Jan 02, 2014

    Bourse not likely to gallop in Horse year

    DOUBT slipped into the local market in the Year of the Snake amid tapering talk, property-cooling measures and a penny-stock crash.

    At the end of the half-day trading session on Tuesday, the total value of 770 companies listed on the Singapore Exchange (SGX) tracked by The Business Times was $899 billion, up from $887 billion at the end of 2012, but down substantially from the nearly $1 trillion reached in April and May last year.

    The benchmark Straits Times Index (STI) closed at 3,167.43 points at the end of last year, almost unchanged from 3,167.08 points a year earlier.

    Singapore was left out in last year's developed-markets rally, with the STI 8 per cent lower than its peak of 3,450 points in May.

    On the local bourse, a full-fledged gallop is not expected in the Year of the Horse, with analysts' expectations ranging from a complete standstill to a tiny trot.

    Summing up last year, CIMB head of research Kenneth Ng said: "It was a tale of two halves. The Singapore market started brightly for the first five months and then weakened as US tapering talk came on."

    UBS Wealth Management's regional chief investment officer, Mr Kelvin Tay, expects home prices to dip by 3 to 6 per cent this year. He told BT that the STI might be "range-bound" between 3,000 and 3,300 points this year.

    In an environment of tapering and global economic growth, exports look to have bottomed out, but a recovery is likely to come only after its North Asian counterparts'. Domestically, companies are grappling with slower growth, wage inflation and a labour shortage, he said.

    "Against this backdrop, cyclical stocks with revenues leveraged to global economic growth are likely to perform well," Mr Tay said. "In contrast, pure yield plays with no growth prospects as well as domestically oriented companies are likely to underperform."

    Ms Carmen Lee, head of OCBC Investment Research, expects the STI to trade between 3,000 and 3,400 points, "supported on the low side by undemanding valuations and capped on the upper end by uncertainty on the global front".

    Banks and oil-and-gas might outperform while property stocks might ease in the first half, she said.

    Others are predicting a comeback for the local bourse, driven by better earnings, improved global economic growth and a flight to safety amid political and currency turmoil in the region.

    Mr Patrick Yau, Citi Singapore's head of research, said he expected 5 to 10 per cent returns this year, from companies finally making more profits as a result of stronger exports, especially to Europe. This is compared to tepid growth in the past three years.

    "In 2013, there was hardly any earnings growth, it was minus 2 per cent among the 60 companies we cover. Next year, there could be 9 per cent due to the base effect. It's the first time in three years where I'm thinking there's some upside," Mr Yau noted.

    Citi Research has a 3,278-point target price for the STI for this year, translating to a price-to-earnings ratio of 15.6 times. It prefers oil-and-gas play Keppel Corp, China-exposed Wilmar International and CapitaMalls Asia, DBS Bank, Keppel Land, as well as industrial plays ST Engineering and Venture Corp, which Mr Yau reckons may benefit from a strengthening US dollar.

    Small-cap specialist DMG & Partners Securities is among the most bullish, with a 3,480-point STI target for this year.

    Referring to the penny-stock crash a few months ago, DMG said that "while some counters got their 'just deserts', many others were punished unjustifiably".

    DMG added that the small caps it covers are trading at nine times this year's forecast earnings while growing more than 20 per cent.

    In the small-cap space, construction-sector stocks and S-chips should see investor interest, DMG said. Its top picks for the local market include Eu Yan Sang, King Wan, Lian Beng, Midas, MTQ, Nam Cheong and OSIM.

    For Mr Yau, three sectors now look cheap: commodities, transport and real-estate developers. Oil prices are still high, and affecting airlines and shipping companies. There is potential upside for developers - which have been hit by higher consumer debt and potentially rising rates - if property prices and volumes do not fall as much as feared.

    "Stocks that are cheap can surprise on the upside if operating factors are better than expected," he said. "With the market at an average level, if you want to outperform the market, you have to look at stocks growing much faster or trading much cheaper than the market."