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Navigating A Potential Consolidation With Stock Selections
Perspective | 06 March 2014
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By: Shane Goh
Articles (99) Profile

Confronted with a potential drawdown on the US Quantitative Easing (QE) programme, the 8th property cooling measures and penny stock fiasco, the Singapore market went through much turbulence for 2013 while the Straits Times Index (STI) ended the year flat. Shares Investment met up with Joshua Tan, Head of Research, and Kenneth Koh, Market Analyst and Equities, from Phillip Securities, to seek their outlook for 2014 following a minor correction in late January.

Shares Investment: Federal Reserve chairwoman Janet Yellen recently announced the second US$10 billion tapering of its QE programme. What are your views on the US market moving forward?

Joshua: We think that QE tapering signals a stronger US economy, but it might influence capital market movements in the short term. This could be country-specific and those with policy credibility should fare better. An example would be the selloff in Indonesia due to the tapering which has started to find a base and rise again while India might struggle to sustain its rebound. On a whole, it should be good for stocks around the world.

Kenneth: The technical perspective coincides with the strong fundamental story coming out of the US. The sectors that should be outperforming such as industrial, materials and cyclical have been doing so for the past few months. An increasing bond yield usually gives credibility to a stronger economy. Despite the recent rally, bonds remain in a longer term bearish trend. Coupled with the eventual rise in interest rates, it paints a negative picture for bonds and positive outlook for stocks. This is what we see as the longer term trend, that we are in a bull market, but nonetheless 2014 could be a consolidation year.

Joshua Tan, Head of Research

SI: However, the latest US data has not been encouraging, possibly due to poor weather conditions. What are your thoughts on Yellen’s next move with regards to tapering?

J: We believe that Yellen will take it one step at a time and continue tapering unless the data goes against her. Overall, data is positive with core durable new orders rising, house starts rebounding while the US trade deficit is on a narrowing path. On top of it, fiscal consolidation is taking place in the US. If not for it, the economy could be stronger.

Kenneth Koh, Market Analyst and Equities

SI: China’s full-year growth in 2013 was 7.7 percent, steady from 2012 and its lowest since 2000. Recent data suggests the country could be slowing down. What are your views on the world’s second largest economy?

J: While China’s data has not been strong, we have to be cautious towards the reliability of the information. We try to smooth out the data with moving averages and not place much emphasis on one or two indicators, but look across a range of data instead. The key is to focus on the story behind the information. We expect a period of fuzzy growth due to large imbalances within the economy.

These imbalances are: oversupply of all classes of real estate, excessive off-balance sheet credit, overcapacity in many industrial sectors, and imbalance of tax collection toward the central authority rather than the local government. To work through all these excesses will be a long drawn out process. We’ll just have to get used to a slower China.

However, a silver lining could be found in the service sector. We do see that China services have experienced both a steady and even growth compared to manufacturing. Hopefully, the sector would be able to absorb industrial workers forced to exit due to consolidation in their previous industries.

SI: What do these global factors mean for the Singapore market?

K: The STI and US indices are highly correlated, especially when both are on the downside. According to Yale Hirsch’s January Barometer (JB) belief, as January goes, so goes the year. The JB has predicted the year’s stock market direction 76 percent of the time since 1950. With the Dow Jones Industrial Average and S&P 500 index down 5.3 percent and 3.6 percent respectively in January, the JB has issued a negative warning. This is only one of the signals we look at; others include sector rotation, sentiment, inter-market and market breadth.

However, the bearish effect might be diluted as the STI is cheaper than the S&P both in absolute and relative terms. Presently, the price-to-book value (P/B) ratio of the STI is trading at 1.4 compared to its 10-year historical range of 1.0 to 2.2 while the S&P has a P/B ratio of 2.5 on a range of 1.6 to 3.0 over the same period. This suggests that the S&P could fall by a larger margin compared to the STI if a correction occurs. On top of that, the STI has had a dip since the start of the year, which could further mitigate effects from a US fall.

For the year, we expect the US indices to be flat. Assuming no exceptional fundamental surprises on the negative front, any corrections should not extend beyond an estimated 20 percent from the level at the start of the year. Why less than 20 percent? Since 1956, in the US, the bear markets that took place without an invert yield curve had an average loss of about 19 percent in 143 market days. The yield curve is presently far from flat and other conditions still positive for stocks. The story would be similar for the STI. If you are a Singapore trader, a range bound trading strategy could be beneficial for the first half of the year. As we said, we expect this year to be a consolidation in a larger uptrend regarding equities.

SI: This suggests a potential range bound market for 2014. In such a market outlook, would there be any sectors to look out for, particular the property segment given the cooling measures surrounding it?

J: When you observe Singapore, it tends to be a stock-specific market as opposed to a sector-specific market. Our top picks so far for Singapore are Boustead, Silverlake Axis, M1 and First Resources. We also like Iconix Brands which is a US play.

As for property stocks, we see them as a value play, but not necessarily a bullish buy. They would favour an investor with a longer term outlook.

First of all, there is a large supply coming on which will exert downward pressure on prices. Additionally, Singapore’s loan to gross domestic product ratio has risen significantly mainly due to property. This poses a macroeconomic risk to the economy, which the government would not want to let get out of control. Macro prudential measures will be continually tweaked to soften demand and reduce the prices buyers are able to offer for properties. For stock investors, this presents interesting opportunities as the sector as a whole gets punished. Presently, we have an accumulate rating on City Developments and Ho Bee Land.

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Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

City Developments  9.480 +0.03 +0.32%   
Business: Co is an international property & hotel conglomerate. [FY18 Turnover] Property development (48.4%), hotel operations (39.8%), rental properties (8.5%), others (3.3%).

Insight: May-19, 1Q19 decreased 29.5% to $746.2m compared t... Read More
Ho Bee Land  2.380 -- --   
Business: Invests in & develops real estate properties in Singapore. [FY18 Turnover] Rental income (91.3%), sale of development properties (8.7%).

Insight: Apr-19, 1Q19 revenue rose 7.7% due to increased re... Read More
Boustead Singapore  0.795 -0.010 -1.24%   
Business: A global infrastructure-related engineering services & geo-spatial technology firm. [FY18 Turnover] Real estate solutions (48.8%), geo-spatial technology (28.2%), energy-related engineering (23%).

Insight: Feb-19, 9M19 revenue surged 25% as contributions i... Read More
First Resources  1.530 +0.010 +0.66%   
Business: Co engages in the cultivation and maintenance of oil palm plantations. [FY18 Turnover] Refinery and processing (95.5%), plantations & palm oil mill (4.5%).

Insight: Feb-19, FY18 revenue dipped 2.1% due to lower aver... Read More
Silverlake Axis  0.535 -- --   
Business: Provides software solutions & svcs. [FY18 Turnover] Maintenance & enhancement svcs (M&E) (72.7%), software licensing (10.1%), software project svcs (6.7%), insurance processing (5.4%), credit & cards processing (3.4%), sale of software & hardware (1.7%).

Insight: Feb-19, 1H19 revenue jumped 27.8% to RM336.2m due ... Read More

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