Nov 02, 2015

    STI 'likely to move sideways this week'

    LOCAL shares had their best performing month in a year in October despite last week's pull back, as regional markets regained their footing after a mauling in the third quarter.

    But the hot streak may not have much steam left, with economy and corporate performances offering few reasons to cheer, say analysts.

    Last month was red hot for Asian equities, with the MSCI Asia ex-Japan index gaining over 7 per cent - the best monthly showing since January 2012.

    "Continued expectation of easier central bank policy has helped underpin equity markets after a turbulent few months. Investors are veering between confidence that the United States economy is still performing well enough to withstand a rate rise, to an expectation that if it's not, the Fed will remain on hold," CMC chief analyst Michael Hewson told Reuters in London.

    Last week, the US Fed opted to further delay its interest rate hike to December or even next year. However, the Fed's meeting statement also indicated an improved confidence on economic outlook.

    But economic conditions elsewhere in the world are not so sanguine.

    In China, its manufacturing sector last month shrank for the third straight month, according to latest official data released yesterday. This has fuelled fears that growth in China's economy - the world's second largest - is slowing faster than what official numbers suggest.

    The People's Bank of China cut interest rate for the sixth time in a year to 4.35 per cent two weeks ago to revitalise the stagnant economy. Further easing looks to be highly necessary.

    In Europe, European Central Bank president Mario Draghi also recently hinted that the euro zone's quantitative easing programme may be expanded.

    The prospect of a delay in the US rate hike cheered local investors. Singapore's benchmark Straits Times Index gained as much as 7.4 per cent to 3,083.07 last month. However, it dropped to below 3,000 by Friday.

    "There may still be room for an increase (in share prices), if regional central banks decide to release further stimulus measures. But more likely (the STI) will move sideways in the coming week, as investors also wait and see whether upcoming data points to a firm economic recovery," remisier Alvin Yong said.

    The key data to watch this week will be Friday's release of US employment figures, a major indicator used by the Fed to gauge the state of the US economy.

    Regardless of macroeconomic signs, Singapore corporate results in the current reporting season has produced a very mixed picture.

    Last week saw OCBC Bank and United Overseas Bank announcing their third-quarter results, which showed their otherwise stable core earnings eroded by market disruptions in recent months.

    More tellingly, loans growth continued to slow and non-performing loans worsened, pointing to financial difficulties across the broader corporate sector.

    Sembcorp Industries, another blue chip company, reported a 37.8 per cent net profit plunge due to weaker utilities and marine revenue. Two weeks ago, its unit, Sembcorp Marine, posted a 76 per cent profit drop for the three months to Sept 30.

    Against this backdrop, investors looking for growth stocks may have to look away from the blue chips and seek value among the small- and mid-cap counters, Mr Yong said.

    "Plenty of these companies - in the property sector, for instance - are now trading at 20 to 45 per cent below their book value, with single digit price-to-earnings ratio."

    For investors starved of initial public offerings, seafood restaurant operator Jumbo Group's Catalist debut is a welcome respite.

    The counter, which will commence trading next week, is a bright spot in an otherwise uncertain market, Mr Yong said.