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Sunday, 29 June 2008

S'pore stocks - down but not out

Rough ride expected ahead, but counter-inflationary stocks or those that can ride rising oil prices could offer opportunities

Business Times - 28 Jun 2008
By LYNETTE KHOO

(SINGAPORE) Rising inflation and slower economic growth projections are eating away at sentiment on the Singapore stock market. With the picture unlikely to brighten in the near term, stocks could drift further south in the second half of this year, analysts say.

Since January, the Straits Times Index (STI) has lost almost 15 per cent to 2,955.91 points along with the broad sell-off across regional bourses and on Wall Street.

Trading volumes have also slumped 46 per cent from a year ago to some 150.5 billion shares in the first half of this year.

Analysts believe that investors are in for a tougher ride in the next six months as lingering inflationary fears and possible tightening measures by central banks continue to stoke market volatility.

'We started the year thinking that the second half will be better than the first, but we are beginning to doubt it more and more,' says CIMB-GK research head Kenneth Ng.

In May against a backdrop of choppy trading, the main market index was lifted to a high of 3,250 points on positive news of the Bear Stearns rescue, the aggressive interest rate cuts and the stimulus package by the US Federal Reserve.

But that did not last as the index subsequently slid towards March's low of 2,800 on worries over oil price spikes, slowing exports growth and further monetary tightening by central banks.

Already, analysts have priced in higher costs and lower demand into corporate earnings estimates.

They point to a host of concerns that will trouble the market in the second half - high oil prices and inflation, poor performance of US and European banks, slower consumer demand and easing economic growth.

'As these issues are likely to persist for a while and together with the lack of any strong positive leads, the market is already showing signs of a standoff, with a downward bias,' says Carmen Lee, head of research at OCBC Investment Research.

A survey by fund managers by OCBC Bank's wealth management unit released yesterday echoed these views.

Given the slowing consumer demand and rising costs, fund managers are concerned that earning expectations may be too high and warned that potential earnings downgrades could weigh on equity markets in the following months.

Kim Eng's technical chartist Ken Tai noted that the STI could break below 2,800 points in the second half before recovering back towards the end of the year on a potential Santa Claus rally.

'Market yield is 7.1 per cent but inflation is 7.5 per cent. The market has to correct lower in order for it to make sense for investors to buy,' he says.

But not all is lost. Analysts believe that market corrections also present opportunities for investors to accumulate stocks that can ride the inflationary wave, or are less adversely impacted by rising prices.

Offshore marine and oil and gas plays will continue to get attention as long as oil prices do not correct significantly in the near term, analysts say.

Yesterday, oil prices continued to edge up, with light, sweet crude for August delivery hitting a record US$141.71 per barrel in Asian trading.

Also looking good now are companies with pricing power, big cash hoards or high dividend yields as the average retail investor pulls money out of bank deposits in search of a better hedge against inflation.

'We couldn't find any reason to be terribly excited but we think there are still some stocks that investors could consider,' says Kim Eng's regional head of research Stephanie Wong.

She favours counter-inflationary stocks such as SingTel, MobileOne and Singapore Press Holdings (SPH), which she believes have pricing power.

She also likes stocks that may benefit from higher oil prices, such as Keppel Corp and ASL Marine.

Likewise, DBS Vickers' research head Janice Chua said in a recent report that her third-quarter picks were based on the inflationary theme and the 'urgent need to keep it in check'.

Parkway Life Reit is seen as a natural hedge against inflation as the minimum guaranteed rental growth is pegged at one per cent above the consumer price index, Ms Chua said. Shipping trusts and offshore ship charterers are also expected to benefit if the greenback strengthens as anticipated as their earnings are denominated in US dollars.

DBS Vickers is also positioning its strategy on what it reckons to be a rising interest rate environment that will bode well for the banks, and on the Formula One fever ahead of the event in September, the key beneficiaries of which are hotel and tourism-related stocks.

OCBC recommends a flight to safety towards defensive stocks. This would include blue chips for their profit track record and sound business models, while CIMB-GK recommends dividend exposure via SPH and local Reits, as well as some oil and gas exposure.

Analysts are, however, divided on commodity stocks. While most select counters in the agricultural commodities sector, Ms Wong of Kim Eng believes commodity prices could be a bubble in the forming.

'We are talking about investors who are taking a longer-term view - who want to buy into stocks with deep value, downside protection with asset backing, and decent yields,' Ms Wong says.

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