Dear all

It has been some time since I last wrote an article on market outlook. I have been extremely busy for the past three months where I have been meeting companies and other associates. (Check out my LinkedIn HERE). I have also just arranged an exclusive meetup with Lendlease Reit Manager CEO, Kelvin Chow and Head of Investor Relations, Ling Bee Lin with my clients last Friday. (Click HERE). As of last Friday, Lendlease Reit’s market capitalisation is around S$1.16b.

With reference to Chart 1 below, October continues to see the third monthly outflows of funds from China equity markets. CSI 300 is down approximately 10% year-to-date (“YTD”). This positions CSI 300 to a third consecutive year of losses, a record so far if it materialises.

Elsewhere, markets are not much better. Hang Seng closed at 17,172 on 20 Oct 2023, down 13% YTD. This is the lowest close since 10 Nov 2022. STI closed at 3,077, down 5% YTD, the lowest close since 28 Oct 2022.

Chart 1: Foreigners’ selloff of Mainland shares in the past four months

Source: Blomberg Oct 2023

 

Are we on the verge of an apocalypse? How should investors position their portfolios?

Below is a sample of my market observation and my personal market view which I typically send to my clients on a regular basis. This is for general reference only. Readers who wish to seek specific advice with respect to their own unique situations should engage their financial advisors or banker.

  

Readers who are interested to receive such articles can consider signing HERE. 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.

 

Personal view – I am accumulating on weakness via a staggered approach

Notwithstanding the myriad of risk factors, I am accumulating on dips into companies which I feel should report good and improving results.

 

Why am I bullish in the markets?

a) Pessimism abounds – potential contrarian indicator

Based on one measure done by Bank of America, their bull and bear reading has dropped to 1.9 as of 18 Oct. A reading below 2.0 is seen as a potential buy signal. According to their studies, since 2002, there has been 20 such occurrences. Subsequent to such occurrences, global and U.S. equities registered a median gain of approximately 7.6% and 5.4% respectively.

Based on a report by Morgan Stanley, global funds are the least positioned in China since 2020, based on their average position in China. CSI 300, having dropped 10% YTD, is on track for its third yearly losses which will be a record, if it materialises.

b) Corporate results should be ok, amid muted expectations

Based on data compiled by Bloomberg, approximately 86 S&P500 companies have reported results through 20 Oct morning, 74% surpassed consensus’ profit estimates, compared with 78% for the entire season a year ago. My personal view is that it is still early in the reporting season. Next two weeks will see more companies reporting results. My gut feel is that overall results should not be too bad, especially when U.S’ economic data for 3Q continues to be pretty strong.

c) China and Hong Kong measures are imminent

For China, some market watchers are hoping to see some economic measures to be announced during the politburo meeting and Third Plenum (dates of both meetings are not announced yet). It is noteworthy that according to Xinhua News Agency, China National Policy Committee (“NPC”) meets on 20 Oct till 24 Oct 2023. An important item on the NPC’s agenda may be the authorization of the State Council to approve a specific amount of local government bonds in advance.

In addition, a potential meeting between US President Joe Biden and President Xi Jinping at the APEC Summit in Nov may offer another potential catalyst.

For Hong Kong, markets will focus on Hong Kong Chief Executive John Lee’s policy address on 25 Oct. Amid other measures, I do hope that Mr. John Lee can reduce stamp duty on both stock trading and property.

d) Various indices reach key support levels

As of the close of 20 Oct 2023, various indices are trading around key support levels.

Firstly, S&P500 closed at 4,224. First key support level is around 4,208 – 4,233 where its 50.0% Fibonacci and 200D SMA reside.

Secondly, Shanghai Composite index (“SSE”) closed at 2,984. Key support level is around 2,960 – 3,000. There is an uptrend line established since 2005 with support around 3,000. With reference to Chart 2 below, it is apparent that SSE bounces off this uptrend line whenever it tests it since 2005. Let’s see whether it can go above its uptrend line in the next few days.

Thirdly, Hang Seng closed 17,172 which is around the low last seen on 4 Oct 2023 and 28 Nov 2022. There seems to be a bullish inverted hammer formed on 20 Oct, signifying a potential bullish reversal. Nevertheless, we still need to see either a gap up, or a long green candle with volume expansion to corroborate this bullish pattern. In my opinion, the probability of a potential bullish reversal is boosted as Hang Seng tests back its prior support last seen on 4 Oct 2023.

Fourthly, STI closed 3,077. Key support level is around 3,060 – 3,100. At this level, STI is already lower than 14 Mar 2023 low (U.S. regional bank crisis) and is at the lowest close since 28 Oct 2022.

Chart 2: SSE tests 18-year uptrend line

Source: Bloomberg 19 Oct 23

e) Seasonality seems to be in favour for equity markets

Based on seasonality, S&P500 performs well at year end, especially in Nov and Dec. According to Ned Davis Research, for the past 14 times when S&P500 has registered a 10% return through July and then dropped in Aug, S&P500 has risen every time over the last four months of the year with an average gain of around 10%.

f) Valuations for Asia seem decent

With the exception of U.S. market, the valuations for our Asian markets look decent.

SSE trades at almost 0.5x standard deviation below its 5-year average PE of 14.5x and 2.0 standard deviations below its 5-year P/BV of around 1.5x.

