Sep 08, 2014

    Go easy on equities amid mixed signals

    THE preponderance of conflicting signals has made it difficult for traders to decide which way the market is headed.

    On Wall Street, United States stocks rose modestly on Friday despite data showing weaker-than-expected jobs creation. Some 142,000 new jobs were created last month - well below the sub-200,000 monthly increase registered in the first seven months.

    Over in Europe, markets ended slightly lower on Friday, even though the European Central Bank had announced a trio of rate cuts the previous day to try to spur growth in the weak euro zone economies.

    In Asia, regional markets got a leg-up last week, following upbeat economic data out of China that offered investors some optimism on the country's outlook. This lured traders into snapping up mainland stocks listed in Hong Kong and counters with China exposure.

    Fund flow data in Citi Investment Group's latest report also fails to offer a bearing on how the market will fare. Last week marked the sixth straight week in which funds poured into emerging market equity funds.

    While there was a net US$690 million (S$865 million) of fresh money entering emerging market funds, China and Taiwan exchange traded funds - which are made up of baskets of funds tracking stock indexes and other indicators - saw a total net outflow of US$1.4 billion.

    Still, some market strategists are hopeful of a pick-up in stock trading activities.

    Shane Oliver, AMP Capital's head of investment strategy, said that while shares have seen a strong recovery from the early August mini-slump, the correction season is consistent with the old adage - "sell in May, go away and come back on St Leger's Day", which falls on Saturday.

    Valuations remain undemanding, taking into account the low interest rates and bond yields, he added.

    Given the mixed outlook in the various markets, analysts here have advised investors to adopt a more cautious stance towards equities. Some are concerned by the spate of lacklustre results during the recent corporate earnings season.

    CIMB observed in a recent note: "Planters were hit by lower average selling prices and poor China performance. Yards face slower order flow, while airlines and shipping have no pricing power. Dwindling tourist arrivals hit some hotels and retail malls, while credit restraints hit home sales and adspend."

    The gloomy assessment across many sectors means there are fewer counters that can stand out as attractive investments in terms of earnings resilience.

    One suggestion is to buy into counters such as telcos and Reits as they offer good yields, notwithstanding the fact that they have outperformed the rest of the market this year.

    Deutsche Bank said in a note that after assessing the lacklustre second-quarter reporting season, it had added DBS Group and SingTel to its stock picks, while dropping Genting Singapore.

    It said: "DBS' fundamentals are better than peers in our opinion because of its deposit franchise, Greater China exposure and lower valuations. SingTel's market dynamics for its Australian unit, Optus, and associates in Indonesia and India are improving."

    The German lender added that it had turned cautious on Genting because of the continued challenging operating environment which the casino operator faces in Singapore.