Regional markets may face more volatility this week as investors keep a wary eye on fresh signs of economic slowdown in China and news of the first rate hike in the United States since the global financial crisis.
Markets last week were dominated by bearish sessions which saw the MSCI Asia ex-Japan Index - which tracks the large and mid-cap stocks in 10 regional markets -fall 2 per cent, one of its biggest weekly losses this year.
The sell-off was partly triggered by a flash estimate showing China's purchasing managers' index falling to a 15-month low in July. But sentiment was just as downbeat in the US, where disappointing corporate results sent the Dow Jones index down 2.9 per cent for the week.
"Global markets are reaching a crux and things may get ugly... Don't forget this week we also have FOMC's July meeting," CMC Markets analyst Nicholas Teo said, referring to the Federal Reserve's governing committee, which dictates US interest rates. The two-day meeting starts tomorrow.
"This will be one of its four remaining meetings this year, and going by street expectations of two rounds of rate hikes by the end of this year, the first hike may be announced as soon as this week."
Market watchers are expecting a total of a 25-basis point hike in 2015, a figure that was also in a Fed staff economist projection that was leaked recently. The eventual hike is not likely to trigger a major crash, although most analysts still expect it to at least give the markets some short-term swings.
In Singapore, the rate-hike talk will once again put the local banks under the spotlight. All three banks will announce their results this week, starting with DBS Group Holdings today. Investors will be looking for improvement in margins and earnings from the banks.
"We forecast DBS' earnings to grow by 9 per cent year on year, OCBC's by 2 per cent year on year and UOB's by 5 per cent year on year," Nomura analysts said in a note last week.
"We think the resilience in the second-quarter results and the impending US interest rate hike are possible catalysts for these stocks. Our top pick is DBS, as it is the prime beneficiary of higher interest rates," they added.
Reflecting the keen market interest, all three stocks have been gaining for the past two weeks. DBS was up 2.1 per cent, OCBC Bank rose 2.6 per cent, and United Overseas Bank increased 2 per cent.
But the impending rate hikes will not bring good news to every sector. For instance, real estate investment trusts (Reits) are likely to lose their appeal, even as they reported improved earnings over the past week. These included Ascendas Reit, which reported a 5.5 per cent increase year on year in distribution per unit (DPU) for the quarter to June 30. For the same period, Suntec Reit's DPU rose 10.3 per cent. But Ascott Reit posted a 5 per cent drop in DPU due to declining turnover from existing properties.
While Reits are a popular choice for investors looking to build a stable income-generating portfolio, Mr Teo is hesitant on their outlook.
"Investing in Reits is about dividend yield, which is certain to come down when interest rate rises, so I don't recommend Reits for the coming quarter," he said.
It remains to be seen how the Monetary Authority of Singapore (MAS) review of the Reit market will affect the performance of Reits going forward, he noted.
MAS announced early this month that it will go ahead with most of its proposed new rules on Reit regulation that were put up for consultation last October.
The changes include tweaks to borrowing caps and a requirement for fees charged by Reit managers to be justified.