Good chance of bullish trend continuing for STI in 2019

Published Sun, Feb 24, 2019 · 09:50 PM

THE Straits Times Index (STI) ended 2018 with a 6.5 per cent decline in total returns. The performance of the STI was influenced by several international factors such as the interest rate hikes by the US Federal Reserve, Sino-US trade disputes and China's growth slowdown.

The STI also ended 2018 more than 10 per cent lower than the highest level achieved in 2018.

However, although the STI started 2019 with a decline in the first two trading days, it has staged a strong rebound since, climbing more than 5 per cent. The recovery can be attributed mainly to better investor sentiments following the decline in the previous few months, and anticipation of progress in trade talks between the US and China.

The rebound is also supported by companies generally reporting better-than-expected earnings results, although many firms also warned of slowing growth in 2019.

Short-term view

Looking at the simple moving average (SMA) of the STI, the 20-day SMA has just crossed the 50-day SMA in mid-January. This is generally taken as a bullish signal and is in line with the recent trend of the STI rebounding off the lows at the start of 2019.

However, the STI is trading near the 3,290 region, which is the 50 per cent Fibonacci level drawn between the highest and lowest points in 2018. If the STI manages to break that level, the next resistance should be around 3,370. Otherwise, the next support for the STI would be 3,210.

We believe both international and local fundamental factors also point to a bullish short term performance for the STI which should support the rally into the next quarter of 2019.

Long-term view

Looking at the SMA again, the 50-day SMA has yet to cross the 200-day SMA - this pair is usually taken to be a more reliable and significant gauge of the long-term trend. However, it might be good to note that the 20-day SMA just crossed the 200-day SMA. This could also indicate the possibility of a long-term bullish trend if the current rise in the STI is maintained.

For the longer-term view, however, fundamental factors might play a bigger part in influencing the overall performance of the STI as global trade worries continue to weigh on investors' minds.

US-China trade talks would be closely monitored for any significant breakthrough. American President Donald Trump's willingness to potentially extend the March deadline pushes the impact of the trade talks into the second half of 2019. China's slowing economic growth and weaker expected earnings for companies in 2019 will also affect sentiments in the long run.

We believe that the US Federal Reserve's decision on interest rate hikes would still be significant to Singapore, noting that the Fed has hinted to be patient with rate hikes in 2019. A sizeable proportion of the STI is made up by the three Singapore banks, which are affected by interest rate levels in the US due to their impact on the Sibor.

In summary, the STI has a good chance of continuing the bullish trend for 2019 after the correction in the second half of 2018. Investors have already tapered expectations due to various volatile factors in the previous year, and Singapore's resilient economic fundamentals would be sufficient to anchor the STI's performance in 2019 to possibly outperform its peers in the regional markets.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

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