Dear all
STI has been on a tear since the start of the year. With reference to my write-up published on 5 Jan 2022 (click HERE) citing that Asian indices are likely to outperform that of the U.S. market in 2022, STI has indeed notched strong year to date (“YTD”) gains of 10.1% to close 3,439 on 16 Feb 2022. This outperformance is especially stark if we compare it to S&P500’s -6.1% YTD returns. As I have shared with Lianhe Zaobao on 9 Feb 2022, I personally feel that our STI is overbought in the near term with several near-term headwinds.
Let’s take a look at my basis below.
Some near term headwinds
a) Economic data
U.S. latest CPI numbers posted its largest annual gain in four decades, at 5.5% on a YoY basis, above market expectations. U.S. markets sold off further after St. Louis Federal Reserve Bank President James Bullard said the data had made him “dramatically” more hawkish. Mr Bullard, a voting member of the Fed’s rate-setting committee this year, said he is looking at a full percentage point rate hike by 1 Jul 2022.
PPI data released this week also showed higher than expected numbers. Some FOMC Members such as Waller, Williams and Brainard will be speaking on this Fri and Sat. Any hawkish comments from the FOMC members may increase market’s expectations of rate hikes.
b) U.S / Russia tension
In a Reuters’ article dated 16 Feb 2022 (click HERE), it reported that Russian military presence is actually growing at Ukraine’s borders, as compared to earlier articles on Russia pulling back his forces. Suffice to say that the situation and newsflow on this front remain fluid and subject to sudden changes given that relations between Russia and U.S remain tense.
c) U.S / China trade tensions
In a Reuters’ article dated 7 Feb 2022, it was reported that U.S. is getting impatient with Beijing for failing to fulfil their commitment to buy US$200b in additional U.S. goods and services in 2020 and 2021 under the “Phase 1” trade deal. Any heightening of this U.S / China trade tension is potentially a headwind for the market.
d) Earnings
We are in the midst of the earnings period where U.S. and Singapore firms are releasing results. Oftentimes, companies’ share prices may fall when they report results or / and guidance below expectations, Meta platforms (Facebook) is a case in point where it dropped 33% from US$323 (on 2 Feb 2022 just before results) to an intraday low of US$216.15 on 8 Feb 2022 in four trading sessions, after posting weaker than expected guidance. Although I am unable to quantify this, the magnitude of decline on results / guidance miss typically exceeds that of share price increase on results / guidance beat. (i.e., fear seems more powerful than greed).
e) Flattening of yield curve
U.S 10Y and 2Y bond yields closed 2.045% and 1.529% respectively on 16 Feb 2022. Although banks thrive on rising yields, a flattening of the yield curve may affect their net interest margins in the longer term. The yield curve has flattened quite a bit from 80 basis points end Dec to 52 basis points in less than 1.5 months. If short term 2Y yield rise much faster than 10Y yield, this may lead to inversion. Based on a 2018 report by the Federal Reserve Bank of San Francisco, since 1955, the U.S. curve inversion has preceded each recession with a recession happening between six and 24 months later. There was only one false signal since 1955.
The yield curve last inverted in 2019 which was followed by a recession in the U.S in 2020 (albeit caused by the pandemic) This is something to ponder over the medium term.
f) Overbought bank shares
It is well known that our Singapore bank shares have been on a tear since the start of the year. Based on Table 1 below, UOB leads the pack by posting a YTD gain of 21.7%! OCBC has notched 12 consecutive days of rally from 26 Jan to 14 Feb with its RSI hitting a ten year high of 86.6 on 14 Feb. Based on Bloomberg dated 16 Feb 2022, DBS is trading at 1.6x FY22F P/BV, two standard deviations from its 10Y average P/BV 1.2x which seems expensive to me. Suffice to say that our bank shares are rather overbought with likely limited near term potential upside.
Any weakness or profit taking in our bank shares may have knock on effects on our STI given that they comprise of approximately 44.8% of STI (click HERE). This also brings us to the next point.
