Picking up attractive stocks in volatile market
Don't panic. Rather, think about investing in stocks whose valuations have fallen to attractive levels in the recent market mayhem.
That's the message from a number of major market players weighing up options in a stock market that remains volatile.
Many investors may be worried or confused about what to do now as markets keep see-sawing in response to news from China and the United States.
But most experts are confident that there will not be a financial crisis on the scale of the global financial crisis back in 2009.
Their confidence is based on a belief that US corporate earnings will continue to be supported by resilient domestic consumption by American consumers.
YUAN FALL V HARD LANDING
While it is true that the yuan depreciation is ultimately a symptom of a slowing economy, this is a different scenario from a hard landing or crash that several pundits keep painting with some regularity.
MR HARTMUT ISSEL, of UBS CIO wealth management
Also, they reason that China, while slowing, will avoid a hard landing as it has its property and service sectors to cushion the impact of falling output.
In fact, some argue, this could be a good time to buy certain stocks whose valuations have sunk to more attractive levels.
That said, investors should purchase these stocks gradually, many institutions advise, as they cannot be sure they will time their entry optimally because there could be sudden market changes that cause them to miss buying opportunities.
DBS Vickers' regional equity strategist, Ms Joanne Goh, however, said that the bank remained cautious on investing in the near term. It would be safer to invest when it is clearer that China's growth has stabilised, she said.
The mainland's third-quarter growth figures are likely to be weak owing to stock market volatility in the second quarter, she added. If and when this weak growth is announced, stock prices could fall further, she said.
Emerging-market stocks could also fall again if the US Federal Reserve decides to increase rates later this month, she said. A Fed rate hike would likely cause investors to move their funds to the US to seek higher yields, causing emerging market shares to fall.
Experts also say that more nervous investors, keen to reduce the volatility in their portfolios and safeguard their capital, should look at increasing their exposure to bonds.
One financial institution, Jaguar Organisation, which represents AXA Life Insurance Singapore, said it is moving client funds into safer assets. It added that there is a risk of a significant correction in the equity market given that, for the past six years, prices have been rising.
Singapore stocks fell sharply last month after fears about China's growth prospects, following the yuan's devaluation, caused investors to worry about the economic growth prospects of Asian countries which rely heavily on the huge Chinese market, noted Mr Vasu Menon, vice-president of wealth management Singapore at OCBC Bank.
Investors also moved capital out of Asia on concerns about impending Fed rate hikes. They were concerned that the rate hikes would cause Asian currencies to weaken against the US dollar, he said.
Local stocks, however, remain attractive to investors seeking a moderate return without relatively high risk, Mr Menon said.
They offer a decent 3 to 4 per cent dividend yield and are more insulated from currency depreciation and political turmoil than higher-yielding stocks in the Asean region.
Also, blue chips here practise a higher level of corporate governance than their peers around the region, reducing the risk of investing in these stocks.
With recent economic weakness, it is now more likely that the Monetary Authority of Singapore will ease the value of the Singdollar, which would benefit share prices, noted Mr Hartmut Issel, head of equity and credit for Asia Pacific at UBS CIO wealth management.
OCBC recommends exposure to sectors such as telecommunications and healthcare, where demand will persist even with weaker exports and a softer economy.
Ms Lena Teoh, Asia Pacific head of asset allocation at Credit Suisse Private Banking and Wealth Management, recommends Singapore banks whose valuations are "close to 2008 global financial crisis" levels.
Interest-rate hikes would improve bank margins and it could be a matter of time before some local property cooling measures are removed to prop up the property sector and household loans, she said.
An RHB report recommended investing in DBS Group Holdings because it would "weather headwinds better than (its) peers".
It cited DBS' fee income growth momentum and the quality of its assets, among other factors.
OCBC is also attractive because of its asset quality, a strong wealth management business and improved regional prospects following the acquisition of OCBC Wing Hang, it said.
Raffles Medical was also one of its stock picks, in the light of expansion plans over the next three years which would increase capacity by more than 70 per cent. Demand for medical services should remain resilient, RHB added.
