May 26, 2014

    Blue chips looking up but not the pennies

    DESPITE the lacklustre market conditions, blue chips appear to be holding up well, with the benchmark Straits Times Index gaining about 3.5 per cent so far this year.

    While investors can sniff the on-coming spring for blue chips - as foreign funds are wooed into loading up regional equities once more - the same cannot be said of penny stocks, which remain in the grip of a harsh Siberian winter.

    Going by the gyrations of the FTSE ST Catalist Index, which tracks the performance of 115 small-capitalised stocks listed on the Singapore Exchange's junior Catalist board, investors had ended up getting caught in a bear trap each time penny counters made a futile attempt to rally.

    In fact, since hitting a two-year high of 1,200.08 in September, the FTSE ST Catalist Index has fallen about 22 per cent. This puts penny stocks technically in bear territory - defined by stock chartists as share prices falling more by 20 per cent from their previous peak.

    Some dealers have suggested that the penny stock market has yet to recover from the calamitous sell-off in the three stocks - Blumont Group, Asiason Capital and LionGold Corp - which wiped billions of dollars off the market in October.

    What has also spooked sentiment was the wide-ranging probe launched by the authorities since last month, as they tried to unravel the trading irregularities around the stock trio. The investigation had apparently ensnared the bosses of a few other penny-stock companies and led to some dealers getting questioned as well.

    But aversion towards penny stocks does not appear to be confined to the local bourse.

    Even as the S&P 500 on Wall Street flirts with record-high levels, the Russell 2000 Index, which tracks 2,000 United States small-capitalised stocks, has fallen almost 10 per cent below its March peak - hitting levels which chartists describe as market-correction territory.

    What is also interesting is the flight to the safety of bonds by investors. Their growing appetite for bonds has replaced the US central bank's own slackening demand for bonds as it scales back its vast asset purchases.

    Citi Investment Research noted in its latest fund flow report that, last week, there was an inflow of US$5.9 billion (S$7.4 billion) into bond funds and a net outflow of US$7 billion out of equity funds, mainly from those who invested in the US stock market.

    This raises the question: Is the sell-off of smaller companies telling us something significant about the global bull run, which is now over five years old?

    At least for the 45 small and mid-cap companies which it covered, CIMB Research has an explanation for their lacklustre performance - their results are simply not up to par.

    It noted in a recent report that only 16 per cent of them had reported quarterly results which were above market expectations, another 49 per cent had reported in-line results, while the remaining 36 per cent had fallen short.

    As for what investors should do, it sounded a cautious note in another report, suggesting that they should switch back to stocks with earnings certainty, or those trading at deep discounts to net asset value.

    "In the US, tapering is a sure thing, but there is a growing view that rates might not rise even after the end of tapering. We add more dividend stocks, Reits and stocks with asset backing to our top picks," it said.

    At least, so far, nobody is suggesting that the market is headed for a serious correction.

    For sure, the bear brigade is growing, but investors have put their faith in central bankers, such as the US Fed's Janet Yellen, to keep the market ship stable amid a sea of uncertainties.