Analysts welcome market correction; fundamentals, bull run still intact

Singapore

DESPITE the recent bloodbath in the Asian bourses, it is not yet the end of the world, market watchers have said.

Singapore's Straits Times Index (STI) shed 46.89 points, or 1.33 per cent, to finish down on Monday - alongside bourses in Tokyo, Hong Kong and Seoul - after higher United States Treasury yields fuelled panic selling on Wall Street last week.

Hartmut Issel, head of Asia-Pacific equity and credit in UBS Wealth Management, said on Monday afternoon: "The market weakness today is not confined to Singapore, which in any case is not the most affected index."

Yet even as the STI continued to retreat from decade highs after having closed above 3,600 on Jan 24, the research team at KGI Securities (Singapore) still put out an update on Monday, exhorting traders to "buy the dip on market over-reaction".

The index is likely headed for "a mild correction" of 5 per cent to 10 per cent, KGI retail research manager Joel Ng told The Business Times over the phone. But he maintained that "nothing has changed on a fundamental basis", adding that regional markets are still up so far for the year, "so a healthy correction is good".

Eli Lee, head of strategy at the Bank of Singapore, also described the market consolidation as "healthy".

"History shows that short-term corrections are common - even in bull markets - and these are usually short-lived and take an average of less than six months to recover," he said.

Phillip Securities Research investment analyst Jeremy Ng said the sell-off had been imminent.

While adding that "the market needed to catch a breather and rebalance", he stuck to the bullish call on the stock market that he had issued at the start of the year. Like Mr Lee, he predicted that the local index correction would be short-lived.

Still, Mr Ng cautioned that, from a price action perspective, more dip buying is likely to reappear around the STI's 60-day moving average of 3,469 points.

The team at DBS Group Research has pointed to near-term support in the range of 3,450 to 3,480 points, while IG Asia market strategist Pan Jingyi pegged the STI's immediate support level at 3,470, ahead of uptrend support at around 3,430.

"While the pullback had been deep this round, (with) the likes of the local STI being dragged past a key support level, I maintain the view from this morning that we are not at an inflection point for prices yet," she said in an afternoon e-mail to BT.

Although Phillip Securities' research head Paul Chew told BT that it is hard to pinpoint the exact timeline of a recovery, he added that the market is set up to trade range-bound for now, as any macro-economic news will be scrutinised for its potential effect on a US Federal Reserve rate hike.

KGI's Mr Ng also pointed out: "We're still in earnings season, and valuations are what drive stocks."

Singapore traders can look forward to results from blue chips such as DBS and Singtel; both STI constituents are due to report ahead of the market's open on Thursday.

CMC Markets Singapore analyst Margaret Yang wrote in a morning note that a sell-off in Singapore and Hong Kong would likely be due in part to profit-taking, ahead of the earnings season's peak.

"The downside is cushioned by improved fundamental elements and relatively low valuation, therefore value investors should have confidence about the market outlook beyond this correction," she said.

And analysts were adamant that, when it comes to markets' bull run, the fat lady has not yet sung.

UBS' Mr Issel noted in his e-mail to BT that "the sharp market move should be put in context", given factors such as markets' "exceptional" performance of late.

"US monetary policy is in the process of normalising after a period of unusually ultra-easy monetary policy and record-low bond yields. Investors should expect volatility to return to normal too," he said.

"With this in mind, we don't believe that now is a time to reduce exposure to stocks. Global growth and earnings remain strong, with the recent tax cuts providing a boost to growth."

Marie Owens Thomsen, chief economist at Indosuez Wealth Management, told BT: "We are probably seeing mostly profit-taking at this stage, consistent with recent high readings of bullish sentiment in the markets."

She added that Asian economies have become more resilient to external shocks. "A sharply higher oil price could make vulnerabilities emerge again, but there is a lower risk of balance-of-payments crises in the region today than previously."

Bull markets tend to end when the growth cycle turns negative or there is excessive policy tightening, said Binay Chandgothia, Hong Kong-based managing director and portfolio manager of Principal Global Investors' asset allocation arm. "Neither sign is visible" at the moment, he added.

All the same, there may still be headwinds in store.

Every word from the lips of new Fed chairman Jerome Powell "will be critical in the near term", said Phillip's Mr Chew - as investors wait to see if he is a hawk pushing to tighten the screws on monetary policy.

Bank of Singapore's Mr Lee said: "Investors can expect increased market volatility as key risks remain in the backdrop. In our view, the market is under-pricing inflation."

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