Markets Insight

Looking for bright spots in a depressed market

A worker in Myanmar drilling for oil using a hand-powered winch. Global worries over the oil price will likely continue to overshadow the economic outlook of many nations. In Singapore. Keppel Corp was hit by an earnings drop and huge provisions, and
A worker in Myanmar drilling for oil using a hand-powered winch. Global worries over the oil price will likely continue to overshadow the economic outlook of many nations. In Singapore. Keppel Corp was hit by an earnings drop and huge provisions, and no one is expecting much good news from Sembcorp Marine when it announces its full-year results next Monday.PHOTO: BLOOMBERG

There are value plays emerging for local investors keen on holding for the long term

Market jitters look set to return in this shortened trading week when trading resumes on Wednesday.

After ushering in the Year of the Monkey, investors will likely face a depressingly familiar scene fraught with uncertainty and few bright spots. And unless something dramatic happens on the global scene today or tomorrow, investors might decide to pause and take stock of the ups and downs since Jan 1.

Their survey will show a picture that has scarcely changed over many weeks, with economic growth still sluggish, energy prices still languishing and corporate performances showing signs of stress.

A casual observer might think that the US jobless rate falling below 5 per cent to an eight-year low in January would be great news.

But Wall Street was hardly cheering last Friday, with the Dow Jones Industrial Average slipping 1.29 per cent driven partly by fears that the brighter picture would make another interest rate hike more likely.

THE OIL FACTOR

The impact of low oil prices on manufacturing in 2016 will be more pronounced compared to 2015 as order books for Keppel and Sembcorp Marine moderate. Along with petrochemicals and refining, we estimate oil-related manufacturing to total 3.6 per cent of GDP.

MR JOSEPH INCALCATERRA, HSBC economist.

Still, for local investors, these marginal improvements across the Pacific Ocean are looking irrelevant to Singapore's own growth outlook.

Risks of technical recession are rising in the first half of the year as the oil price woes darken Singapore's prospects, HSBC economist Joseph Incalcaterra warned last week.

"The economic growth outlook for Singapore remains fluid and highly dependent on external variables such as oil prices, global trade, and regional growth, particularly in Singapore's two largest trading partners, China and Malaysia," Mr Incalcaterra said in a note.

"The impact of low oil prices on manufacturing in 2016 will be more pronounced compared to 2015 as order books for Keppel and Sembcorp Marine moderate. Along with petrochemicals and refining, we estimate oil-related manufacturing to total 3.6 per cent of GDP."

The writing on the wall is unmistakable for any attentive investor. The crude benchmark Brent has crawled back above the sub-US$30 levels but is still limping at well below US$35 per barrel. Keppel Corp was hit by an earnings drop and huge provisions, and no one is expecting much good news from Sembcorp Marine when it announces its full-year results next Monday.

The downside pressure has spread to other sectors, with major blue chips - banks, transport, developers, among others - all suffering. Little surprise that the Straits Times Index (STI) has pared 9 per cent since Jan 1 to 2,623.21.

But for those willing to buy in on corporate and sectorial fundamentals, it is clear that the selloff has been overdone. With the STI yield level at above 4 per cent and a price-to-book ratio at parity, many counters are worth a closer look.

The banking plays, for instance, may prove a good buy, despite some near-term concerns of credit quality and slowing loan growth.

"We like Singapore banks, as they currently trade at a 20 per cent discount to their mean valuations and we believe their net interest margins should benefit from rising domestic interest rates," Nomura said in an analyst note last week.

Real estate investment trusts are also looking attractive for those seeking stable yield. Office Reits including OUE Commercial Reit, Keppel Reit, Frasers Commercial Trust and CapitaLand Commercial Trust all reported higher return to unit holders in recent weeks.

For the three months to Dec 31, the four Reits averaged a distribution per unit of 1.93 cents, up an average 12.9 per cent from a year ago, Singapore Exchange data shows.

And there is value emerging for those more interested in long-term investment than day-to-day punting. Perhaps now is the time to consider the wisdom behind that famous Warren Buffett quote: "The lower they go, the more I buy."

A version of this article appeared in the print edition of The Straits Times on February 08, 2016, with the headline 'Looking for bright spots in a depressed market'. Print Edition | Subscribe