Sunday, June 7, 2015

Interest Rates and Oil Prices

Dear all,

Hope you had a restful weekend. I took one week break in overseas before resuming my work. The internet here is really bad I ll just write something light to start the week.

Since the start of May, STI has been falling off its high of 3549 and broke 3400 psychological support to close at 3300+. P/E ratio stands at undemanding 13.3. Despite showing significant progress in its road to economic recovery, till date it has not cross the pre-financial crisis level of 3900. 


I ll discuss two reasons affecting the performance of STI and also the chart.

Falling oil prices


KeppelCorp, SembCorp and SembMarine are STI blue chips with significant exposures to energy sector. As expected, all reported weaker earnings with falling oil prices. While we were expecting some cushioning effect as SembCorp Industries derives its revenue from three source of businesses: utilities, marine and urban development; its disappointing earnings from all segments became a double-blow to its performance. Its price went downfall from there and for the first time since 2011 it closed below $4.00

In Jan this year, KeppelCorp announced the privatization of Keppel Land, a right move in my opinion to gain more exposure to property sector and diversify itself. They also own Keppel Infrastructure Trust and Keppel T&T, a logistics company which performed fairly well especially with one off gains in listing of Keppel DC Reit. Despite being a state enterprise and a reputable company worldwide, it has not win any rig contract year to date. Investors are currently keeping a close eye at their forward earnings.

Even as oil glut persists, OPEC has poised to keep pumping to maintain its current production rate, which send the stock price further south. If oil prices continue to stay depressed for long periods, it could affect earnings in the long run.

Interest rates


The economic uncertainty in Singapore brings about fears of interest rates rising too soon. As interest rates is about costs of borrowing funds, the increase will have some negative impact on businesses especially on companies carrying much floating rate notes, as higher interest expense lowers their profit. Currently rig companies still have contracts in their order book secured in the past. However they could face problem servicing their debts moving forward if not enough contracts are secured to generate cash flows to repay debt holders. One solution is to issue new debts to repay old ones, but their new securities likely comes with higher interest and this debt could potentially create a snowballing effect if not properly managed.

After all buying shares is owning a small percentage of a business/company. Investors are generally reluctant to pay more for companies as they become more vulnerable to interest rates hikes.
Secondly, there will be lesser supply of money for stocks with rising interest rates as it encourages investors to place their cash in money market instruments or fixed deposits. Lesser money flowing into stocks lowers demand for stocks, and potentially sending stock prices down.

While in theory, a rising interest rate results in lower corporate profits as a result of high borrowing costs; this is only true when interest rates are at a level that is unsustainable. Should the economy recovers, any rise in interest rate in a fairly restrained manner should be manageable. Let's say if Federal Reserve announce a hike ,it should be good for the stock market because it indicates that the economy is growing and recovering strong such that the interest cost is offset by increased on earnings. Rising interest rates is like Fed signifying to me that the economy is doing better. The experience is similar to fed scaling back in bond purchases back in late 2013. Dow Jones continued it surge, contrary to the belief that market will slide downwards.

Other possible economic reasons affecting the index include:

  • Weak domestic exports
  • Greece worries
  • Slowing emerging markets growth
  • default risk on USD-denominated emerging corporate debt 
  • Slow pace of GDP growth
  • Deflation


Dow Jones Industrial Average (DJIA). 2012 till present

Technical Analysis of STI


Straits Times Index (STI)

Though Singapore's Index has fallen about 200 points since 16th April, I am still bullish on STI in the long term. The chart above shows the price movement is well supported by the long term trendline.

The disappointing STI performance perceived by many reminded me about the book which discussed about the Newsweek cover in 2007 that asked that question "the Death of Equities" which not long before the start of a 18 year bull market. In our context, it's in 'Singapore's equities' and my point is that bull markets are born on pessimism. Stock prices are generally cheaper and it's time to be greedy when everyone is fearful. 

When buying shares, I always put more emphasis on the long term fundamentals of the business than the overall state of economy. Many companies have fallen in every economic downfall; but some tide through and emerge to become stronger and better from a crisis. These are companies too look out for: strong economic moats, good management and strong fundamentals. 

So do stock market daily fluctuations truly reflect the fundamentals/potential earnings of the companies?

Let's look at Silverlake Axis.
In my previous blog post I mentioned that their operating costs are mainly in Ringgit Malaysia (RM) and credit card segment in Yen. This week, JPY depreciated against USD and MYR weakened due to falling oil prices and scrutiny on 1MDB. Yet the stock price reacted negatively to the good news; falling 7.52% in a week.

So ignore markets noises and focus on market fundamentals. The picture below illustrates it well :D



Some updates

1. Thanks to all my Facebook Fans. The total 'likes' surpassed 100 last week! :) 
It's been a pleasure blogging to contribute and learn with the investing community.

Moving on, I ll be kickstarting a blog series on 'making sense of financial documents' for new investors to better understand financial statements, analyze financial ratios, and know the key areas to focus when reviewing reports. And to differentiate my series from investing books , I ll draw comparisons from annual reports of Singapore stocks of various sectors in my analysis. 

2..To my Twitter followers: I have decided to use my personal account- 'makesmewonder' for all future tweets because the current one '_eyeofthestorm' was hacked before. I use Twitter to notify any portfolio change, share investing quotes, re-tweet economic updates, and notify on my blog updates. The follow button (top right hand corner) has been updated too. 

Thanks for reading my blog! Hope you enjoyed reading and benefited from it. Whenever I update my blog series/ blogposts or making adjustments to my portfolio, I'll  post them on my Facebook. To be the first few to be notified and to stay in touch, be sure to follow me on Facebook my liking my page by clicking here or at the top right hand corner (in desktop view)! :) Do also share my posts if you believe my writing could benefit more people. 


4 comments:

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    Replies
    1. Thanks Amanda for dropping by my blog and the opportunity to work together.

      Will be dropping you an email soon.

      Cheers,
      EoTS

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  2. Looking forward to your blog series on 'making sense of financial documents', I'm sure that it would help a lot of novice investors better understand what they're investing in :)

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