Difficult investing environment
Jittery local investors will be bracing themselves for a rough ride in the coming months after stocks across Asia took a hammering in recent weeks.
Investors have grown increasingly nervous over the choppy economic outlook - in particular, mounting uncertainties in China. This bearish mood may lock the Singapore market in volatility towards the end of the year, but some market watchers believe pockets of opportunities await those seeking value.
Last Friday, the benchmark Straits Times Index (STI) sank another 1.29 per cent to 2,971.01, dropping below the key psychological support level at 3,000 for the first time since February last year.
This extended STI's full-month drop to around 11 per cent, and the index now looks to test the three-year low at 2,945 in November 2012.
Investors are wringing their hands over a string of bad news coming out of China, where the central bank last week moved to devalue the yuan in the country's biggest currency adjustment in 20 years.
This was seen as a policy move to boost China's dwindling exports, which slumped 8.3 per cent last month while manufacturing activity shrank to their lowest level in 61/2 years in August, according to a flash estimate on Friday.
"The surprise yuan devaluation last week unleashed fears of competitive currency devaluation in the region. The Singapore market suffered collateral damage in the resulting capital flight from the region. Growth concerns over China have probably also added to the risk-off selling," said Ms Kum Soek Ching, Credit Suisse's regional research head for private banking and wealth management.
"It is difficult to say how low the market will go in this risk-off mode, as it is no longer about valuations, but more about sentiment. The 3,000 level is a psychological support that, if broken, could attract more capitulation selling."
EXITING THE MARKET?
On the trading floor, a growing number of investors are trying to get out of the choppy market.
Remisier Alvin Yong said: "Most of my clients have instructed me to look for opportunities to exit - they would rather have the safety of cash now. But many are stuck between a rock and a hard place because it's hard to find a good value point to sell in a weak market like this."
Reflecting that panic, even the previously defensive banking counters are being sold down aggressively, with OCBC and United Overseas Bank both at their 52-week lows.
Last Friday, OCBC dropped 2.05 per cent to $9.10, UOB was down 2.8 per cent to $19.11, and DBS Group Holdings pared 1.03 per cent to 18.29.
The local banks are one of Singapore's corporate sectors with revenue exposure to the Greater China market. Pre-tax earnings from China were 6.3 per cent of total for DBS in the first half this year, 10.5 per cent for UOB, and 19 per cent for OCBC.
PROPERTY, CONSUMER, OFFSHORE AND MARINE FIRMS HIT
Property developers and consumer companies are other sectors shunned by investors amid the China scare, analysts at OCBC Investment Research said.
One of them, Mr Eli Lee, said: "A weaker yuan will likely have a forex translation impact in terms of asset valuations and earnings for developers who have diversified their exposure into China significantly. In particular, China is a key market for CapitaLand which has 45 per cent of its total assets based there."
"China contributes an estimated 30 per cent of top line for Osim International and BreadTalk Group. For BreadTalk, every 5 per cent decline in yuan against Singapore dollar will see around 3 per cent drop in net profit."
BreadTalk dipped to its full-year low at $1.12 last Thursday before rising to $1.155 on Friday, when CapitaLand was flat at $3, just a hair above its full-year low of $2.94.
But the pressure on the market is not just coming from China. Regional economies, including Singapore, are offering just as few reasons to cheer due to their own sluggishness.
Earlier this month, the Ministry of Trade and Industry narrowed its growth forecast for Singapore this year from a 2 to 4 per cent range to a 2 to 2.5 per cent range, after gross domestic product contracted 4 per cent quarter-on-quarter in the second quarter.
This has led to the softening of regional currencies, with the United States dollar rising around 3.2 per cent against the Singapore dollar over the past month.
Meanwhile, tumbling oil prices still have a choke-hold on offshore and marine plays, with Sembcorp Marine and Keppel Corp both languishing at their full-year lows.
A look at these difficult conditions gave few reasons to cheer for the outlook, DBS Group Research analyst Janice Chua cautioned.
"Post the second quarter, we trimmed our earnings forecast for 2015 and 2016 by 3.6 per cent and 3.2 per cent respectively.
"Earnings growth for the STI companies was cut to a flattish 1 per cent for 2015, with possibility of further downside," she said.
"With earnings growth declining to a flat to negative territory, the STI is trapped within a trading range of 2,900 to 3,300 going forward."
But Mr Kelvin Tay, UBS Wealth Management's regional chief investment officer, holds a more positive view on the local market.
"As the already volatile investing environment is likely to get more complex over the next six months, we have decided to reduce the risk levels in our Asian strategy and focus on the traditionally more defensive markets in Asia.
"We upgrade Singapore to overweight due to its low beta and defensive characteristics."
MSCI Singapore - which tracks the large and mid-cap stocks here - is now yielding close to a 3.8 per cent return, behind only Taiwan's 4 per cent in the region, Mr Tay noted.
Mr Yong agreed that there is scope for value-hunting now: "But you should pace the accumulation out carefully to give yourself some breathing room.
"Sectors that you can look at include utilities, which generate strong cash flow; transport, which benefit from the low oil prices; and banks, to position for the upcoming interest rate hike and better margins."