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Wall Street roils Asian markets but bears stay away for now

Analysts say market swings normal at this stage of bull market; investors advised to focus on defensive plays

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Singapore

A BRUTAL sell-off in the US overnight sparked a bloodbath in Asian markets on Thursday, with heavy losses of up to 5 per cent in some bourses.

But despite the steep selldown, most analysts do not see the start of a bear trend, adding that such volatile swings are typical at this stage of a bull market. Their view was shared by global finance chiefs, with many describing the retreat as a long-awaited correction.

"The fundamentals of the US economy continue to be extremely strong... the fact that there's somewhat of a correction given how much the market has gone up is not particularly surprising," US Treasury Secretary Steven Mnuchin said at the IMF's annual meeting in Bali, Indonesia.

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On Wednesday in New York, the Dow Jones index plunged a dramatic 832 points or 3.2 per cent to 25,598.74, while the S&P 500 lost 3.3 per cent on heightened fears of rising interest rates and the impact of the US-China trade war on economic growth.

The rout continued when Asia and Europe markets opened on Thursday. China's Shanghai Composite Index led the regional pullback, diving 5.22 per cent to close at a near four-year low of 2,583.46. South Korea and Japan were also badly hit - the Kospi index fell 4.4 per cent to its lowest since April 2017; and the Nikkei 225 ended down 3.89 per cent. Singapore's Straits Times Index was also not spared - tumbling 2.7 per cent to 3,047.39.

Despite the local market's widespread losses, analysts advise investors to stay engaged in the market, albeit with a focus on defensive stocks. DBS chief investment officer Hou Wey Fook believes the trigger for the bloodbath is fears of further Federal Reserve rate hikes. He likened it to a similar sell-off in 2004, at the start of a two-year period when the Fed raised rates in 17 consecutive hikes from 1 per cent to 5.25 per cent. "Did the market turn into a bear trend? No. The market continued higher, albeit with much wider gyrations," he said.

Union Bancaire Privée's chief investment strategist for Asia, Anthony Chan, said UBP expects US 10-year yields to reach 3.5 per cent in 2019, with the Fed keeping to its policy path of another hike this year and three more in 2019.

"Essentially we are close to market consensus and the one major upside risk in our forecast is significant upside surprise on US inflation that triggers more hikes than anticipated," said Mr Chan.

UBS chief investment officer Kelvin Tay said the rise in interest rates has made stocks relatively less attractive compared to Treasuries and fuelled concerns that the economy has entered the latter stages of the business cycle and growth will begin to slow.

"Periods of rising volatility and market pullbacks are likely to be more common as the cycle matures," he said. "Thus, we view the past week's market action as fairly 'normal' for this stage of a bull market that's likely to extend for a while longer."

In a strategy report released on Thursday afternoon, OCBC Bank's Carmen Lee guided Singapore investors towards tactical picks like OUE Hospitality Trust and M1 which have shown resilience. For those looking to avoid downside risks from the ongoing trade war, she recommends plays like CK Infrastructure Holdings and NetLink NBN Trust in regulated infrastructure industries.

DBS group research analyst Yeo Kee Yan said domestic consumption, consumer staples and utilities including Sheng Siong and Koufu should outperform on the flight to safety.

He cautioned that "oversold cyclicals like banks (UOB), technology (Venture Corp), offshore and marine (Sembcorp Marine, Sembcorp Industries) are worth a trade, but only for the nimble and disciplined trader".

Whatever their trading strategies, investors should be prepared for things to get worse before they get better, analysts warned.

Jameel Ahmad, global head of currency strategy and market research at FXTM, sees stock market valuations as too strong at this point of time, and said the selling could "certainly continue".

"Expect increased volatility, the market gyrating between developments of trade wars, US elections and possible interest rate hikes in December," said DBS' Mr Yeo.

"In an extreme bear case scenario if the STI does eventually fall below 3,000, the bottom could be at 2,865."

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