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Steering The Markets In 2015 And Finding Opportunities From Low Oil Prices
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By: Dr Chan Yan Chong
Articles (200) Profile

It is time to bid 2014 farewell and welcome 2015 once Christmas is over. In 2014, we saw some upticks in the Singapore stock market, even though the scales are a far cry from that of the US stock market.

So what is the reason for the relatively lacklustre performance in Singapore’s stock market? While the US government has been practicing quantitative easing (QE) in the past years, the Singapore government, on the other hand was worried that excessive foreign money inflows into the property market is would jack up prices, and so it implemented a series of property price cooling measures. As the proverbial brakes are slammed on property developments, share prices of property counters have been given a drubbing.

Additionally, the Chinese stock market has been sliding for the past few years, and that has also weighed down on the Singapore stock market, since a sizeable number of Chinese stocks are listed on the Singapore Exchange. However, even though the Chinese stock market has been on a fevered run recently, the stock market in Singapore did not reflect this optimism. This definitely points to inherent problems within the Singapore stock market.

As the Singapore stock market is dominated by international institutions and funds, retail investors participation have very little sway over its performance. The exact opposite is true with the Chinese stock market. The vast numbers of retail investors are ruled by their own emotions, and institutional investors can only watch as the Chinese stock market drifts beyond their control. That is why they choose to stay put in Singapore.

On the surface, the US market is on a home run, yet its real economy is growing sluggishly. Europe and Japan are in an even worse state, as both slip back into recession. Japan is now pursuing its own QE, and Europe seems keen to follow suit. As a whole, global economic growth has slowed substantially, including in China, where rapid growth in the past seems to be waning.

Looking ahead to 2015, Singapore’s stock market looks set to face a more challenging and turbulent year than 2014. 2015 marks Singapore’s 50th anniversary as a nation, and I believe the government will introduce a number of new policies that are conducive to economic growth, which may give the stock market a boost.

The biggest beneficiary of any economy-friendly policy is naturally the banking industry. For this reason, bank shares are the top picks for 2015. Many years back, DBS Group Holdings bought over Dao Heng Bank in Hong Kong at three times its asset value. After years of managing and restructuring, it has been renamed DBS Bank (Hong Kong) and is now thriving in Hong Kong, having also made a successful foray into the Chinese market that has reaped in handsome returns for DBS. More recently, Oversea-Chinese Banking Corporation has also bought over Wing Hang Bank in Hong Kong at a lower cost of slightly less than two times its asset value. We should be able to expect even better returns in the future.

2015 is likely to be the year the US raises interest rates, which will certainly impact the stock market. However, in light of the recent trend of the US long-term bond rates, the extent of the rate hike is not likely to be significant. A modest hike will not put too much pressure on the US stock market, but a rise in US interest rate will cause an appreciation of the US dollar and a global flow-back of the currency into the US. This will pose a great threat to Singapore and its neighbours. Beware, then, of a scaled-down replay of the Asian Financial Crisis of 1997.

International oil prices have plunged, and the most popular conspiracy theory attributes this to the US colluding with oil-exporting countries in the Middle East to suppress oil prices in order to sanction Russia, which relies heavily on oil exports for its foreign trade income that funds its military operations in Ukraine. Some say that the US has made a breakthrough in shale oil extraction technology, thereby creating a vast supply of shale oil. President Obama has even went as far as to set aside a century-old oil export ban and allowed US to export oil so as to weigh down the international oil market.

As the world’s largest oil refinery, Singapore stands to benefit from this plunge in oil prices as it will encourage consumption and in turn boost Singapore’s oil refining business. That said, oil exploration and extraction is a time-consuming work. Apart from being an oil refining centre, Singapore is also the world’s largest offshore rig manufacturer, and lower oil prices will definitely dampen its rig building business.

How far will oil prices fall? I personally think it is currently at rock bottom, so it is time for some bargain hunting. Investors should look at the stocks of oil rig manufacturers, oil companies and companies providing oil services. Any further fall in oil prices will render shale oil production unprofitable.

Furthermore, with oil prices at such low levels, solar and wind energy production costs will seem prohibitively high by comparison, and thus not economical any more. This is contrary to the principles of global environmental protection.

Another important international strategy that the US needs to consider is that a fall in oil prices is actually benefiting China since they are the largest importer. The Chinese government has already been covertly importing massive amounts of oil to build up its oil reserve. It is ironic, then, that the US has taken great pains to contain a rising China in the past, yet is now suppressing oil prices which is helping China in its rise.

The Shanghai Composite Index (SHCOMP) had almost doubled during the period between October 2008 and November 2009. The Chinese economy has performed well over the past five years since, but the SHCOMP had bucked the trend and maintained a downward trend over this period. 2015 should present an opportunity for bargain hunting. However, from a long-term investment point of view, we should buy cheap stocks and not expensive ones. In other words, investors should now be looking at Chinese H-shares of insurance and banking counters listed in Hong Kong, since they are cheaper than their Chinese-listed A-shares counterparts. The advantage of taking up position with shares that are at low valuations, low price-earnings ratio and high dividend yield is that of flexibility – investors will be in a position to gain either way the market swings.

An investment opportunity usually presents itself when share prices go into correction. During this time, few dare venture into the market, while others are laden with stocks but hold little cash, thereby missing these opportune moments. My latest book has been launched recently. This book, titled The Money is For Those Who Are Prepared, serves to remind investors of the many opportunities available to them, that they are to be ready to capitalise on them and not be hesitant. Also, a real opportunity comes only after a major price correction. Those investors who have the habit of chasing rising stocks with the hope that they will rise further are destined to be losers in the long run. Investors who speculate on concept stocks and chase after rising stocks are not capitalising on opportunities; they are throwing themselves into the snares laid by the big boys.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.

DBS Group Hldgs  25.560 +0.19 +0.75%   
Business: [FY18 Total Income] Institutional banking (43.7%), consumer banking/wealth management (42.9%), treasury markets and others (13.4%).

Insight: Apr-19, 1Q19 net profit rose 9% to a record $1.7b.... Read More
Oversea-Chinese Banking Corp  11.100 +0.09 +0.82%   
Business: [FY18 Turnover] Global corporate/investment banking (35%), global consumer/private banking (34.8%), OCBC Wing Hang (11.5%), insurance (11%), global treasury & mkts (7.7%).

Insight: May-19, 1Q19 total income rose 14.7% driven by str... Read More


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