Some pundits believe China resorted to devaluing its yuan last month because its economy was slowing drastically and needed a boost from cheaper exports.
UBS' Mr Issel said: "While it is true that the yuan depreciation is ultimately a symptom of a slowing economy, this is a different scenario from a hard landing or crash that several pundits keep painting with some regularity."
While there is overcapacity in the industrial sector, other sectors such as the property and service sectors will support growth, he said. Services now constitute about 49 per cent of China's economic output.
China also still has the means to manage growth weakness by cutting interest rate further, said DBS' Ms Goh.
Both banks have forecast that China's economy could slow to below 7 per cent growth in the near term, but would stay comfortably above the 6 per cent level.
Chinese H-shares - mainland companies trading in Hong Kong - are now attractive as their prices have fallen sharply, said Credit Suisse's Ms Teoh.
Export-oriented stocks in the automotive and manufacturing sectors are expected to do well, said DBS' Ms Goh. Valuations of these stocks were hurt by a stronger yuan but, with the cheaper yuan, they could become more attractive.
Jaguar Organisation also said it is increasing its allocation to Chinese shares as their prices have fallen. An eventual economic recovery would cause a resurgence in Chinese manufacturing which would boost China's manufacturing-oriented economy and, in turn, lift its company earnings.
Some investors are worried that a slowing Chinese economy, the world's second largest, will weaken the US economy. Such a slowdown might have severe repercussions for global markets.
DBS' Ms Goh, however, said that even if Chinese growth weakens slightly, US growth would likely remain modest but resilient at between zero and 3 per cent, and not turn negative.
She noted that 70 per cent of the US economy is composed of domestic consumption, which is expected to remain robust.
Years of households reducing their debt levels after the sub-prime crisis, lower oil prices and low interest rates should provide support to consumption.
This would, in turn, generally support company earnings. Severe market drops will usually strike only when company earnings are negative, she noted.
Some observers have also expressed concern over the looming US Federal Reserve interest-rate hikes after years at historic lows. They worry that US growth would be stifled by such hikes, which would make it more expensive for businesses to invest.
Mr Issel, however, said rates will likely remain supportive of business investment, as in the near term they would remain "far shy of 1 per cent".
US stocks are looking relatively expensive, said Ms Goh. The equity market had been rising for a few years and hit an all-time high this year, she noted. With the greenback strengthening and likely to gain further as interest rates rise, the overseas earnings of US firms could be reduced in dollar terms.
While earnings still generally remain supported by the domestic economy, valuations could come down, she said.
Mr Issel also said he was neutral on US stocks as valuations had risen.
Investors can use bonds to reduce portfolio volatility, or preserve capital in a form that can be easily sold in order to purchase equities when their prices fall.
"Given recent market swings, investors should take a step back and reassess whether they can still 'sleep at night'," said iFast financial manager for research and content, Mr Ho Song Hui.
Bonds, whose returns do not fluctuate as much as those of equities, are a means of insulating oneself from market volatility, he said.
iFast recommends investing in shorter-maturity fixed-income securities of tenors between one and three years.
These instruments offer relatively decent yields of 1.5 to 2 per cent, above short-term bank rates of zero to 0.5 per cent.
"If interest rates rise, these bonds mature earlier and you can reinvest proceeds (from the matured bond investment) at (these) higher rates," he said.
Jaguar Organisation is increasing allocation to bonds to safeguard its clients' capital as it believes that the risk of a significant market correction is currently relatively high.
Historically, markets' prices have tended to fall sharply after rising for about five to six years, noted Mr Bernard Chan, financial services director at Jaguar Organisation.
He says that, based on historical data, there is a higher chance of stock prices falling sharply soon given that they had risen for around six years till last month.
Jaguar Organisation is holding more short-term bonds, short-term bank instruments and gold to preserve client assets against this increased likelihood. Should the market suffer a major fall, these assets can be swiftly liquidated and the resulting cash can be invested in cheap equities, said Mr Chan.