Market Insights

Hot streak for shares 'likely to cool off '

A job seeker filling out papers at a military job fair in San Francisco. All eyes are now on Friday's release of US employment figures, a major indicator used by the Fed to gauge the state of the US economy.
A job seeker filling out papers at a military job fair in San Francisco. All eyes are now on Friday's release of US employment figures, a major indicator used by the Fed to gauge the state of the US economy.PHOTO: REUTERS

No Halloween scares for local shares, but analysts forecast chill in investor sentiment

Local shares had their best performing month in a year in October despite last week's pullback, as regional markets regained their footing after a mauling in the third quarter.

But the hot streak may not have much steam left, with the economy and corporate performances offering few reasons for cheer, say analysts.

Last month was red-hot for Asian equities, with the MSCI Asia ex-Japan index gaining over 7 per cent - the best monthly showing since January 2012.

WATCHING AND WAITING

There may still be room for an increase in share prices, if regional central banks decide to release further stimulus measures. But, more likely, the STI will move sideways in the coming week, as investors also wait and see whether upcoming data points to a firm economic recovery.

REMISIER ALVIN YONG

"Continued expectation of easier central bank policy has helped underpin equity markets after a turbulent few months," CMC chief analyst Michael Hewson told Reuters in London. "Investors are veering between confidence that the US economy is still performing well enough to withstand a rate rise, and an expectation that if it's not, the Fed will remain on hold."

Last week, the US Fed opted to further delay its interest rate hike to next month or even next year. However, the Fed's statement also indicated improved confidence on the economic outlook.

But economic conditions elsewhere are less sanguine.

In China, the manufacturing sector in October shrank for the third straight month, according to latest official data released yesterday. This has fuelled fears that growth in China's economy - the world's second largest - is slowing faster than official numbers suggest.

The People's Bank of China cut the interest rate for the sixth time in a year to 4.35 per cent two weeks ago to revitalise the stagnant economy. Further easing looks highly necessary.

In Europe, European Central Bank president Mario Draghi recently also hinted that the euro zone's quantitative easing programme may be expanded.

The prospect of a delay in the US rate hike cheered local investors. Singapore's benchmark Straits Times Index gained as much as 7.4 per cent to 3,083.07 in October. However, it has since dropped to below 3,000 by Friday.

Remisier Alvin Yong said: "There may still be room for an increase in share prices, if regional central banks decide to release further stimulus measures. But, more likely, the STI will move sideways in the coming week, as investors also wait and see whether upcoming data points to a firm economic recovery."

The key data to watch this week will be Friday's release of US employment figures, a major indicator used by the Fed to gauge the state of the US economy.

Regardless of macroeconomic signs, Singapore corporate results in the current reporting season have produced a very mixed picture.

Last week saw OCBC Bank and United Overseas Bank announcing their third-quarter results, which showed their otherwise stable core earnings eroded by market disruptions in recent months.

More tellingly, loans growth continued to slow and non-performing loans worsened, pointing to financial difficulties across the broader corporate sector.

Sembcorp Industries, another blue chip company, reported a 37.8 per cent net profit plunge due to weaker utilities and marine revenue. Two weeks ago, its Sembcorp Marine unit posted a 76 per cent profit drop for the three months to Sept 30.

Against this backdrop, investors looking for growth stocks may have to look beyond blue chips and seek value among small- and mid-cap counters, Mr Yong said.

"Plenty of these companies - in the property sector, for instance - are now trading at 20 to 45 per cent below their book value, with single- digit price-to-earnings ratios."

One of the notable counters is Saizen Real Estate Investment Trust, which announced last Friday that US private equity firm Lone Star has agreed to acquire its Japan portfolio for $517.3 million, which is at a 3.4 per cent premium to the asset value.

Trading of the counter has been halted, but may resume to strong investor reactions.

For investors starved of initial public offerings, seafood restaurant operator Jumbo Group's Catalist debut is welcome news.

The counter, which will commence trading next week, is a bright spot in an otherwise uncertain market, Mr Yong said.

A version of this article appeared in the print edition of The Straits Times on November 02, 2015, with the headline 'Hot streak for shares 'likely to cool off ''. Print Edition | Subscribe