Greece and China will still set the pace

GREECE and China have undoubtedly dominated headlines for the past few weeks - the former because of its controversial referendum last week and its possible messy exit from the euro union, and the latter because of the amateurish manner in which regulators handled the country's stockmarket meltdown.

However, even though events in Europe and North Asia have played a major part in depressing prices here and should continue to occupy a pivotal role again in the days ahead, one can't help getting the feeling that they are simply diverting attention from the main feature - the deep, possibly structural problems plaguing the local stock market.

These have been well-documented so there's no need to delve into them again; suffice to say that it is very likely that institutional money is underweight the local market and has been for many months now.

This is not to say Singapore stocks are wholly unattractive. Macquarie Warrants on Friday said although Macquarie Equities Research (MER) in its latest Singapore Strategy report thinks most global investors are underweight local stocks, MER has a mid-2016 target of 3,500 for the Straits Times Index, implying an 8 per cent total return.

"On valuation, Singapore sits in the middle of the regional pack on forward price-to-earning ratio (MSCI: 13.2x; FSSTI: 13.3x), but its return profile is buttressed by an attractive forward dividend yield (MSCI: 3.8 per cent; STI: 3.6 per cent), joint highest in the region alongside Taiwan's," said MER. In a nutshell, it is boring but probably defensive enough to offer some safety.

A possible 8 per cent return in the next 12 months, however, is unlikely to prompt investors to dash off to buy. Markets on Thursday and Friday may have appeared to accept that Greece's abrupt U-turn with regard to austerity suggests an end to the turmoil, but it would be wise to be prudent on this count.

It remains to be seen, for example, if Greek politicians can sell the idea of major austerity measures to a population that last week voted resoundingly to reject austerity. Moreover, for a continent that has favoured kicking the can down the road throughout the past 5-6 years, this could turn out to be yet another example of can-kicking, albeit one on a grand scale cleverly disguised with conciliatory and concessionary rhetoric.

As for China, with the amount of volatility seen over the past fortnight, no one knows what the end-game might be. Schroders's Louisa Lo, deputy head of Asian equities, in a July 9 report pointed out that the government there is supporting blue chips, but most of the margin selling is focused on mid-small caps so there is a mismatch.

"Given the scale of problems and the leverage involved, there is definitely a need to call for more comprehensive and better thought-through packages from the government to deal with the situation," said Ms Lo.

"A failure to break this margin deleveraging cycle could increase the risk of a systemic risk in the financial system. In our view, a large scale fund backed by government financing is required to provide a floor to the market, restore investor confidence and break the downward margin spiral."

Morgan Stanley however, in its Friday Research Note on China, titled "Addressing Investors' Questions about China's Stock Market Correction", said the issues related to margin financing and over-the-counter leverage are manageable and are unlikely to trigger systemic financial risks and that the economic impact is likely to be limited.

"Moreover, even if the spillover risks do materialise, policy makers have adequate tools and will respond to prevent these risks from affecting the financial system and broader economy," said Morgan Stanley.

For full listings of SGX prices, go to http://btd.sg/BTmkts