Markets Insights

Stock market faces test of earnings season

Ms Kum Soek Ching, head of South-east Asia research at Credit Suisse's private banking arm, recommends that investors in Singapore maintain a portfolio of "quality, high-yield stocks", such as banks and Singapore Reits, and "stocks with low embedded
Ms Kum Soek Ching, head of South-east Asia research at Credit Suisse's private banking arm, recommends that investors in Singapore maintain a portfolio of "quality, high-yield stocks", such as banks and Singapore Reits, and "stocks with low embedded expectations" to ride out any volatility this year.ST FILE PHOTO

Analysts expect bourse's upward momentum to be dulled by less rosy growth prospects

Supportive developments on the US-China trade and US Fed policy fronts gave markets some cheer last week, but a recovery is still a work in progress.

This week, dimmer corporate earnings growth may add a dash of unwanted spice to an already heady cocktail. The fourth-quarter earnings season takes place in the United States, starting with major banks. In the light of corporates like tech stalwart Apple and retail giant Macy's lowering guidance for the quarter, analysts say banking stocks may also be put to the test.

What is also important to watch is the CEOs' outlook for this year, which will drive markets.

Mr Olivier d'Assier, head of Asia-Pacific research at Axioma, says rising uncertainty has lowered confidence in earnings forecasts, while the surge in volatility has made being wrong that much more costly.

As such, investors will pay very close attention to the CEOs' guidance and "any signs that CEOs are lowering guidance for 2019 will send investors running for safety".

In Singapore, analysts expect the market's upward momentum to be dulled by less rosy economic and corporate earnings growth prospects. But longer-term investors can still find value, given local stocks' cheap valuations and attractive dividend yields, the analysts say.

Ms Kum Soek Ching, head of South-east Asia research at Credit Suisse's private banking arm, says the below-historical average market price-to-earnings of 11.4 times (based on 2019 forecast earnings) and 4.4 per cent dividend yield make an attractive risk-reward proposition for longer-term investors.

She recommends that investors here maintain a portfolio of "quality, high-yield stocks", such as banks and Singapore Reits, and "stocks with low embedded expectations" to ride out any volatility this year.

After a broad-based slowdown in loan growth in the third quarter, United Overseas Bank (UOB) and OCBC Bank have guided for mid-to-high single-digit growth. Similarly, DBS Bank has guided for mid-single-digit growth this year as demand for mortgages and trade finance softens.

But Ms Kum believes earnings expectations have not bottomed out for banks. There is still room for margins to expand, she adds, as US rates rise (Credit Suisse expects two rate hikes this year) and loan repricing continues with a lag.

On the data front, the focus for Singapore will be the December non-oil domestic exports data on Thursday.

UOB's economics research team expects another month of decline, by 1.9 per cent year on year, compared with last November's decline of 2.6 per cent year on year.

Other data releases include China's trade data. With the official and private Caixin manufacturing purchasing managers' index having fallen into contractionary territory, consensus is for slower growth in exports and imports last month.

The US will release December retail sales and industrial production data tomorrow.

Citi economists are expecting slower industrial production growth. Signs of moderation could deal a blow to the markets alongside potentially poor earnings data.

The UK House of Commons will be voting on Prime Minister Theresa May's European Union-endorsed Brexit deal. Her withdrawal deal is widely expected to be voted down.

The partial US government shutdown, in its fourth week, will likely continue.

A version of this article appeared in the print edition of The Straits Times on January 14, 2019, with the headline 'Stock market faces test of earnings season'. Print Edition | Subscribe