Current Market Report- Staying on the sidelines

There has been a slight rebound in global markets with STI at 3,220.56, which is a decent distance from its 52-week low of 2,955.68, a 264.88 point difference (8.22%). The same holds for true, where we can see from our STI list here. As you can see here, I revamped the table to include more details of the STI stocks. Last prices are closing prices as of Monday 21 January 2019.

The stock which is closest to its 52-week low is SIA at 5.09%. SATS is the second closest, where it is 5.6% away. You may recall my previous idea of buying at a price of 4.5 but SATS recently ran up and I will be waiting to see if it will fall. Possible reasons for the rebound might include borrowed confidence from the US market, which has seen an impressive rebound itself to 24,706.35 currently.

Major risks entailing this rebound will include:

1) China's slowdown in its economy
Slower growth does mean that China will be able to buy less stuff from the rest of the world. We note that China is the number 1 country where Singapore exports to, so a slowdown here will inevitably spread to our economy.

2) Federal Interest Rate Hikes
I think I said this in previous posts, but this is always worth a mention as interest rates are one of the central elements in an economy. Hikes in interest rates should affect an economy in theory.


Other intermittent risks will be the political instability in US and UK due to the uncertainty respectively arising from Trump and Brexit.

Singapore reits are also pretty overvalued as it seems, and there will definitely be room to fall if major risk 1 and 2 comes into fruition.

As of now, I do not have any ideas of anything to buy, so I will be happy to hear your lovely ideas. Please share and/or comment!

Post-Christmas Analysis- Parkwaylife Reit

Hoping everybody had a great Christmas so far!

As I am writing this, Dow Jones is at its 52-week low of 21,792.20 after suffering a -653.17 (2.91%) drop during Christmas Eve. Since we are on the topic of 52-week lows, here's the updated table for the STI stocks which I have mentioned in my previous blog posts. All prices here are the closing prices on Wednesday 26 December 2018.

Stocks which managed to rebound nicely out of their lows are Keppel, Singtel and SATS. You may recall I mentioned that I am interested in buying SATS at 4.5 and now it is at 4.61, 1.3% above its low. New stocks to the 52-week low list now include UOL, Thai Beverage and UOB which fell a little recently. These stocks also made new 52-week lows during this period which does signify some level of bearishness.

On a very superficial level of analysis, I still think there is room for STI to drop. Currently, it is at 3,011.15, after dropping 39.91 points or 1.31% today. However, it hasn't been really falling in tandem with the US markets in terms of direction and magnitude. It is still short of its 52-week low of 2,955.68 which I think will breach soon. Japan's Nikkei dropped 5.01% during Christmas in the light of US uncertainty and rebounded slightly here.

Although the current US futures are showing a slight rebound here, I am still rather worried about the stock market prospects due to a number of pertinent risks. Firstly, the rate hikes from the Federal Reserve should be top on the list, as an increased cost of borrowing money will contract the economy and pressure the stock markets. Secondly, the current political uncertainty in the Trump administration is worrying too; will the man be impeached? Will he build his wall? Or will he continue his war with China on trade? His unpredictability certainly translates into uncertainty and possibly a bearish stock market. Thirdly, trade war tensions are also key here, where increased tarrifs do adversely affect company profits and the stock market. In the light of these risks, I am waiting to buy at a lower level than current market prices to give myself some margin of safety, should these risks hold true. I will be seeing if STI will hover near the 2,950 mark and see if it will return to 2016 lows. I will likely be a buyer during those lows.

On my radar too are some reits (real estate investment trusts) which are of interest to me. The one that I am most interested in is Parkwaylife Reit, currently trading at 2.62.

I will like to keep this short, so I am going to jump straight into the points that appeal to me. The first highlight is how it is handling the interest rate hikes.

