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Accumulation Of Cash As Potential Correction Looms
Perspective | 08 April 2014
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By: Shane Goh
Articles (99) Profile

Uncertainty surrounding the effects of US quantitative easing tapering, the Russia-Ukraine crisis and a China slowdown left the Straits Times Index (STI) marginally unchanged in the first three months of 2014. Shares Investment caught up with Robin Ho and Collin Seow, top-tier remisiers and traders with Phillip Securities, to uncover their views on the market for the year.

Shares Investment: What do you think are the global themes that will dominate headlines for the year?

Robin: The end of tapering is going to affect the market going forward. The new Federal Reserve chairwoman, Janet Yellen, is preparing the world for a higher interest rate environment. This would impact emerging markets more than developed countries. In the last five years, easy money and carry trades have caused a worldwide asset bubble. A rise in interest rate and improving western economies will cause money to flow out of Asia and back to the US and Europe. While this will deflate prices in the Asian markets, the question of an orderly deleveraging process remains.

Collin: The shadow banking in China which is on the headlines almost daily. Another theme which I am watching closely is the relationship of Israel with Iran.

Robin Ho, Remisier

SI: What do you think is the major concern for the Chinese market?

R: I think the market has been concerned with the housing bubble in China. The Chinese government has been trying to put cooling measures on the property market. However, a low interest rate environment and a lack of investment options, due to an underperforming stock market, have pushed prices up instead. This gives rise to an overheating situation. The recent collapse of a property developer in Ningbo adds to concern of strains in the real estate sector and comes less than two weeks after the first bond default by Shanghai Chaori Solar Energy’s inability to repay its debt.

A large part of the Chinese economy depends on property and property-related development. If the property market were to deflate, property-related companies such as construction would not fare well either. If they default on their borrowings, then companies in the shadow banking industry may suffer.

Collin Seow, Remisier

SI: What do you think the trigger for the downturn, if any, would be?

R: I think a downturn in the developed markets will be the first trigger. Dow Jones’ bull and bear cycles usually last for five years and this marks the fifth year of the bull market. The S&P 500 index could have peaked in its channel trading pattern on a 20-year time scale. As such, from a technical standpoint, the long term target has been met.

In the past, the US central bank used to control the markets by quantitative easing. However, now that the tapering has started, the Fed has turned to forward guidance. With Yellen shifting the goalpost on unemployment as one of the benchmark for interest rate increase, this leaves inflation as the only indicator.

In recent times, the bad weather in America has caused soft commodities to rally to year-to-date highs. One of the risks is weather patterns such as a return of El Nino. However, prices of hard commodities are going down. This shows that the world economy is not in good shape. If inflation goes up more than expected, coupled with a premature rise in interest rate or a hastening of the tapering, a potential crisis might be brewing.

One of the key things to look for is the Russia-Ukraine crisis. Russia is a big player in natural gas, wheat and barley. If Russia’s supply to the rest of the world is cut off or reduced, it would lead to a rise in oil prices and certain soft commodities as Europe is forced to look elsewhere.

SI: How do you think the Singapore market is going to fare for the rest of the year?

C: Singapore is going to make structural changes to its economy. The recent increase in tax levy and tightening of quota of foreign workers show that we are forgoing competitiveness in the short term to achieve quality growth in the long term. This will translate to higher cost for businesses but may also result in skills upgrading of local workers.

Chartwise, we are riding on an old bull. This bull which started in March 2008 is in its sixth year. We may have a correction during the middle of the year based on market cycles, which I study. But saying that, there are certain technical indicators I need to read to confirm this view as we draw closer to June.

R: While the Singapore market has been going sideways since the start of the year, I think the downside risk is limited. When the easy money came to the emerging markets and our region, Singapore was not one of the main beneficiaries of the strong rally. The main ones were Indonesia, Philippines, Malaysia and Thailand.

Although the other indices have broken and advanced beyond their previous highs set before the global financial crisis, the STI has not even touched its pre-Lehman Brothers high. Given that we had not run up that much, we would be fairly resilient.

SI: What are some sectors or stocks that you favour?

R: Back in November 2013, China held its third plenary session of the 18th Central Committee of the Communist Party of China. Two key takeaways were the government’s plan to clean up the environment and spur urbanisation.

I think businesses that target these segments will stand to benefit. Some of companies within the wastewater treatment industry include HanKore Environment Tech Group, SIIC Environment Holdings, Memstar Technology and United Envirotech.

Personally, I view the fundamentals of Global Logistic Properties favourably with its expansion into warehousing and the booming demand of e-commerce in China and Japan. However, the current concerns are the depreciation of the yuan and yen impacting the firm’s bottom line and the potential slowdown in China.

Noble Group looks interesting with many soft commodities prices near their year-highs and the Baltic Capesize Index rising since beginning of the year.

As we await a potential correction in the stock markets, investors should be underweight on stocks and overweight in cash.

C: I am looking at some of the under-valued penny stocks. A lot of investors are staying away from penny stocks because of the three inter-linked stocks that crashed last October. However, I believe that not all penny stocks are the same. There are some smaller cap stocks that are listed on SGX that are good businesses.

Instead of trading the penny stock, one should study the company well and invest in the business. However, I also believe that you can trade profitably in the SGX if you know how to do it right. Trading is about taking good risk reward trades that have positive expectancy.

PhillipCapital is hosting a trading competition, POEMS 2.0 Stock Challenge, on its brand new platform – POEMS 2.0. With over $130,000 worth of prizes awaiting participants, register now and put your strategies to the test!

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.

Memstar Technology  -- -- --   
Business: Co is presently a dormant company following the sale of its principal business.

Insight: Aug-14, Following the sale of its business, Co has... Read More

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