump in profits thus far may become undervalued. It is better to value companies based on their Cash Flow rather than earnings now. This is a part that most analysis and reports lack at the moment. This may change in the coming months so it is something to lookout for and turn to our advantage.
Tactical (1week – 1 month)
USD shows a rebound. This means that non-US investors have less reason to sell their USD assets. Pullback in US stocks have been attributed to selling by non-US investors so if the trend does not persist, downside is limited. On the flipside, the buyers on the sell-down were likely to be US investors. This shows a certain level of confidence they have in their own market. Another point here is the discussion on the budget. This affects the supply of and value of USD and must be observed more carefully.
Strategic (1 month – 6 months)
Cheap money remains abundant and shall continue to inflate asset prices. This is in contrary to Bill Gross’ investment outlook. The reason why I would audaciously beg to differ is because our investment horizon is much shorter than PIMCO. Cheap money not only comes from the US but Japan and China as well. Look at how Abenomics is affecting the Japanese economy driving short term price inflations and now fuels the need to increase Japanese income. In China, the government is supporting various labour intensive industries like Shipbuilding so as to maintain employment and income levels. Also, Chinese manufacturing is slowly moving into IndoChina (Vietnam, Cambodia, Laos). This means that Chinese money moves out of China this way as well.
At a time when business confidence is just returning there is no reason why central banks would increase interest rates or the Fed do tapering if it still has the means to maintain a loose monetary policy.
Mergers and acquisitions have been picking up recently all over the world. In my opinion, business men are taking the opportunity to consolidate weaker competitors because they are optimistic. This is important because earnings projections now are likely to be inaccurate. P/E will get lower when earnings increase. Certain companies with incredibly high P/E due to a slump in profits thus far may become undervalued. It is better to value companies based on their Cash Flow rather than earnings now. This is a part that most analysis and reports lack at the moment. This may change in the coming months so it is something to lookout for and turn to our advantage.
Wednesday, 11 December 2013
Special: Time to Bargain Hunt?
Flow data shows non-US investors taking profit on US stocks. Perhaps the Dollardex ( DXY) is at a level at which more downside is expected. This is in contrast to the rise in the US indices previously. S&P and Dow Jones Industrials retreated last night but it does look as if the dip has just begun.
As such, some downside can be expected in the coming days. Asian markets like Japan, China and HK can be reasonably expected to retrace “gaps” on the indices. This may drag sentiment down further.
Looking at 3025 – 3050 on the STI here and about 23300 on HangSeng. Suggest that market participants focus on banks and industrials for bargain hunting. Industrials in this case, mean heavy industries like shipbuilding, autos, machinery. Property stocks, even though they are high beta, may not perform as well on the rebound as fundamentals for property in the region remain weak. Commodities may be a high beta alternative but soft commodity and energy prices have moved ahead already.
Fundamentally, the market looks sound and the consensus on 2014 is generally positive with a focus on stock selection. At a moment like this I would prefer to focus on picking the right sectors rather than specific stocks because sectors can turnaround together, and it does not really matter which stock you choose to trade in those sectors.
Once again, the sectors that have been identified are generally banks and industrials. Those who wish to take higher risk can consider the tech stocks and gaming stocks listed in HK. There may be another wave which may include consumer stocks but that is for a later discussion.
As such, some downside can be expected in the coming days. Asian markets like Japan, China and HK can be reasonably expected to retrace “gaps” on the indices. This may drag sentiment down further.
Looking at 3025 – 3050 on the STI here and about 23300 on HangSeng. Suggest that market participants focus on banks and industrials for bargain hunting. Industrials in this case, mean heavy industries like shipbuilding, autos, machinery. Property stocks, even though they are high beta, may not perform as well on the rebound as fundamentals for property in the region remain weak. Commodities may be a high beta alternative but soft commodity and energy prices have moved ahead already.
Fundamentally, the market looks sound and the consensus on 2014 is generally positive with a focus on stock selection. At a moment like this I would prefer to focus on picking the right sectors rather than specific stocks because sectors can turnaround together, and it does not really matter which stock you choose to trade in those sectors.
Once again, the sectors that have been identified are generally banks and industrials. Those who wish to take higher risk can consider the tech stocks and gaming stocks listed in HK. There may be another wave which may include consumer stocks but that is for a later discussion.
Monday, 2 December 2013
Kepcorp negotiating new contracts, Vard secured new contract, GSH buys Land in KL, Market Participants' Dilemma
Opportunities
Keppel Corp (BN4, $11.31) confirms that it is currently negotiating with Golar LNG on the conversion of an existing LNG carrier into a Floating Storage and Liquefaction Vessel (FLSV). The terms and conditions of the contracts have yet to be finalized.
Comments: All these upcoming project expectations may be why Keppel remains strong compared to SembMar.
Vard (MS7, $0.80) secured a NOK400m contract from Island Offshore to construct an advanced offshore support vessel, scheduled for delivery in 1Q15.
Comments: Look at this. Stock price has been depressed for too long. A position trade may be worth considering.
GSH (J16, $0.075) acquired a 5,800sqm prime land parcel located at Jalan Kia Peng, in Kuala Lumpur's "Golden Triangle" from Malaysia’s Tropicana Corp, for a consideration of RM132.4m. The site is slated for mixed residential/commercial development.
Comments: Think this is better than Iskandar land.