Source: Parkwaylife Reit 3Q 2018 Results Presentation

Its interest cost is only 0.94% which means for every $1,000 it is borrowing, it only has to pay $9.40 in interest costs. This is quite low considering that Federal Reserve recently hiked rates to 2.5%. Notably, its interest cost is one of the lowest among Singapore reits, which gives me much comfort. A good interest cover ratio of 13.5 also means that the reit can pay interest payments for 13.5 years based on its current profit. In terms of interest payment, this is one of the better reits to choose from.

Second point which I like is the increase in Net Property Income (NPI) for this year. This is rather obvious, because it is a nice bonus if the reit can increase its profit so that it can pay out more distributions to its unitholders (aka you and me). According to the presentation, this was attributed to higher rent amounts from the reit's properties. Another plus point is the constant increase of distribution per unit (DPU) for the past 10 years which is a testament to its track record.

Source: Parkwaylife Reit 3Q 2018 Results Presentation

Source: Parkwaylife Reit 3Q 2018 Results Presentation

Other essential details would include the Net Asset Value (NAV) which currently sits at 1.76 and gearing which is 37.7%. From a NAV perspective, the reit might be too overvalued at 2.62 as you are paying 86 cents more for every unit purchase. However, I can understand the premium so far due to its advantages in its more favorable interest rate management. Gearing is also at a comfortable 37.7%, well below Singapore's regulatory 45% for all reits. From a dividend yield perspective, in 2018, the reit is currently trading at about 5% yield. Current 52-week low is at 2.56. 

I will be waiting to see if Parkwaylife Reit will continue to trade lower given the bearish sentiment in the markets. Interestingly, Singapore reits have not been falling as hard as the STI stocks (non-reits). Capitamall Trust is instead near its 52-week high, which I am rather surprised by. 

What are the stocks that you all are interested to buy? Please share!

Federal Reserve hikes rates- Gameplan for now

The most prominent news that has been rattling the markets is the hiking of federal fund rates by the Federal Reserve from 2.25% to 2.5%, for more details, you can read here.

Essentially, when there is a rate hike, the cost of borrowing money is higher which translates into a lower household disposable income. People will have less incentive to spend money when that happens, and businesses will feel the brunt of that in the form of lower profits. That is not the only way businesses will be affected; they will also have to face higher borrowing costs which may lead to slower growth and of course lower profits in the long term. In a nutshell, a rate hike should lead to a hit in the stock market by theory. And so far, the theory is holding true, with markets worldwide taking a hit this week. At the point of this writing, the Dow Jones is 464.06 points down at 22,859.60, a 2% drop.

So that's the brief macro background for today.

Now turning to the Singapore market, I updated the 52-week low table here. As you can see, those which are highlighted are roughly the same (1% above 52-week low) with a new addition of Sembcorp Industries. Interestingly, all the highlighted stocks made fresh new 52-week lows after I wrote my last post, Keppel Corp at 5.89, Sembcorp Industries at 2.52, SATS at 4.55, Singtel at 2.93, Venture at 14.11 and SPH at 2.35. The closing prices I am using here is the prices of Thursday 20 December 2018.

When rates go higher, investors tend to venture out of riskier assets like stocks and buy safe haven instruments such as government bonds (especially US treasuries). The risk premium (the difference between the return of the risky asset in question and the return of risk-free assets) is narrowing. For example, why would I buy a risky asset like a stock when I am only getting extra 1% of yield as opposed to buying a government bond? For reference, the US 10-Year Treasury Note is trading at 2.766% yield at this point of writing. If I would compare with a stock like SATS which is trading at 3.93% at its current price, I need to question if the prospects of SATS are good enough to justify the (3.93-2.766)= 1.164% spread (which honestly isn't that high).

So what's my gameplan for now? Conventional wisdom tells us that the rate hikes will definitely be bearish in the short term for stocks and the 90 day truce for the US-China trade war does not seem to be working well. I will be looking to see if there is further weakness in the Singapore market and see if there are any buying opportunities in terms of undervalued stocks. One of which I highlighted would be SATS at 4.5 at 4% yield. I would also be talking about some REITs which I am currently interested about in my next post.

Stay tuned and happy holidays for the rest of the year!