Activities in the global stock market have been somewhat muted in the past month. Despite some major indices like the Dow Jones, Straits Times Index and Hang Seng Index continuing to break new 52-week highs, stocks continued to trade range-bound.
The price action suggests that confidence in the global stock market has yet to recover. In fact, stocks quickly went into correction mode shortly after hitting new highs but also rebounded after several days of decline. In moments like this, traders will find it hard to capture turning points in the market.
On 28 June 2017, the Dow gained 144 points but lost ground and fell 168 points on the following day. After which, on 3 July 2017, the Dow again rose 129 points to a new record of 21,562 points.
Rise and fall based on mere speculation
There were no apparent reasons: 28 June was a rebound from 27 June, after stocks fell when the Senate postponed voting to overhaul “Obamacare”. 29 June’s decline was due to European Central Bank President Mario Draghi’s speech on the gradual unwinding of the central bank’s stimulus. Finally, the latest rally on 3 July was merely due to traders speculating on oil and financial stocks. In reality, the factors mentioned above should have little implications, but market participants took the opportunity to speculate on stocks.
Also, volatility in tech sector continued to remain high, owing to the recent report from Goldman Sachs that claimed that US tech stocks are trading at expensive valuations.
Google was further adversely affected after the EU levelled a record-breaking fine of EUR2.4 billion on the tech giant. Just last year, the US slapped Germany’s Deutsche Bank with a hefty fine hence the EU fine on Google is viewed as a retaliatory act that could spark off an underhanded trade war.
The wisdom of Buffett
For the past decades, legendary investor Warren Buffett’s investment strategies have been almost so flawless that his moves in the market are also highly influential.
After passing the US Federal Reserve’s stress tests, numerous US banks made announcements on boosting dividends and share buybacks. Amongst them, Bank of America (BOA) proposed to raise dividends to US$0.48 per share. Buffett may exercise his warrants to buy BOA common shares and hence effectively make himself the top shareholder.
In 2011, Buffett invested US$5 billion to purchase BOA’s preferred shares at an annual yield of 6 percent or US$300 million, and an option to swap for 700 million ordinary shares.
If Buffett were to execute the swap, he would then receive US$336 million of annual dividends. In the meantime, BOA stock price has risen to US$24.32 (as at 29 June), and Buffett’s BOA holding would be equivalent to US$17 billion after the swap, representing a US$12 billion capital appreciation. Together with the annual dividend of US$300 million received for the past six years, Buffett would have made a total return of US$13.8 billion from his investment in BOA!
During the weak economic period of 2011, Buffett’s strategy was to accumulate dividends through preferred stocks instead of bonds since bonds never appreciate in value. Recently, the Oracle of Omaha also made an investment in a real estate investment trust (REIT).
REITs are high-yielding instruments that can also appreciate in value. If the existing properties within a REIT are revalued to the upside, rental income will increase, and the unit price of a REIT will naturally rise in tandem. This time though, Buffett’s initial interest was only US$377 million, a small amount but should be something investors may want to pay attention to.
Currently, the US stock market is trading at the higher spectrum of the range while US tech stocks continue to be pressured by the Goldman Sachs report. Certain tech stocks have indeed traded up to rather high multiples, as Amazon is trading at a price-to-earnings ratio of 183 times – twice that of Hong Kong’s Tencent Holdings!
Therefore, Buffett may be defensive in investing in a REIT. Of course, dividends can increase or fall depending on the overall health of the US economy. Nonetheless, the move can also mean that Buffett views the property and rental market positively.
Include REITs for dividends
Following the observation, investors should also include some dividend stocks in their portfolio. In our local space, investors may consider Temasek-backed Mapletree REITs. After all, the local sovereign wealth fund has an enormous financial power to acquire capital-intensive assets and inject them into Mapletree REITs’ portfolio. Alternatively, investors can also consider Manulife US REIT since its properties are based in the US.
After the latest bout of Fed rate hike, banks will see an increase in their interest rate spreads. Consequently, global bank stocks have been performing rather well, with stocks of Hong Kong banks outperforming its Singaporean peers.
China-Hong Kong bond connect
3 July also marks the first day of the China-Hong Kong bond connect scheme. Market reaction was muted, but aggregate trading volume still amounted to about Renminbi 7.1 billion.
Media coverage of the event was limited even though the global bond market surpasses the global stock market regarding transaction volume as only a handful of retail investors purchase bonds.
For a start, China’s bond market will focus on attracting foreign investments into Chinese sovereign bonds and state-owned financial conglomerates. Over time, Renminbi-denominated derivative products will expand in offerings, and a credit rating market will eventually be established.
HSBC Holdings looking attractive
With it, China can then push their bonds to international institutions more effortlessly. In the long-term, Hong Kong-listed Bank of China (3988.HK) will stand to benefit most since it has been designated as an official clearing and settlement bank for the Renminbi, making it a stock that investors could hold for the next two decades.
There are two types of dividend stocks: high-yield dividend stocks or growth stocks that pay good dividends. Fitting the criteria of both is none other than Hong Kong-listed HSBC Holdings (005.HK).
At the moment, Hong Kong-HSBC offers an attractive yield of five percent. The prospect of wider interest rate spread will also help boost the bank’s profitability. Coupled with the US-led deregulation of financial institutions, the bank may also boost share buybacks to lift the stock price.
Be careful of rumours about “shell” companies
Last week, the Hong Kong Exchange (HKEX) witnessed a plunge in a series of penny stocks. In the past, “shell” status on the Mainboard of HKEX was said to be worth HK$500 million and HK$100 million on GEMS, the junior board. Assuming a shell company has a net asset value of HK$100 million, the shell company would then be worth a total of HK$600 million or HK$300 million respectively.
In the latest penny stock rout, investors were quick to capitalise on the dead cat bounce of a particular shell company after its market capitalisation fell below HK$100 million, which is the value of a shell company in Hong Kong. Shortly after the stock had risen a few times in value, prices started plunging once again resulting in severe losses for retail investors.
There are numerous counters with less than a market cap of HK$100 million in HKEX, but not many of them will become a potential shell company in the short-term. The HKEX has seen more of speculation of reverse takeovers (RTO) of public shell companies than the deals coming to fruition.
Market operators often manipulate the stock prices of shell companies and spread rumours about potential RTO deals. After retail investors take the bait, these operators would dump their stocks and make a windfall profit, leaving their victims to rue their losses.
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They’ll be covering topics on personal finance, macroeconomics and investment strategies to help retail investors make more shrewd decisions especially in the current uncertain and volatile economy. Click on the button above to learn more and grab your early bird tickets. See you there!
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