Little Changes Added Up to Imminent Bull Markets

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 1^st 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 29^th 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

http://superphang.blogspot.sg