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Few hiding places left for investors as STI approaches 2,500

China woes, vulnerable HK dollar pummel regional stock markets, but analysts point to "fear factor" at work rather than fundamentals changing



INVESTORS in Asia got out of risk assets like cats from a bath on Wednesday as weak Chinese economic data, falling oil prices and fears of a vulnerable Hong Kong dollar sent stock markets tumbling to multi-year lows.

The Straits Times Index (STI), Singapore's bluechip equity gauge, fell 2.98 per cent, or 78.7 points, to close at 2,559.77, a four-year low.

In Hong Kong, the Hang Seng Index shed 3.82 per cent, or 749.51 points, to finish at 18,886.30.

Coming off Tuesday's gains, Wednesday's pullback had hints of profit-taking.

"Despite yesterday's advance, the market is still flush with an overhang of sellers waiting to come out and will keep a lid on the potential to advance further," NetResearch Asia wrote in a note before Wednesday's market opened. "'Forced and voluntary liquidation' also appears to be a buzzword as some clients are faced with margins calls while others who fear stocks were still headed lower, opt to sell into strength."

Andrew Chow, head of UOB Kay Hian Research, said Wednesday's selling in the stock markets was more a case of "fear factor" at work than fundamentals changing. The analyst said stocks were close to fair value at the moment, although investor wariness could be protracted and continue to dampen prices for a while.

How low could the STI fall?

"At 2,590 for the STI, the market is factoring zero per cent corporate earnings growth for 2016 and close to -1.5 standard deviation for a blended price-to-book and price-earnings ratio. We're below that already, which says that a lot has been factored in," Mr Chow said.

Most analysts have a floor of about 2,500 for the STI.

DBS on Monday issued a report that said the probability of the index falling towards 2,500 has increased.

"Along the way down though, we do not rule out a technical rebound around 2,600, but this should be capped at 2,630 or moderately higher at 2,700," DBS wrote.

HSBC Asia equity strategist Devendra Joshi also expects Asian equities to be lacklustre in 2016 as slowing economic growth hits earnings.

"High-dividend-yield equities are a good place to hide," he said. "Also, long-term investors should start to build up positions in quality names."

The Hong Kong dollar remained under pressure on Wednesday amid speculation about whether the territory had the means to defend the currency's US-dollar peg.

The currency traded as weak as 7.8265 HK dollars for every US dollar on Wednesday, just shy of the HK$7.85 limit set by the current peg.

"With US-dollar-based rates rising, Hong Kong's currency peg necessitates that rates in Hong Kong would rise as well," said Hartmut Issel, who heads equity and credit in Asia Pacific for UBS Wealth Management. "This just happened very swiftly now and thus people are getting very nervous. This means that monetary policy in Hong Kong is effectively tightening, which in turn has the potential to curb growth . . .

"What also does not help matters is that, globally, several currency pegs have either been dismantled or are put into question by markets. Some investors have similar concerns about the Hong Kong dollar peg, although we believe it is likely to hold."

Hong Kong's currency turmoil may not be over yet, although market concerns may be overdone, Mr Issel said. "As far as interest rates in Hong Kong go, they probably need to offer a decent premium over the US rates to compensate investors for some of the uncertainties," he added.

"Given that there is no such premium yet, one cannot say that this adjustment process is finished as of now. However, if the main concern behind these developments ultimately remains a China hard landing, the recent GDP and also property numbers show clear evidence of a slowdown, but not of a crash landing, and the market response looks exaggerated."

The Singapore dollar weakened slightly, trading as much as S$1.4412 per US dollar, but staying below the S$1.45 level.

The Singdollar also received some support from the Monetary Authority of Singapore (MAS), which on Tuesday reiterated its existing policy stance of maintaining a modest appreciation of the currency.

HSBC does not expect the Singapore central bank to soften policy anytime soon.

"A common misperception in the market is that the MAS widens the policy band during periods of economic and market uncertainty to accommodate higher volatility," HSBC said. "However, the MAS's modus operandi is actually the opposite: policy will not accommodate volatility but 'provide an effective anchor for economic and financial stability during a period of global and regional uncertainties'."

The Japanese yen, however, has benefited from regional investors who have shifted allocations to cash and want to park that cash in a safe-haven currency, said IG market strategist Bernard Aw. The yen strengthened to about 115.98 yen per US dollar on Wednesday.

"The Japanese yen is a safe haven in this region," Mr Aw said.

Weak commodity prices and concerns about China also quelled investors' appetite for risk.

Oil prices continued to fall on Wednesday, with Brent crude for March delivery falling 2.7 per cent to US$27.98 per barrel in London.

DBS, however, argued that the drop in oil prices is a function of supply having run too far ahead than of demand falling. This might pose problems for oil-and-gas industry players such as rigbuilders and contractors, but for everyone else lower prices should be positive. A supply-driven glut should support growth since expanding economies will get a boost from cheap oil, the firm said.

"Many think weak demand from China is pushing prices down. The converse is true," DBS wrote. "Strong supply is pushing prices lower and this is providing an enormous benefit to China and the rest of Asia."

UBS's Mr Issel recommended finding shelter in diversification amid volatile times. Investors could even look at hedge funds, and should maintain allocation discipline.

"Diversification of portfolios is of utmost importance," Mr Issel said. "This includes holding even a portion of developed-market government debt such as US Treasuries. These positions serve as buffers in turbulent times like these. However, they do not promise solid return levels and hence we currently recommend to underweight them (but still hold some)."