Buyers beware as markets get hit on 4 fronts

Despite the headwinds ahead, Mr Lee feels Singapore has made progress in addressing demographic issues, by opening up the population to immigration. Putting effective policies in place should enable Asian economies to get back on track.
Despite the headwinds ahead, Mr Lee feels Singapore has made progress in addressing demographic issues, by opening up the population to immigration. Putting effective policies in place should enable Asian economies to get back on track.ST PHOTO: TAMARA CRAIU

Mr Lee King Fuei, who heads Asia equities for Singapore at Schroders Investment Management (Singapore), shares his outlook for the local market with Jeremy Koh in the latest in our series featuring fund managers and leading market experts.

Stock prices here have fallen even further in the new year, taking the Straits Times Index to a four-year low. Many investors wonder if they have dropped so much that it is now a good time to enter the market.

Hold on for a while, counsels Mr Lee King Fuei, who heads Asia equities for Singapore at Schroders Investment Management (Singapore).

He feels local bank counters still have room to fall.

Property, telecoms and offshore and marine stocks do not look attractive either.

Demographic challenges, deflationary pressures, technological disruption and high leverage will weigh on Asian growth in the near term, he feels.

DOWNSWING FOR COMMODITIES

With the unwinding of the credit bubble in China, the excess capacity that's been built up over the past couple of decades means that the commodities cycle itself is probably over because demand for commodities will probably not be that strong.

'' MR LEE KING FUEI, head of Asia equities for Singapore at Schroders Investment Management (Singapore).

This will hurt local bank and property stocks, which will also face further pressure from the United States rate hike, he said.

He believes more bankruptcies could be in the offing, so the local market could fall further.

The telecoms sector could struggle as a fourth operator seeks to enter the market, and offshore and marine companies will remain distressed because of excess capacity in China and low oil prices, he said.

However, he is optimistic about one local financial technology firm that offers some services provided by banks but at a cheaper rate. That business is asset-light and expanding overseas to boot. He declined to name the company.

Q What is your outlook for Asia?

A There are four forces working against the region.

First, some countries in North Asia are facing a demographic cliff. For China, it's coming up in 2020 because of the one-child policy. That could affect market performance.

Second, there is deflationary pressure because of considerable over-investment - for instance, in China's industrial sector, where there is excess capacity. This is starting to weigh on the economy.

Third, technology is displacing lower-value-added jobs. This has a greater impact on Asia, which people see as being the factory or manufacturing centre for the rest of the world.

This puts the Asian consumer in a more difficult position because if you are worrying about your job, you will probably spend less. This in turn means investments in businesses will go down as well.

Another issue is that many Asian economies are now highly leveraged. Deleveraging has to take place before the economy can have a good base from which to recover.

Q What is your outlook for the Singapore market?

A Singapore doesn't look as attractive as other countries in the region.

Based on the price-to-book ratio, the local market does look cheap. However, this is not a good indicator as banks make up a good chunk of the market and, for the banks, the books are not believable.

For banks, the question is, how much of the bank loans will turn into bad debt? I think current valuations have not sufficiently discounted the bad news that's likely to come.

The four factors affecting the region described above also mean that banks and property are not likely to perform well. And if US rates do continue to go up, these rate-sensitive sectors will also underperform. For property, it also depends on your broader view of whether property prices are likely to come down sharply.

If they do, then property stocks and real estate investment trusts (Reits) are probably not likely to do well as falling property prices will mean negative rental reversion - the rental income you collect will get less and less, and the dividend will be cut as well.

Q How are other sectors in the Singapore market looking?

A If you look at telecoms, which is the other big sector here, because of the continued overhang from that fourth operator coming in as well as the competitive dynamics, it is not necessarily attractive.

Then there is the offshore and marine sector, which also makes up a large part of the market.

With the unwinding of the credit bubble in China, the excess capacity that's been built up over the past couple of decades means that the commodities cycle itself is probably over because demand for commodities will probably not be that strong.

When you have that, and crude oil prices are as low as they are now, nobody is going to be drilling for new wells, so I think the order momentum there would be pretty poor.

So, actually, probably over three- quarters of the local market does not look very attractive at this point.

Q When would be a good time to go back into Singapore stocks?

A One of the things we are watching for is bankruptcies coming through.

I think, unlike in the last round, you are probably going to see bankruptcies more in the commodities sector because that's where there has been the most capital investment.

As bankruptcies start to come through, companies will have to start recognising these bad debts, and that's when you will have a clear indication of a company's real value - that's when you would be able to buy into the company with more confidence.

Q Do you think there will be a sustained fall in the markets?

A We already have seen markets come off - it's really just looking for the last leg of bankruptcies that will form the basis to buy. They are usually the indicator of a real troughing in the markets.

The last leg down can be extremely, extremely painful. Even back in 2008, after the markets had already come off a lot, that last leg down came to another 30 to 40 per cent before the recovery.

Until valuations show a very strong picture, you should not jump in too early.

Q Are you confident about any local stock right now?

A We don't name names, but we like one financial technology firm that offers some bank services at a lower price than banks do. They are the ones that are disrupting the market, and these people would tend to be the ones that do very well.

They are in a position to grab market share by cutting out the middleman because they have a superior product that's cheap.

In addition, they don't require much capital to grow, and they are actually expanding into other countries around the region.

Q With regard to the four forces working against the region, are there any bright spots?

A The challenges can be addressed. For instance, Singapore has had success in managing demographic challenges by opening up the population to immigration.

To cope with technological disruption, you need a greater emphasis on factors such as value addition and intellectual property.

The right policies will allow Asia to grow strongly again.

A version of this article appeared in the print edition of The Sunday Times on February 07, 2016, with the headline 'Buyers beware as markets get hit on 4 fronts'. Print Edition | Subscribe