Table 1: YTD gains – Bank shares
Source: Ernest’s compilations
g) MSCI Singapore index rebalancing end Feb
MSCI Singapore index will do a rebalancing end of this month. The weightage for our three local bank shares will be reduced to make way for SEA. As our bank shares comprise of approximately 44.8% of STI index, any selling in our bank shares may affect STI. As I have shared with my clients last week, it is likely that our bank share prices may have peaked last week, or are going to peak this week, judging from the historical price action of the bank shares seen in Aug 2021 and Nov 2021 where such rebalancing also occurred.
Stocks sorted by total potential return
In line with my usual practice, I have sorted some SGX listed stocks by total potential return using Bloomberg data as of the close of 31 Jan 2022.
I have generated two tables below and have appended the top 10 and bottom 10 stocks for readers. Table 2 lists the top 10 stocks sorted by highest total potential return. These top 10 stocks offer a total potential return of between 49.2 – 85.1%, based on the closing prices as of 31 Jan 2022. (Most importantly, please refer to the criteria and caveats below). [My clients will receive the entire list of my compilation of 104 stocks and some highlighted stocks immediately– see important note 4 below.]
Table 2: Top 10 stocks sorted by total potential return
Source: Bloomberg 31 Jan 2022
Table 3 lists the bottom 10 stocks sorted by total potential return. These bottom 10 stocks offer a total potential return of around -6.2% to +11.5%, based on the closing prices as of 31 Jan 2022.
Table 3: Bottom 10 stocks sorted by total potential return
Source: Bloomberg 31 Jan 2022
Criteria in generating the above tables
a) Mkt cap >= S$400m to potentially capture more market opportunities;
b) Presence of analyst target price.
Very important notes
a) This compilation is just a first level stock screening, sorted purely by my simple criteria above. It does not necessary mean that Aztech is better than Wilmar in terms of stock selection. Readers are still required to do their own due diligence and form their own independent investment decisions;
b) Even though I put “Ave analyst target price”, some stocks may only be covered by one analyst hence may be subject to sharp changes. Also, analysts may suddenly drop coverage. Furthermore, Bloomberg may not have captured all the analysts’ target prices and some of these target prices may not be the most updated figures;
c) Analyst target prices and estimated dividend yield are subject to change anytime, especially after results announcement, or after significant news announcements. For example, I have previously highlighted in my 7 Nov writeup that even though the average analyst target price for Riverstone is $1.27, odds are likely that analysts may reduce its target price downwards post its 3Q results on 9 Nov (after market). The average analyst target price has indeed been revised 28% downwards to $0.920 post 3Q results;
d) In my list of 104 stocks above, I have highlighted some stocks in green (visible to my clients but not for readers) which my private banking clients and I are looking at. Naturally, as I have a limited portfolio size and bandwidth, I do not intend to buy all the highlighted stocks. However, some of my private banking clients have a bigger portfolio and hence they have the capacity to accumulate 10-20 stocks (not only limited to Singapore) with meaningful quantities. Notwithstanding this, we may change our stocks accordingly as variables change (e.g., newsflow on the specific stocks; prices have moved etc.)
e) The above stock prices and average analyst target prices are rounded to two decimal places.
Conclusion
In a nutshell, given that our SG bank shares have risen easily 12.7% since 31 Dec 2021, with UOB leading the pack by being up 21.7% YTD, it is reasonable to assume that some of the optimism in the banks’ results and outlook have been baked into the share prices. Furthermore, given the MSCI Singapore index rebalancing in end Feb, my personal view is that our SG bank share prices may have peaked last week, or are going to peak this week. Given the aforementioned headwinds, it is likely that STI may face some profit taking in the near term. However, the long-term outlook continues to be robust and readers can consider to use this up-move to rebalance their portfolio.
Readers who wish to receive the entire compilation of the 104 stocks sorted by total potential return can leave their contacts here http://ernest15percent.com/index.php/about-me/. I will send the list out to readers on 19 Feb 2022.
Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/
P.S: I have shared with my clients last week that my personal view is that our bank shares’ prices may have peaked last week, or are going to peak this week. given the aforementioned points.
Disclaimer
Please refer to the disclaimer HERE