The Singapore second-
and third-liners all moved up strongly this week mainly due to rebound in crude
oil prices. However, the STI still largely remains in the doldrums. This begs
the million-dollar question: Will the STI move up soon?
The HK market has moved
up quite a fair bit in the past 3 months or so. My strong sense, based on both
my fundamental and technical analyses, is that the uptrend of HK market is
still intact and the China market and Singapore market will start to move from
here onwards. The following reasons will lend support to my prognostication.
1. Inclusion
of RMB in SDR
As of 1st
October 2016, the Chinese renminbi (RMB) has been included by IMF in the
Special Drawing Rights (SDR) together with four other major currencies -- the
U.S. dollar, euro, the Japanese yen, and pound sterling. The SDR is an
international reserve asset, created by the IMF in 1969 to supplement its
member countries’ official reserves. This will help RMB to be more
internationalised and increase the foreign funds’ interest in trading stocks in
Shanghai and Shenzhen stock exchanges, partially through HK stock exchange.
2. The
countdown to Shenzhen –HK Stock Connect
The Shenzhen-Hong Kong Stock
Connect will be rolled out by end of 2016 and so far most pundits believe it
will take place in November. This is a strong booster to stocks listed in HK
Exchange, especially H-shares.
3. China
expansionary PMI
The China Caixin Manufacturing PMI announced on 30 Sep is 50.1, and the
official government Manufacturing PMI is 50.4. It has been a few months for this
economy leading indicator to hover above the expansionary level of 50. This
should give impetus to smart monies to enter the China and Hong Kong markets.
The China August railway freight volume increased by 1% compared to the
same period last year. This number may seem insignificant but it is the first
growth registered in a single-month freight volume in the past 32 months. The
electricity power consumption in August grew 7.8% compared to the same period
last year. The RMB loans were up 11.6% in August as compared to August 2015. These
three important figures that economists monitored closely for the health of
China ‘s economy have all shown obvious improvement and this should translate
into an imminent strong rebound in China’s economy and thus the stock market
performance.
4. Entry
of A-shares into Morgan Stanley Composite Index (MSCI)
On 29th
September, MSCI Inc. noted that Shenzhen-HK Stock Connect will allow foreign
investors to put their money in the US$6 trillion China stock market, and this
should help international investors solve their problems of bringing their
investment money out of China.
It is expected that MSCI
will announce the assessment of all its indexes in June 2017 and there is a likelihood
that China’s domestic equities (A-shares) can be included into MSCI emerging-market
index, which is tracked by investors
with US$1.5 trillion in assets, even before June 2017’s announcement and if
this happens, it will prop up A-shares prices more. The entry into MSCI Inc.’s
benchmark indexes will turn renminbi into a truly international currency.
5. Market
Reforms taken seriously in China
China stock market has been a closed market that used mechanisms
like freezing the market and making it illegal to short, using government funds
to buy shares -- interventions that are not welcome among global investors.
However, there have been a number of market reforms in progress.
In February, China regulators allowed qualified traders to shift money in and
out of the country on a daily basis, a key change for open-ended mutual funds
and ETFs. In May, domestic stock exchanges published rules restricting trading
halts. In June, China gave a 250 billion renminbi (US$38 billion) investment quota to the US, allowing American institutions to invest overseas
renminbi in mainland markets. The progress made has shown China’s determination
to make itself link to the world and this should augur well for the China stock
market as well as for the world economy.
6. Equity
Risk Premium are telling us the markets are undervalued
The historical average
p/e for matured stock markets are generally around 15x. But when the interest
rates are low, the more practical way is to use equity risk premium to
determine if the markets are undervalued or overvalued.
Equity risk premium is
the excess return that investing in the stock market provides over a risk-free
rate. A survey of academic economists gives an average range of equity risk
premium of 3 to 3.5% for a 1-year horizon.
From the Business Times
Weekend Oct 8-9, 2016, we can obtain latest p/e of various markets. The estimated
p/e of HSI is 13.1x, STI is 13.8x and SHCOMP is at 14.1x. The p/e of US S&P
500 is currently 18.3x. If we benchmark against fixed deposit rates, with about
1.5 % per annum, as the risk-free investment, the equity risk premiums are 6.13%,
5.75% and 5.59% for HSI, STI and SHCOMP respectively, which are all better than
the range of 3 to 3.5% as recommended by economists.
From
mathematical calculation, p/e needs to be around 20x for equity risk premium to
be at 3.5% with respect to a one-year-risk-free rate of 1.5%.
This shows
that the stocks in Singapore, HK and China are all very cheap compared to putting
money in the banks or with government bonds.
The current US
two-year treasury bond yield is only at 0.838% partly because all investors are
treating US dollars as the safe haven. So, even the USA market which is
perceived to be lofty, with p/e of S&P at 18.3x, is still considered as undervalued.
7. The
charts are telling us an uptrend has started
The charts of STI and
SHCOMP have shown that both markets are starting to move up and the momentum
should be increasing soon. Hang Seng Index (HSI) for HK market has already
experienced a bull run and the uptrend is intact.
I hope I
have given all a clear picture of why the Singapore and China markets will
start its bull run soon. Singapore market will not be lacklustre anymore. I
have moved some of my money back to Singapore market after about 20% gains made
from investing in HK market for the past 6 months or so.
Download the
mobile free apps: InvestingNote and you can find remarks of my recommendations
like Rowsley and Ezion W200424. For the latter, I got in at an average price of
5.088 cts on 8 Sep 16, and now it is 8 cts --- a whopping surge of 57.23% in exactly a month.
Luck? Not really. It is still about old-fashioned hard work, research, research
and research.
For my
estimation done in InvestingNote, I will set a target price for a stock I
recommended to buy or sell. Once the target price is reached, I will likely
post another estimation to ride the trend. But in actual investment, once I get
hold of a growth stock and when its price keeps ascending, I will not sell it
until Mr Market signals to me that the reversal is imminent. You could see that
I have kept raising my target prices for Ezion W200424 in InvestingNote as I am
still holding on to this rare and beaten-down gem.
The shrewd
investors and smart money have to move their funds to a more lucrative asset
class. Period.
Superphang
