2018 Outlook What To Expect From Key Asian Equities Part 2

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By :  ,  Financial Analyst

The mature bull market in equities is being backed by a steady pace of growth expansion where the JPMorgan Global PMI stands at 54.0 in Oct 2017 which is the highest since Mar 2015 and a steady decline in unemployment rates around the world. During the later stages of a bull market, momentum–driven plays tend to take centre stage and also a rotation into the laggards that offer cheaper valuations such as MSCI Asia ex Japan, Europe (Stoxx 600) and MSCI Emerging Markets where their 1-year forward price to earnings ratios stand at 12.6, 14.9 and 12.1 respectively versus 18 seen on the U.S. S&P 500.

A stable backdrop in China economy with potential fiscal expansionary policies coupled with the Belt and Road Initiative (BRI) programme to counter the deleveraging policies shall be favourable to commodities and resources related stocks.

In addition, the persistent low inflationary environment in Japan is showing signs of a potential turnaround. After scoring a major victory in the recent national election in Oct 2017 for PM Abe’s ruling coalition, Abe’s camp now has now build-up a significant political mileage to enact expansionary fiscal policies.  A planned “carrot and stick” corporate tax cut is in the pipeline to encourage companies to raise wages by a minimum of 3% in fiscal year 2018. This is a positive development for the Japanese stock market with Bank of Japan’s dovish monetary policy stance versus the rest of the developed countries.

Rio Tinto (ASX: RIO)

Fundamental drivers

  • Iron ore price is likely to stabilise above $54 per tonne after a plunge of close to 25% in Q3 2017. Assisted by higher Chinese steel prices due to production cuts directed by Chinese authorities to curb pollution. These production cuts shall continue in 2018 as President Xi has highlighted in the recent Party Congress to double up commitments on green development in China.
  • Strong balance sheet and cash flow due to recent debt reduction programme.

Technical analysis

  • Continues to evolve in a medium-term ascending channel in place since Feb 2016 after the bullish breakout from its primary long-term descending resistance from Feb 2011.
  • Major support now rests at 65.60 for a potential further up move towards 76.24/77.50 and above it may open scope for a further rally towards 88.50/90.00 resistance (upper boundary of the aforementioned ascending channel, Feb 2011 swing high area & 1.00 Fibonacci projection of the rally from 03 Feb 2016 low).

Bank of China (HKG: 3988)

Fundamental drivers

  • Higher profit margin and better assets quality due to China central government’s deleveraging policies.
  • Cheaper valuation versus banks in U.S., Europe and Japan.

Technical analysis

  • Continues to evolve above its major long-term ascending channel support at 3.30.
  • A break above 4.20 resistance is likely to increase the conviction for another potential upleg to target the median line of the major ascending channel and the previous major tops of Oct 2007 & Nov 2010 which confluences at 4.80.

Sekisui House (TSE: 1928)

Fundamental drivers

  • Changes in fiscal policies in Japan to increase wages for fiscal 2018. A tax plan has been proposed that will allow companies to reduce corporate taxes if such companies raise wages by at least 3% in a year or invest in their employees through skills development training.
  • In November 2017, Japan’s unemployment rate recorded a drop to 2.7%, a 24-year low which indicates a strengthening labour market that will continue to add upward pressure on wages.   
  • Wage reflation theme that can trigger a positive feedback loop into the real estate via rents increases and higher inflation expectations to lift property prices.  

Technical analysis

  • Continues to evolve in a multi-year primary ascending channel since May 2012.
  • Price action has staged a bullish breakout from a “Cup and Handle” bullish continuation chart configuration in place since June 2015 with incremental volume. Recent price action has started to pull-back towards the former neckline of the “Cup and Handle” now turns support at 1976.  The exit potential of the “Cup and Handle” bullish breakout stands at 2450.
  • Momentum indicator (weekly RSI) remains positive without any bullish exhaustion signals.
  • Major support rests at 1620 for a potential up move to target the 2450/2516 resistance. A break above 2516 is likely to open up scope for a further bullish impulsive move towards the next resistance at 2670/2720 (upper boundary of the ascending channel & Fibonacci projection cluster)

City Developments (SGX: C09)

Fundamental drivers

  • Singapore, a small and open economy is set to benefit from a continuation of the on-going global recovery. Median forecast (from Bloomberg) for 2018 Word GDP growth stands at 3.61% which is higher than 3.5% y/y in 2017.
  • The services sector in Singapore which represents almost two-thirds of GDP has started to gain strength after it lagged behind the recovery seen in the manufacturing sector so far in 2017.  Latest Q3 2017 data from the Department of Statistics Spore has indicated the services sector (measured by the Business Receipts Index) has continued to grow steadily at 6.3% y/y from 5.0% y/y in Q3 2017). A further improvement is likely to create a positive feedback loop into the local Singapore property market.
  • The URA property price index (a performance gauge for the Singapore property market) has started to tick up in Q3 2017 where it recorded a growth of 0.5% q/q versus -0.1% q/q in 2Q 2017. This recent uptick is the first rise seen in four years since 3Q 2013.

Technical analysis

  • Continues to evolve in on the upper half of a medium-term ascending channel since its bullish breakout on Jul 2017 from a multi-year descending channel from Oct 2010. The median of the aforementioned ascending channel will act as an intermediate support now at 11.76.
  • Momentum indicator (weekly RSI) remains positive without any bullish exhaustion signals.
  • Major support rests at 10.90 for a potential up move to target the 14.04/65 resistance zone (upper boundary of the medium-term ascending channel & Fibonacci cluster). A clearance above 14.65 may see a further up move extension to target the next resistance zone at 16.30/50 (Fibonacci projection cluster & major swing high area of Sep 2007.

Charts are from eSignal


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