Markets Watch

There's reason for optimism but expect volatility

Debate still raging on whether market has more legs or is in dangerous bubble territory

After hitting its highest levels in a year last week, Singapore's Straits Times Index (STI) retreated on Friday as players decided to cash in on some of the gains.

However, market experts were almost unanimous in the view that the medium-term upside remains intact, given the huge liquidity and increased institutional and retail participation now.

The benchmark index lost its grip on the key 3,000-point level to end the week at 2,991.53, down about five points from the previous Friday.

As usual, the local bourse took its cue from Wall Street, where the major indices tapered down from the euphoria-driven highs of last Wednesday in the wake of US President Joe Biden's inauguration.

The Dow Jones index retreated almost 0.6 per cent last Friday, while the S&P slipped 0.3 per cent. The Nasdaq was slightly higher.

Analysts note that despite the pullback, equities continued to attract interest, fuelled by the search for yield.

In a report late last week, the Singapore Exchange (SGX) noted that over the first 13 sessions of this year, growth stocks listed here made average gains of 6 per cent, while value stocks rose 5 per cent.

Leading the growth stocks over those sessions have been AEM Holdings and UMS Holdings, which have averaged 20 per cent gains on net institutional flows close to $40 million, SGX research shows.

Equity research house Jefferies sees more upside for the Singapore index. Jefferies strategist Sean Darby reckons, on a dividend discount model, that the STI should trade around 3,200 points.

This works out to an immediate upside of about 8 per cent from current levels.

But the debate on whether the market has more legs or is in dangerous bubble territory continues to rage.

Experts like Mr Jeremy Grantham, co-founder of asset management firm GMO, reckon many US tech stocks are hugely overvalued and this bubble could burst within months, bringing most Wall Street stocks down.

But others, like BlackRock managing director Ben Powell and UBS chief investment officer Mark Haefele, note that the fundamentals underpinning today's markets - like liquidity and federal support - have changed the dynamics.

Mr Haefele, for example, notes that low interest rates and government stimulus are pushing investors towards the notion that "there is no alternative" to equities.

While acknowledging individual speculative bubbles, he adds that new fiscal stimulus being added to an accommodative monetary policy makes equities look more appealing than bonds. "We therefore retain a pro-risk stance," he noted.

Mr Powell says the current euphoria makes sense from an economic perspective, adding: "The market is pricing activity restart, and 2021 should see the fastest growth in global GDP (gross domestic product) since the 1970s."

Indeed, with some US$4 trillion (S$5.3 trillion) of liquidity sloshing around and another US$1.9 trillion in fiscal stimulus planned by the Biden administration, the market might well have much more upside. But expect volatility.

Trading in the week ahead in Singapore will also be guided by notable results, including Keppel Corp and at least 19 real estate investment trusts, such as those under the Keppel, Mapletree and CapitaLand umbrellas, OUE, Ascendas and City Developments Limited.

A version of this article appeared in the print edition of The Straits Times on January 25, 2021, with the headline 'There's reason for optimism but expect volatility'. Subscribe