Singapore market: A year of two halves

Display of the Straits Times Index on ticker board in SGX Centre on Aug 21, 2015. ST PHOTO: ONG WEE JIN

This year has been a challenging one of two halves.

In the first half, the Straits Times Index (STI) stayed above the 3,260 level and touched a high of 3,550. In contrast, the second half has been characterised by almost panic selling in the third quarter, bringing the STI as low as 2,740, down 23 per cent from the year's high.

What happened in the world was aptly captured in the volatile price movements in the local market.

Early optimism was quickly clouded by a slew of unfavourable news sparked mainly by weak economic growth in China, the devaluation of the Chinese yuan and the Chinese stock market rout.

It was not just China-centric developments that hit market sentiment, as mixed economic news from the United States and the cut in US corporate earnings heightened market concerns over excessively high valuations.

During the year, uncertainty on the next rate hike also led to wide swings in the market at each Federal Open Market Committee meeting. Concerns over the health of emerging markets, the plunge in commodity prices and the continuing downtrend for oil opened up new areas of uncertainties and put a brake to stock market gains.

With the cut in economic growth projections and the resultant cut in corporate revenues and profits, the slowdown also meant that new orders were not forthcoming and could potentially hurt next year's earnings.

While developed markets were generally considered to be less affected, they were not completely spared, as any slowdown in emerging markets will also hurt demand in developed markets. In addition, uncertainty over the next US rate hike also created additional volatility in the market. Based on the MSCI World Index, this cumulated in the heavy selling in August-September, which brought the MSCI World Index down 15 per cent from the year's high to the year's low.

Economic growth projections have been progressively cut during the year. Earlier in the year, the US economy was projected to grow 3 per cent this year, but the current projection is 2.4 per cent. There was a similar cut for US gross domestic product (GDP) growth next year and this trend was similarly seen in most key economies.

China's growth, which is key to this region, was slashed from 7 per cent to 6.5 per cent for next year. In Singapore, growth for this year was cut from 3.7 per cent to 2.1 per cent currently and growth for next year was slashed from 3.7 per cent to 2.5 per cent.

One of the very few bright sparks now is Europe, where its growth forecast has changed from 1.1 per cent to 1.5 per cent, and this was also supported by the improving purchasing managers index (PMI).

We expect geopolitical risks to remain, especially with the recent attacks in Paris, but as with all recent terrorist attacks, market reactions are likely to be sharp and brief.


In the Singapore market, selling in the third quarter of this year was across the board and blue chips bore the brunt of the selling pressure. As a result of this, the STI is now one of the worst performers in the region as several of the key sectors, such as oil and gas, commodity and property, are facing challenging operating conditions and soft demand.

In terms of growth drivers, we need to look offshore and China remains a key factor. After years of heady growth, China is now projected to grow at below 7 per cent this year and next.

While the old engines of growth, such as industrial activities, are losing steam, new engines of growth such as consumption and services are helping to plug the gaps.

Singapore companies are fairly reliant on the regional economies, and this interdependency is being aggravated by the current widespread slowdown in the region.

The exposure of Singapore companies ranged from consumer products to commercial properties, and this closely linked economic bloc is likely to see reduced inter-regional trades and cross-border transactions if the pace of slowdown accelerates.

In addition, oil is currently trading close to its five-year low of US$38 per barrel and yet there is a lack of near-term drivers to lift prices higher, especially with the current supply.

Volatility for the STI (10-day) hit a recent high at 31.6 in September. The last time it crossed the 30-level was in October 2011, during the European debt crisis. With the hazy global outlook and impending rate hikes, the market is likely to stay volatile for the near term.

This is reflected in the local business sentiment, which has progressively worsened recently. Based on the latest quarterly BT-UniSIM Business Climate Survey, the outlook for the six months to March next year is at the lowest since the financial crisis. This was clearly seen in three areas: sales, profits and new orders. Sales have been on a prolonged downtrend, but the weaker global outlook means that expectations for new orders have also slowed.


In recent times, investors have ignored cheap valuations as a reason to buy equities, in view of the current backdrop of slower corporate earnings growth.

Corporate earnings, based on consensus for the STI stocks, are expected to grow 1.8 per cent this year and 5.2 per cent next year. However, with the weakening economic outlook, there is risk of further earnings cuts next year.

Based on current levels, the STI is currently trading at 12 times earnings, 1.1 times book and with an average dividend yield of 4.2 per cent for next year. These levels are not excessive and are almost close to the levels seen in the previous two crises in 2008/09 and 2011.

We believe this is not warranted, as current market conditions are not as bleak or heading into recessionary conditions. At current price levels, we believe that most of the negatives have already been priced into stock valuations.

Refocusing on core fundamentals, we continue to like companies with a differentiated business strategy and sustainable business model, placing them in a better position to ride out any near-to-medium term uncertainty.

Some of our favourites include A-Reit, CapitaLand, DBS Group Holdings, Frasers Centrepoint Trust, Keppel DC Reit, Raffles Medical, Sheng Siong, Singapore Post, Singtel, QAF, UOL, Venture Corp and Wing Tai.

•The writer is head of OCBC investment research at OCBC Bank.

A version of this article appeared in the print edition of The Sunday Times on November 29, 2015, with the headline 'Singapore market: A year of two halves'. Subscribe