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Singapore stock pullback offers buys, but no clarity on H2 outlook
THE storm of uncertainties, ranging from US-China trade tariffs to the recent tumbles in the local equity market, have made it more difficult to predict the outlook for local equities, but analysts are mixed on what the second half could bring.
At the start of the year, many were predicting that the Straits Times Index (STI) would hit nearly 3,600 by the end of 2018, following a bull run at the end of last year, when the index jumped 18 per cent to close at 3,402.92 points.
A few bulls are standing by their year-end forecasts for STI to hit between 3,600 and 3,800; others are bearish on its prospects.
As of Wednesday, the STI had largely recouped the losses from the twin troubles of property cooling measures and trade tariffs the week before, but still closed 4.52 per cent down for the year to date (YTD).
Looking on the bright side, the YTD retreat has actually provided an attractive entry opportunity, said Eddy Loh, senior investment strategist at Credit Suisse.
With a 12-month forward price-to-earnings (P/E) ratio of 12 times, the Singapore market is attractively priced, below its 10-year average of 14 times.
"As the year progresses and earnings come through, we believe the STI will grind higher," he said.
IG Singapore's market strategist Pan Jingyi said that the STI is expected to reverse its losses and bring back investor confidence.
However, she cautioned that volatility stemming from escalating trade tensions could not be ruled out in the near term.
With the 3,200 support level breached with the recent knee-jerk reaction to property-cooling measures announced by the government, year-end expectations remain for the STI to explore the upper end of the trading range this year "towards 3,600". "Looking ahead, the clearance of the trade tensions is still expected to bring about the return of investors' confidence, particularly with strong earnings still in sight," she said.
HSBC Private Banking also maintained a brighter outlook, remaining "overweight" on Singapore equities and forecasting the STI to hit 3,800 at year's end.
Supported by continued global synchronised growth, solid corporate earnings and prudent central banks, global equities are likely to rebound in the second half of 2018, with US and Asian equities offering the most attractive outlook, HSBC Private Banking said.
Fan Cheuk Wan, its head of investment strategy and advisory for Asia, said: "We prefer Singapore equities for their robust earnings growth of 15 per cent by consensus estimates and strong economic growth."
Analyst Neel Sinha at Maybank Kim Eng noted that valuations on the STI are "undemanding" with a 12-month trailing P/E at 10.2 times, compared to a 10-year average of 12.4 times.
The new property tightening measures are now likely to contribute to prolonging the current market weakness, in a departure from the broker's earlier expectation of a modest performance recovery in H2 2018, he wrote in a research note.
Among Maybank Kim Eng's top picks on the local market are CapitaLand, Genting Singapore, ground-services provider SATS and SingPost.
It maintains an "overweight" on financials and tech stocks, "neutral" on healthcare counters and industrial Reits, and "underweight" on office and retail Reits.
The volatility over the first six months of 2018 brought more intraday swings to a number of STI stocks, noted Geoff Howie, SGX market strategist.
Electronics firm Venture Corporation was among the five most active stocks by turnover for the first six months of the year, while AEM Holdings, UMS Holdings, Hi-P International, Creative Technology, Valuetronics, Sunningdale Tech and Allied Tech ranked among the 50 most actively traded companies by turnover for the first six months of 2018.
The "tit-for-tat" trade war, playing out across the borders of the world's two largest economies, has also injected "considerable uncertainty" into the markets, said Eli Lee, head of investment strategy at Bank of Singapore.
He warned that Singapore could feel the effects of the fallout too; a full-blown trade war would likely exact a heavy economic toll on open-market economies like Japan, South Korea and Taiwan, which are intertwined with global supply chains. Prolonged trade tensions "could also diminish business confidence and capital investment further", he added.
Head of RHB Research Institute Singapore Shekhar Jaiswal also said that market consensus pointed to slowing economic growth during H2 2018 and 2019. He expects Singapore's H2 2018 gross domestic product (GDP) growth at 2.1 per cent year-on-year, down from an expected 3.8 per cent growth in H1 2018.
"We are already in the late part of an expansionary economic cycle and are recommending investors to gain exposure to consumer staples and consumer discretionary sectors, which have historically outperformed during late cycles.
"Despite concerns over a slowdown in bank-loan growth amid the recently announced property cooling measures, Singapore banks remain the best way to play the rising interest rates," he said.
Credit Suisse's Mr Loh, echoing these comments, said that in view of lingering concerns over trade, geopolitics as well as rising interest rates, investors should "maintain a well-diversified portfolio to mitigate downside risks".