On 4 January 2018, the Dow Jones Industrial Average surged above 25,000 points. Almost immediately, President Trump cheered and promised to deliver another 20 percent gain to the US stock market. Reacting with much exuberance, investors pushed the Dow past 26,000 on 16 January 2018 in a matter of less than two weeks. By 26 January 2018, the Dow rose to as high as 26,616 points.
Almost every other day, US stocks made headlines and closed at record territories. Recent corrections were short-lived and the magnitudes were also small. As a result of the huge run-up, many investors waiting for a major correction have lost their patience. Instead, they have jumped onto the bandwagon to chase stocks at high prices, along with the traders and speculators. However, they could easily see their profits wiped out when a major correction emerges.
The fear of losing more puts this group of investors constantly on the edge, as they hope to exit the market before the next correction comes. Repeating the cycles over and again, these investors more often than not underperform market returns, especially in a bull run.
There is a saying in the financial markets: Go against the crowd. The advocacy of “reverse psychology” is further popularised by the Oracle of Omaha Warren Buffett who echoed the belief that “one should be fearful when others are greedy.”
Yet, there is a fundamental problem with taking the contrarian approach. How high is high and the sky may be the limit. So how do we know if valuations have run ahead of fundamentals? Some traders use the Relative Strength Index (RSI) – a technical indicator – to see whether the stock market is in “overbought” territory. But what happens if the RSI continues to stay in “overbought” territory?
The trickiest thing about Trump is his unpredictability and his inconsistency. Last year when he became US President, Trump publicly iterated that the US dollar was too strong. To meet Trump’s demands, outgoing Federal Reserve Chairwoman Janet Yellen managed to weaken the strength of the US dollar over the past year. As at the time of writing, the US dollar index has already slipped below 90.
But Trump has changed his stance on the strength of the US dollar when the US Secretary of Treasury Steve Mnuchin recently accelerated the currency’s decline after commenting that a weaker US dollar would benefit US exports.
Due to the intense sell-off of the US dollar, Trump retracted and said that Mnuchin’s remarks were “taken out of context”. Taking a step further, Trump even said “a strong dollar is preferred”!
Indeed, Trump’s words definitely helped to give some support to the US dollar, at least temporarily. But in my opinion, the longer-term policy for the US is to abandon the “strong dollar” mantra.
In 2017, the US stock market was driven higher, and one of the main reasons was the weakness in the US dollar. In similar context, Japanese Prime Minister Shinzo Abe had also lifted the Japanese stock market by allowing the Japanese Yen to weaken.
On the contrary, Singapore dollar has strengthened against the US dollar, thus putting some pressure on the performance of our local stock market. This was the reason why our local stock market underperformed Hong Kong, since the latter pegs its currency to the greenback.
That said, while many local investors have exchanged their monies into Hong Kong dollars to invest in Hong Kong, they should bear in mind that their returns can be impacted by the exchange differential when the Singapore Dollar appreciates.
Interestingly, over the past year, even though the US Dollar has depreciated across the board against major currencies like the Chinese Renminbi, Euro Dollar and Great Britain Pound, the US Dollar did not depreciate significantly against the Japanese Yen. From this, we can infer that the Japanese government has also allowed its currency to weaken in order for its goods to stay competitive.
According to a research report by Goldman Sachs (GS), the bulge bracket bank published its 2018 top stock picks for American stocks. Facebook topped the list, followed by Amazon. Out of the 14 companies that were listed, 10 companies belonged to the IT sector. While GS is clearly bullish on the IT sector this year, our local stock market is unfortunately lacking in offerings for this sector. As such, local investors can only try to discover undervalued companies in traditional industries.
In the last two years, Hong Kong-listed casino operators in Macau have posted impressive gains. At the beginning of 2016, Galaxy Entertainment Group was only trading at HK$20 per share. Today, its shares have run up to almost HK$70. Local-listed Genting Singapore PLC also posted significant gains, although still somewhat trailing the Hong Kong counterparts.
Over the last 10 years, amongst all the gaming stocks, I have encouraged investors to consider Galaxy Entertain Group. But recently, Wynn Macau’s stock took a beating following the sexual harassment allegations against its Chairman and Chief Executive Steve Wynn surfaced. Investors with bigger risk appetite can consider buying the stock as I believe the scandal would not have a significant impact on the casino’s operations. In its latest earnings release, Wynn Macau’s results also far surpassed market expectations. Despite that though, in the long term, Galaxy Entertain Group is still my best pick amongst gaming stocks.
Previously, in view of rising oil prices, I have mentioned that investors should consider Hong Kong-listed Chinese oil stocks and local-listed oilfield services stocks. In my opinion, oil prices should continue to climb, as Saudi Aramco is seeking a listing. The national oil company of Saudi Arabia is the second largest by proven reserves and higher oil prices would translate to higher valuation for its assets.
Apart from Saudi Arabia, Trump also wishes for higher oil prices. In his view, alternative energy are expensive to produce and hence less economical than oil. In addition, he can raise US oil export revenue if US oil companies produce more.
In 2017, China’s economy expanded 6.9 percent as global economic activities picked up and bank stocks are amongst the biggest gainers. Whether it is local or Chinese bank stocks, investors should hold on to their shares as global equities continue to run higher.
Many retail investors do not understand this logic and have taken profit from some of their positions to chase after stocks that are being speculated. But remember, a market correction is indiscriminate: Investors that chase after stocks at high prices have more to lose.
In the previous issue, I have mentioned about A50 ETF. The “A50” refers to China’s 50 largest companies by market capitalisation. Last year, CSOP FTSE China A50 ETF (2822.HK) registered gains of 41.6 percent while iShares FTSE A50 China Index ETF (2823.HK) rose 42.5 percent. Their performance outperformed that of Hang Seng Index, indicating that China-A shares are in greater demand.
At the start of 2018, China-A shares are gaining momentum. In 2017, China’s gross domestic product exceeded Rmb80 trillion, almost twice that of 2010. As such, investors should keep their eyes on A-shares ETF as well as H-shares ETF. For those interested, SGX FTSE China A50 Index Futures are the most-actively traded in the world.