Oil woes 'unlikely to rein in stocks'

Crude prices will rebound, says DBS; trouble in Greece won't have global impact

This article was first published on Jan 7, 2015

Trouble in Europe and a plunge in crude oil prices are unlikely to halt the climb in global stocks this year, said DBS Bank.

Its chief investment officer of group wealth management and private banking, Mr Lim Say Boon, said at a briefing yesterday that "the stock market started the year with a new wall of worries".

Concerns about declines in sharply falling oil prices and the potential Greek exit from the euro zone, dubbed the "Grexit", have caused tumbling stock markets this week.

But "these issues will pass", said Mr Lim, who expects crude oil prices to rebound above the technical support level of US$58 a barrel by year's end.

A United States benchmark for crude oil, West Texas Intermediate, fell below US$50 a barrel on Monday to US$49.95.

Brent crude, used primarily in Europe and other parts of the world, dropped to US$51.23 a barrel.

Lower crude oil prices will have an immediate effect on energy-related stocks, though Mr Lim said the upside would be stronger consumer spending.

Higher spending, however, takes time to flow through to better corporate earnings and consequently improved stock prices.

The woes in Greece will also not derail global stock prices, he said.

The reasons that Mr Lim is not unduly worried? The Greek economy is relatively small and the amount of outstanding Greek debt can be absorbed by the markets, if not already written off.

He also expects that any exit would be made so punitive by European officials that no other nation would dare to not comply with reforms, thus likely preventing a contagion effect.

DBS has a "neutral" call on European equities in the short-term three-month window, however, as corporate earnings have not been supportive of growth.

Speculation that the European Central Bank could launch its own version of quantitative easing should lift stocks, with the bank giving European equities an "overweight" call over 12 months.

"European equities' out-performance will have to wait until monetary conditions in the US start tightening."

Even though the US Federal Reserve's quantitative easing has ended and the central bank will likely hike rates this year, Mr Lim has stayed most bullish on US markets.

He has given it an "overweight" call over the three-month and 12-month periods.

"US rates will rise in 2015, but when they do rise, they will rise only very gradually.

"Eventually they will likely exit the rate-hiking cycle at a much lower level than the historical average since World War II, which is about 5 per cent."

The Fed's median forecasts are for its rates to come in at 1.13 per cent by the end of this year and 2.5 per cent by the end of next year.

Japanese stocks are also favoured by DBS, given the Bank of Japan's quantitative easing, which has weakened the yen, in turn, boosting Japanese products and corporate earnings.

Hong Kong and mainland China stocks are also in play for the bank this year.

Singapore stocks will likely trade higher this year but may not be a good buy, said Mr Lim.

"If you look at the Singapore market, yes, it runs a current account surplus, it is less vulnerable to a stronger US dollar, it doesn't require external financing of its dollar requirements, but does it offer deep value? I don't think it offers deep value."

Bonds, however, may have run their course and Mr Lim is underweight on the asset class.

"The bull market for bonds has gone on for a very long time, this is a very late stage, valuations are very high."

feimok@sph.com.sg