Investing now - more opportunity than trap

In the week when Brexit chaos rocked the financial markets, only US$44.54 million (S$60 million) was taken out of equity funds invested in Singapore-listed shares.

That was a pittance compared with the US$12.26 billion that was pulled out of United States equity funds in the same period as investors panicked over the impact Brexit could have on the global economy.

But the Singapore stock market is far smaller than Wall Street, so any funds outflow should also be on a considerably smaller scale.

However, what is interesting to note is that the outflow from Singapore equity funds that week was only slightly bigger than the previous week's outflow of US$40.19 million, based on data culled from an OCBC Treasury Research report.

This suggests that while traders might have panicked with a knee-jerk sell-off in the local stock market when the Brexit vote was announced, long-term fund managers had adopted a more sanguine attitude. They more or less stayed put, without trimming their portfolios significantly.

While it may be tough for investors to perfectly catch the market at the bottom, if they invest now, they can do so with the certainty that they are not buying at the top.

Does this suggest that local blue chips have fallen to attractive enough levels that fund managers will not lose sleep even over the impact that a cataclysmic event like Brexit could have on their portfolios?

If that is the case, it flags a buy signal for value investors. But analysts are mostly advising investors to stick to defensive dividend-paying stocks for now, rather than growth plays.

It is not difficult to understand their cautionary stance.

Since hitting a then seven-year high of 3,539.95 points in April last year, the benchmark Straits Times Index (STI) has fallen 19.6 per cent. This puts the market barometer within touch of bear market territory, which chartists say happens when stock prices drop at least 20 per cent from their most recent peak.

So the question for an investor with a five-year view, for example, is whether the stock market's depressed level presents a buying opportunity, or will it only become even cheaper, to the point of a deadly bear trap?

To answer the question, it may be useful to examine the performance of the STI's 30 component stocks.

Broadly speaking, they can be divided into six categories - banks, real estate investment trusts (Reits), property developers, telcos, plantations, and the offshore and marine sector.

In the past 14 months, the worst performer has been offshore and marine, with Sembcorp Marine almost halving in price and Keppel Corp losing about 41 per cent following a drying up in rig orders as oil prices tumbled to as low as US$26 a barrel.

Oil has recovered significantly since then, but this has largely been due to production outages rather than a recovery in demand. Dour analysts are also predicting a likely prolonged spell of low rig orders.

UOB Kay Hian warned in a recent note that unless existing rigs are scrapped in a big way, a new rig order boom may not surface until well past 2020 as this drought "echoes the contracting lull post-1985" when there was a similar drying up of orders. "Higher oil demand alone is insufficient to increase rig orders," it said.

Another depressed sector is property, which has yet to turn the corner following the slew of anti-speculation measures imposed on the residential market, even though most developers are trading at big discounts to book value.

City Developments has fallen 24 per cent since April last year while CapitaLand is down 18 per cent. Hong Kong Land has also lost 18 per cent, reflecting the tougher business conditions in Hong Kong.

In Singapore, the outlook is challenging as the supply of completed private housing units will swell to as many as 22,000 this year, even though the average annual demand in the past decade has been for only 11,890 units.

The redeeming feature is that foreign purchases are picking up again and this may help to lift demand for private homes.

Weakness in these two sectors has inflicted collateral damage on the three local lenders, whose share prices have dropped around 20 per cent since April last year.

Maybank Kim Eng noted that the property curbs will spell fewer lending opportunities for banks while the oil rout may cause non-performing loans to rise.

On top of these old concerns, new worries have cropped up as Singapore's economy struggles with sub-par growth and tepid retail sales, which suggest that the banks' already low single-digit loan growth target may need to be revised down.

Banks may also be more vulnerable to any sell-offs in global lenders due to Brexit concerns, with Citi Research noting that such worries will cap the valuations in Singapore lenders for now.

Among the STI component stocks, the relative outperformers have been the Reits. But even here, the performance varies, depending on the make-up of the company. CapitaCommercial Trust, for instance, is up 4.7 per cent in the past 14 months while CapitaMall Trust is down 3.9 per cent.

Even here, a range-bound market may prevail. Credit Suisse noted that for Reits, the prospect of more benign interest rates, with the US central bank postponing further hikes, has to be balanced against the sluggish Singapore economy, which makes it a challenge to lure tenants or raise rentals.

Still, there may be a couple of silver linings beneath the gloom and doom. In times of stress, markets may not just be pricing in rational risk expectations but also the emotional anxiety of all those investors who have taken their eyes off their long-term goals.

And if the gloom over the economy proves to be less pervasive than what the consensus would have us believe, then there may be stock opportunities awaiting the brave investor.

For now, where are investors placing their bets?

One STI stock that has bucked the bearish trend is Thai Beverage, which has gained about 20 per cent since April last year after getting kudos for expanding its share of the Thai beer market.

Another is Sats, which has risen 12 per cent as it has become a play on Singapore's ability to attract more tourists.

A possible upswing in palm oil prices due to disruptions in production and higher demand in the lead-up to the Hari Raya holiday in South-east Asia may also have been a boon to plantation giants such as Wilmar International.

The outlook for the high-dividend-paying telcos may brighten as they fend off the business disruption from the emergence of a fourth telco.

All said, while it may be tough for investors to perfectly catch the market at the bottom, if they invest now, they can do so with the certainty that they are not buying at the top. No matter how you choose to invest, the ride in the short term is likely to be bumpy. What you must do is to buckle up, sit back and stay calm.

A version of this article appeared in the print edition of The Straits Times on July 11, 2016, with the headline 'Investing now - more opportunity than trap'. Print Edition | Subscribe