Half empty or half full? STI's rebound stirs debate

Singapore

THE winds pummelling Singapore stocks appear to have changed direction of late - with a recent relatively balmy upturn that has seen the local market more or less recoup its year-to-date losses.

Analysts, however, have not changed their minds so much.

Although sectors that were notably hammered earlier in the year - such as offshore and marine, banks, real estate investment trusts (Reits) and property - have since recovered, market watchers who were bearish at the beginning of the year think the recent market rebound is fragile and risks being a bull trap.

At the other end of the spectrum, those who were bullish at the start of January - even when things looked bleak - are sticking to their optimism, especially on banks and property.

One strategy most analysts generally agree on, however, is that investors should take advantage of higher prices to get out of offshore and marine (O&M) stocks.

Going for defensive yield plays is also likely to be a relatively better bet in the current environment than chasing growth or capital upside, they say, with some suggesting that investors selectively buy banks, Reits and real estate developers.

Though there is little consensus in interpreting the recent recovery in local equities, analysts generally suggest that investors make hay while the sun shines - warning that the rally might fizzle out by the time the US Federal Reserve has its next policy meeting in June.

From 2,882.73 points at the end of last year, the benchmark Straits Times Index (STI) fell to as low as 2,533.70 on Jan 21. It subsequently regained ground to reach 2,906.80 on March 18, though it has since eased to finish at 2,847.39 last Thursday. (Friday was a public holiday here.)

Half the analysts who spoke to The Business Times preferred to err on the side of caution, saying there was little sign that fundamentals have significantly improved.

"At the depth of the market's selldown earlier in the year, many investors were literally lost and caught in the lights of an oncoming truck . . . We felt that a technical rebound could ensue and that one should prepare to use such a rebound to 'house-keep' portfolios - that is, get out of holdings in weaker sectors like oil and gas," KGI analyst Joel Ng said in an email.

"We are seeing that technical rebound now and our view has not changed . . . while the strength of the rally from the market's bottom has surprised us, this rally has been fuelled largely by short covering and events unrelated to the fundamentals of the underlying companies and sectors we remain in doubt over."

While the Singapore stock market has likely benefited from fund inflows, he said this was "mainly instigated by 'hot money' moves and may not last". "Nothing has changed in terms of outlook over Q1 despite the volatile swing in prices," he added.

NRA Capital research director Liu Jinshu does not view the recent recovery in the benchmark STI as a technical rebound. But he agrees that short covering, rather than major improvements in fundamentals, played a key role in the STI's recent rally.

"There's a higher risk that it's a bull trap," he said in a phone interview, adding that he expects the market to remain trapped at 2,500-3,000 points. "The rebound has been stronger than expected . . . At current levels, the market risks running into resistance. My view is that the outlook remains challenging for earnings, and the market may end up being range-bound as investors take profit nearer to the results season."

Analysts in the other camp took the opposite view, largely arguing from the standpoint of attractive valuations.

"On valuations, Singapore certainly looks attractive, having fallen 20.2 per cent from its previous peak in April 2015 and trading near minus one standard deviation P/E (price to earnings) of 12.7 times (historic: 14 times)," RHB research head Ong Kian Lin wrote in an email, saying RHB was one of the contrarian houses that was "overweight" on Singapore at the start of the year and still holds that call.

"We expect the market to progressively post a rebound on the back of Singapore's safe-haven status and laggard play. We expect the recovery plays (within) Singapore's large-cap companies to step up first, before the upswing percolates down to small-mid caps."

Recent institutional fund flows back into Singapore stocks in March after an almost six-month outflow indicate that "risk appetite appears to have improved - spurred by the optimism of further easing in China and a strengthening Singapore dollar, while developments in the crude oil market have also allowed oil prices to stabilise, helping to generate trading opportunities", he added. He thinks the STI has a chance of reaching 3,200 points by end-2016.

Kum Soek Ching, head of Southeast Asia research at Credit Suisse Private Banking Asia Pacific, said the Singapore market was undervalued at the start of the year. It "has been rising with the tide, and has outperformed the region in the last one month as valuation was in its favour", she said, adding that she expects capital flows into Asia ex-Japan to "remain supportive for Singapore in the weeks ahead".

Even so, analysts on both sides of the fence say the Singapore market recovery might run out of steam closer to the Fed's next policy meeting in June, as fears of a rate hike resurface.

They also say that investors should seize this chance to exit offshore and marine stocks, and selectively pick up defensive yield instruments.

"The spotlight will be back on a Fed rate hike in May-June, which also coincides with seasonally weaker capital flows into the region. So we see the rally in the Singapore market running out of steam by then," Ms Kum said.

"Investors really have to be very stock-selective and look out for 'reversion-to-mean' opportunities in this market given the macro challenges and external headwinds. Yield stocks should do well in the short term but could face pressure in the head up to the next Fed rate hike."

KGI's Mr Ng added: "We are only as good until the next key data point and we have loads of these key data points ahead . . . We are advising clients to take advantage of the rebound and to reposition themselves in a more defensive portfolio - get out of oil and gas (in general) and, yes, seek out dividend and yield plays.

"There are hardly any 'growth' plays around. Companies have not been able to report topline growth in their quarterly reports in general. Bottomline numbers have been squeezed out of cost savings, buybacks and similar engineering - this cannot last quarter after quarter."

NRA Capital's Mr Liu recommended caution on offshore stocks, saying that even if oil prices stabilise, contract flows for offshore companies will take longer to improve.

On the local banks, analysts were divided. "They face risks from offshore and marine exposure and slowing demand in China. On the whole, the risk is more likely that things will not get better," Mr Liu said.

Ms Kum of Credit Suisse was less committal, noting that the banks "have rallied between 13-21 per cent from their lows this year and another leg of meaningful re-rating would hinge on signs of a peak in the NPL (non-performing loan) cycle".

Mr Ong was the most optimistic, saying that RHB remains "buyers of banks, property, Reits, transport, technology and utilities".

He said the house has upgraded its call on the property sector from 'neutral' to 'overweight', on the back of "resilient results and attractive valuations". It also recently upgraded the Singapore Reits sector to 'over-weight', citing valuation reasons as well.

Ms Kum also said property developers could be a good bet. "Property developers have lagged in this rally, so we continue to see some long-term value in this sector."