STI looking cautiously bullish

THE Straits Times Index (STI), a capitalisation weighted index that tracks the performance of the top 30 companies listed on the Singapore Exchange, has been trading near price-to-book (PB) ratio of one despite US indices reaching ballooned PB ratios of above 3.3 in recent record high trading days. This suggests a clear sign of valuation disparity.

Driven by real estate investment trust (Reits), developers and financials, STI has recovered from the bottom of 2,993 in January to this year's peak of 3,415 in April and recent high at 3,285. Similarly, recent data shows signs of Singapore economy stabilising and possible bottoming out after five quarters of declining growth.

Catalysed by growth in finance and telco industries, the Singapore economy grew 0.5 per cent year-on-year in the third quarter, slightly better than the previous quarter. While non-oil domestic exports showed a decline of 9.6 per cent, there was an improvement compared to a drop of 14.7 per cent in the last quarter. The unexpected 4 per cent growth in manufacturing output in October has also further strengthened the positive sentiment in the market.

The easing of monetary policies and the US Federal Reserve's dovish stance, together with the partial Sino-US trade deal, fuelled our trade-dependent economy.

With these optimistic signals, are we seeing a reversal of the downtrend? Is the worst over? Let us examine from the perspective of technical analysis.

The 20-day MA line crosses over 50 and the 200-day MA line when both exponential moving average (EMA) and simple moving average (SMA) are applied to the daily chart of STI.

Adding another indicator, the Stochastic Oscillator (SO), into the chart, the recent selloff has pulled the SO lines near the oversold territory but shows no clear sign of crossing upward. This suggests that the index might reside at the oversold territory for a period of time before charging to a higher landscape.

Observing the trend line, the higher-low in October and higher-high points in early November again signify the index is stretching gradually northward. However, the index is still far from the higher-high cap seen in April. This shows that the index is consolidating and waiting for a strong catalyst, perhaps a clearer trade deal or an end to the unrest in Hong Kong.

Based on the Fibonacci retracement momentum indicator shown in the chart, drawn from the peak at 3,641 (in May 2018) and trough at 2,955 (in October 2018), the key Fibonacci ratio support level of 78.6 per cent coincides with the trough at 3,104 point seen in May 2019 and a few other support points seen in August to October this year. The indicator faced a rejection at the 78.6 per cent level but managed to pierce through the 61.80 per cent level (3,217), resulting in an upward swing. However, the index faced resistance at the 50 per cent ratio near 3,300 which is a key resistance for it to stay bullish.

In view of the above-mentioned significant yet weaker bullish signals and the fear of a trade deal not happening by Dec 15, 2019, I remain cautiously bullish for shorter term trading. Given the current uncertainty in Hong Kong, we should also not rule out the impact of geopolitical risk following US President Donald Trump's intervention.

Nonetheless, longer term investors can be more confident of a positive outlook after the US and Singapore elections next year. The STI is still priced at 70 per cent discount compared to the US market in terms of PB ratio. The three-year annualised return of 8 per cent (inclusive of dividends) does look attractive - not forgetting the stimuli by central banks around the world and the almost sealed trade deal that may lift our economy to a goldilocks state in 2020, a moderate yet stable growth.

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