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STI stocks hurtling towards year's lows with August mauling
AUGUST, traditionally a weak month for Singapore equities, is panning out worse than expected, with the index down 5.3 per cent this month.
The benchmark index components, often regarded as bellwether companies of the local market, have not been spared: Nine of the 30 counters of the Straits Times Index (STI) hit 52-week lows in the last week, although for different reasons.
Four of them (Jardine Matheson Holdings, Dairy Farm International, Hongkong Land and Jardine Strategic Holdings) have significant exposures to Hong Kong, where the effect of 10 weeks of protests are already having an impact of the city's economy.
Two counters, namely national carrier Singapore Airlines and Hutchison Port Holdings Trust (HPH Trust), are vulnerable to trade-related issues.
The remaining three - Singapore Press Holdings (SPH), Sembcorp Industries and Yangzijiang Shipbuilding - have been hobbled by company-specific issues, said the head of OCBC Investment Research Carmen Lee.
Referring to SPH, she said the cautious economic outlook and softer economic growth forecast may translate into cautious advertisement spending by companies, which could hit SPH.
KGI Securities' head of research Joel Ng said: "SPH's media business is still under pressure, and its heavy investments into the UK are taking a hit from Brexit fears and the country's weakening currency."
Turning to Sembcorp Industries, he said it has been roiled by Sembcorp Marine's Brazil probe and the difficulties its subsidiary is facing in the offshore and marine sector.
Ms Lee said: "A sustained recovery in new orders (by Sembcorp's customers) will take time. With intense competition, margins are likely to stay compressed for this unit."
Over the last week, Yangzijiang faced a heavy sell-off from investors after news broke that Liu Jianguo, who chairs the charity foundation set up by the shipbuilder's executive chairman Ren Yuanlin, is now under probe by the Beijing authorities, who are running an anti-corruption crackdown.
The recent stock performances of these nine STI counters have also run into global economic headwinds and growing fears of a recession.
KGI Securities' Mr Ng told The Business Times: "Results for companies in the previous quarter had already indicated that the slowdown started in 2018; that has now been confirmed by the latest gross domestic product and export data from the government."
Of the nine companies that hit 52-week lows in the past five trading days, three of them - Singapore Airlines, SPH and Sembcorp Industries - are under UOB Kay Hian's coverage.
The brokerage's head of research Adrian Loh noted that the companies had released results that "were either in line with or had missed ours and consensus expectations".
"This may have exacerbated the share price fall in this earnings season and more recently," he added.
As it stands, the economic slowdown is a reality faced by other economies; with that, investors have taken risk off the table.
Equities have been affected by fund flows to safe-haven assets like fixed income instruments and gold.
And then, market sentiment - already fragile - was dealt a blow at the start of the month by US President Donald Trump, who moved to implement tariffs on the remaining Chinese imports to the US. Brexit and the protests in Hong Kong continue to weigh on sentiment as well.
Such conditions may cast a pall over markets, but analysts believe that this year's market performance is unlikely to compare with that of last year, when the STI lost 9.8 per cent.
The STI is down by around 9 per cent from its April high, and is now only slightly up from its 2018 closing. That said, Ms Lee noted that the index is now trading below its five-year and 10-year averages.
"Pending no drastic deterioration in the coming months, current market valuations for the Singapore STI stocks are not expensive, compared to historical averages," she said.
Mr Ng said: "The global economy is definitely slowing down and monetary authorities will be aggressively easing policies in the next few months. That should provide some support to the financial markets."
In the current climate, UOB Kay Hian's Mr Loh said the brokerage favours local banks DBS and OCBC Bank, which have reported "a decent set of first-half results".
"(The two banks') attractive dividend yields differentiate them from their regional peers, while their asset quality and capital-adequacy ratios remain strong," he said.
UOB Kay Hian also favours real estate investment trusts (Reits).
Among STI components, KGI's Mr Ng prefers bourse operator Singapore Exchange, which benefits from volatility through its derivatives products. Singtel, which offers a 5-to-6 per cent dividend yield, is also preferred by KGI.
Ultimately, the key variable, he said, remains the trade war between the US and China, which is what will deepen a slowdown and push stock markets lower.
Ms Lee said: "We prefer to stick with companies which are more defensive, and have proven strong management and sustainable business models. On price weakness, we recommend accumulating CapitaLand, City Developments, Singtel, UOL and Venture Corporation."