MARKETS INSIGHTS

Another turbulent week ahead for markets

The precipitous fall of oil prices is a major concern to investors and has prompted several market watchers to slash their 2016 forecasts for the commodity.
The precipitous fall of oil prices is a major concern to investors and has prompted several market watchers to slash their 2016 forecasts for the commodity. PHOTO: BLOOMBERG

Bearish mood expected to continue amid falling oil prices and slowing growth in China

Asian markets are set for another turbulent week as the headwinds that have rocked sentiment since the turn of the year show no signs of abating.

With oil prices plummeting, China's growth slowing and a mixed corporate earnings outlook looming ahead, investors are hard- pressed to see reasons to be optimistic.

The bearish mood was apparent on Wall Street last week when the Dow Jones Industrial Average slipped by 2.2 per cent and the S&P 500 tumbled by 2.2 per cent. This came as oil prices plummeted to below US$30 a barrel.

The same concerns also spooked investors here, with the Straits Times Index losing 4.38 per cent last week to 2,630.76.

BOTTOMING OUT

The decline in commodity prices, and especially oil, has surprised us... We do however believe that the price is getting close to the bottom.

SCHRODERS FUND MANAGER GARETH ISAAC

The precipitous fall of oil prices has had several market watchers slashing their 2016 forecasts for the commodity.

Bank of America Merrill Lynch has cut its target for oil prices from US$50 to US$46; the Royal Bank of Scotland is tipping a more alarming drop to US$26 per barrel this year.

Others, such as Schroders fund manager Gareth Isaac, however, believe that oil prices will soon bottom out.

"The decline in commodity prices, and especially oil, has surprised us. The fall in price has forced producers to pump more oil, exacerbating the supply glut and pushing prices even lower. It has been a vicious circle," he said last week.

"We do, however, believe that the price is getting close to the bottom. The supply-demand dynamics should push the cost of oil higher as we move through 2016."

These issues will probably be pored over during Keppel Corp's fourth-quarter and full-year results briefing on Thursday, with analysts and investors likely examining the damage done to Keppel's offshore and marine businesses.

The group's rig-making unit, Keppel Offshore & Marine, reported a 36 per cent drop in revenue in the three months to Sept 30 last year. This forced the company to cut jobs and downsize operations.

Since then, the demand for rigs from global producers has only worsened, and, more recently, news that Sete Brasil may be facing bankruptcy has raised further concerns. The Brazilian firm is a major client of both Keppel and Sembcorp Marine, and its demise may wipe out about 40 per cent of their order books, analysts say.

It should be noted, though, that Keppel Corp still commands stable earnings from its property and infrastructure units, both reporting around 50 per cent year-on-year growth in their net profit for the first nine months last year.

Another blue chip company reporting its results this week is Singapore Exchange, on Wednesday .

The bourse had an eventful 2015. The departure of chief executive Magnus Bocker in June was read by investors as a capitulation to the range of issues facing SGX, including a perceived inability to revitalise the stagnating stock market.

Questions on how to bring in more liquidity and new listings will continue to hound the management led by current chief executive Loh Boon Chye, but SGX has had no problem tabling respectable numbers despite the choppy market.

In the three months to Sept 30, SGX reported a 28 per cent year-on-year increase in net profit and an interim dividend of five cents per share.

The bourse's strategy of diversifying its business mix, with a strong focus on derivatives, will remain an anchor for growth this year.

As investors navigate the bearish market, Keppel Corp and SGX may yet offer relief to those who are willing to look beyond the near-term volatility and focus on long-term fundamentals.

A version of this article appeared in the print edition of The Straits Times on January 18, 2016, with the headline 'Another turbulent week ahead for markets MarketsInsights'. Print Edition | Subscribe