Hang Seng trades at almost one standard deviation below its 5-year average PE and P/BV of around 11.2x and 1.1x respectively.

STI trades at approximately 1.1x standard deviation below its 5-year average PE of 16.2x. It trades at 1.1x P/BV in line with its 5-year average P/BV.

SSE, Hang Seng and STI have estimated dividend yields of around 3.3%, 4.2% and 5.4% respectively.

 

Risk factors

There are numerous risk factors ahead. Otherwise, the above indices will not be trading at such levels. Nevertheless, if any of these risk factors worsen, the markets may drop more. Furthermore, due to time constraints, I am only listing down some of the risk factors.

a) Further escalation of Israel-Gaza war

Further escalation of Israel-Gaza war may cause oil and inflation concerns to spike. U.S. dollar may also move up amid flight to safe haven. Such consequences may have an adverse impact to the markets.

b) China and Hong Kong policy measures underwhelm market

If China and Hong Kong announce underwhelming policy measures, this is likely to cast a pallor to their already weak equity markets.

c) Poorer than expected corporate results

Next two weeks will be crucial to see how U.S. corporates are faring in terms of their results. My personal view is that the U.S. technology stocks, especially the Magnificent Seven, which have been leading the market most of the time in 2023, need to regain their leadership for the markets’ sentiment to improve and hopefully, markets may stablise and stage at least a bounce in 4Q. Thus, hopefully, most of the results from the Magnificent Seven can surprise on the upside. Tesla reported results last week and disappointed the market.

d) Economic growth is likely to slow in 2024

Economic growth may slow in 2024 given the lagged effects of monetary policy. Moreover, there may be a reduction in spending from U.S. consumers as they have largely exhausted their pandemic savings, coupled with the restart of student loan repayments in October. This may not bode well for U.S. corporate results in CY2024, especially when consensus still projects a 12% increase in earnings and close to 6% rise in revenue for CY2024 based on FactSet Research.

e) Inflation data

Markets are worried that inflation seems to be sticky. Any higher-than-expected increase in inflation readings (especially on inflation readings deemed sticky – see clarification on sticky inflation HERE) is likely to have an adverse impact on the markets. A key data point to watch on inflation is U.S. Core PCE Price Index m/m data. This will be out on 27 Oct 2023.

f) U.S. Fed FOMC

Based on this article on Forbes (click HERE), markets are pricing in a 95% that Fed will hold steady on 2 Nov. U.S. Fed rate decision and press conference will be on 2 Nov 2 am and 230 am respectively. Personally, I think what transpires during the Fed press conference will be very important for markets to chart Fed’s future rate path.

g) U. S. 10Y bond yields soared 107 bps since the last Fed rate hike on 27 Jul

Since Fed’s last rate hike on 27 Jul 2023, U.S. 10-year bond yields have soared almost 107 bps in less than 3 months. The rapid clip at which it increases has exerted significant pressures on the equity markets. If U.S. 10-year bond yields continue their ascent and at such speed, it is likely to have an adverse impact on the equity markets.

h) Republicans have not elected a speaker yet after ousting Kevin McCarthy

U.S. Republicans have not elected a speaker yet. Thus, market is worried that without a speaker, there may be a legislative standstill resulting in a possible government shutdown post 17 Nov.

i) Key chart supports, if broken, may have accelerated declines

We may see continual and accelerated declines if the above highlighted key supports for the indices are broken, especially when it is accompanied with volume expansion and on a sustained basis. In addition, chart reading is subjective in nature.

 

What is next if we decide to buy, or switch out of some stocks to buy others?

Given that markets have retreated quite a bit, besides my usual compilation of SGX stocks sorted by total potential return at the start of the month, I have also sent out a simplified list of SGX stocks sorted by total potential return to my clients as of the close of 18 Oct 2023.

Readers who wish to receive my manual compilation of SGX stocks sorted by total potential return at the start of the month, you can leave your contacts HERE. I typically send the list out to readers around the first weekend of the month, if time permits. (I definitely send out to my clients at least on a monthly basis)

With this list, it may be a good first level screening to decide which stocks to sell into strength, or add positions on weakness, or rebalance your portfolios. Nevertheless, please refer to all the important notes such as criteria and noteworthy points etc. in the list to ensure you are aware of the limitations of such screens.

 

Conclusion

Personally, I am buying on dips. In fact, as markets have retreated by quite a bit, I have judiciously utilised leverage via my newly open margin account and accumulated some blue-chip Singapore and Hong Kong stocks. I have also accumulated some more volatile investments such as Lion-OCBC Hang Seng Tech ETF. Do note that leverage is a double edged sword and not for everybody. Readers and clients who wish to know more about margin financing can refer to this link HERE.

 

Lastly, my usual caveat: Do note that everybody is different

Importantly, do note that the above is based on my personal view premised on my personal portfolio, risk profile, investment horizon and strategy. It may, or may not be suitable to you as everybody is different. Hence it is good to incorporate my general market views with your own due diligence, and taking into account of your percentage invested, risk profile, investment horizon and make your own informed decisions. Everybody is different hence you need to understand and assess yourself. The above is for general information only. For specific advice catering to your specific situation, do consult your financial advisor or banker for more advice.

 

Disclaimer

Please refer to the disclaimer HERE