Commentary
Market participants seem to be playing a game of “prisoners’ dilemma”. I shall summarise our “Market Participants’ Dilemma” below:
i) You buy, others buy, Everyone makes money when markets go up.
ii) You buy, others don’t buy, You may get stuck.
iii) You don’t buy, others buy, Others may get stuck.
iv) You don’t buy, others don’t buy, the market does not move.
Similar cases shall apply for a bearish scenario.
This is why position trading matters more in such a market. For position trades, you expect to get stuck at least for a couple of weeks. This is what is happening in markets that are moving at the moment. Participants take a longer view and so everyone still buys. If no one wants to get stuck in the short-term, some markets (like Singapore) do not move much.
Keppel Corp (BN4, $11.31) confirms that it is currently negotiating with Golar LNG on the conversion of an existing LNG carrier into a Floating Storage and Liquefaction Vessel (FLSV). The terms and conditions of the contracts have yet to be finalized.
Comments: All these upcoming project expectations may be why Keppel remains strong compared to SembMar.
Vard (MS7, $0.80) secured a NOK400m contract from Island Offshore to construct an advanced offshore support vessel, scheduled for delivery in 1Q15.
Comments: Look at this. Stock price has been depressed for too long. A position trade may be worth considering.
GSH (J16, $0.075) acquired a 5,800sqm prime land parcel located at Jalan Kia Peng, in Kuala Lumpur's "Golden Triangle" from Malaysia’s Tropicana Corp, for a consideration of RM132.4m. The site is slated for mixed residential/commercial development.
Comments: Think this is better than Iskandar land.
Commentary
Market participants seem to be playing a game of “prisoners’ dilemma”. I shall summarise our “Market Participants’ Dilemma” below:
i) You buy, others buy, Everyone makes money when markets go up.
ii) You buy, others don’t buy, You may get stuck.
iii) You don’t buy, others buy, Others may get stuck.
iv) You don’t buy, others don’t buy, the market does not move.
Similar cases shall apply for a bearish scenario.
This is why position trading matters more in such a market. For position trades, you expect to get stuck at least for a couple of weeks. This is what is happening in markets that are moving at the moment. Participants take a longer view and so everyone still buys. If no one wants to get stuck in the short-term, some markets (like Singapore) do not move much.
Friday, 29 November 2013
A New Perspective: China Property Curbs May be Positive for Stocks
Much has been written and reported on China property curbs by the central government. Much has been its dampening of the property market and property developers. The stock market has been hit to some extent as upside on property developer stocks have been limited. Is the market really so bearish or are we missing a different picture?
Let us look some indicators:
1) China’s 7+% GDP Growth moving forward is still amazing. Yes, it is not as good as before. They are in a “slow down”. But how many other countries have such growth numbers?
2) Consolidation within industries. We have all noted such announcements of public-listed companies but these numbers do not truly reflected the unreported private deals going on. The fact that big fish are taking out their smaller competitors by acquiring them is a bullish sign.
Now, think about why the China property market has boomed. We have all read about the “new rich” in Asia. Many business men have made their fortunes in China’s boom days. Some of their money has gotten to acquire property. Simple trend.
Now, consider that China has capital controls on the movement of RMB. Much money that has been earned from China’s domestic boom and growth in consumption is in RMB this money stays within China, mostly. Therefore, if there are property curbs in China to ease investment in the property market, the hot money has to flow somewhere else. China does not have a vibrant fixed-income (debt market). RMB is not a reserve currency for trading commodities. The simplest solution is to park money in stocks.
Shanghai Composite, SSE is trading at 10.97x P/E currently and at 8.56x FY14. This is attractive considering other major markets are trading above 10x FY14 P/E. The fact that China companies have been missing profit expectations puts a low base their earnings benchmarks. Any improvement in earnings in 2014 will make the market appear even cheaper in terms of FY 14 P/E.
I suggest we consider looking at blue-chips listed in Hong Kong and Singapore. December may be an excellent opportunity to accumulate when activity in the market is seasonally lower. Chinese New Year comes at the end of January 2014 so it may not be wise to be too hesitant.
Let us look some indicators:
1) China’s 7+% GDP Growth moving forward is still amazing. Yes, it is not as good as before. They are in a “slow down”. But how many other countries have such growth numbers?
2) Consolidation within industries. We have all noted such announcements of public-listed companies but these numbers do not truly reflected the unreported private deals going on. The fact that big fish are taking out their smaller competitors by acquiring them is a bullish sign.
Now, think about why the China property market has boomed. We have all read about the “new rich” in Asia. Many business men have made their fortunes in China’s boom days. Some of their money has gotten to acquire property. Simple trend.
Now, consider that China has capital controls on the movement of RMB. Much money that has been earned from China’s domestic boom and growth in consumption is in RMB this money stays within China, mostly. Therefore, if there are property curbs in China to ease investment in the property market, the hot money has to flow somewhere else. China does not have a vibrant fixed-income (debt market). RMB is not a reserve currency for trading commodities. The simplest solution is to park money in stocks.
Shanghai Composite, SSE is trading at 10.97x P/E currently and at 8.56x FY14. This is attractive considering other major markets are trading above 10x FY14 P/E. The fact that China companies have been missing profit expectations puts a low base their earnings benchmarks. Any improvement in earnings in 2014 will make the market appear even cheaper in terms of FY 14 P/E.
I suggest we consider looking at blue-chips listed in Hong Kong and Singapore. December may be an excellent opportunity to accumulate when activity in the market is seasonally lower. Chinese New Year comes at the end of January 2014 so it may not be wise to be too hesitant.
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