Mar 31, 2014

    Wild swings in prices likely, so tread with care

    AS THE curtains are drawn on the first quarter of the trading year today, the big question is whether the trend observed during the quarter - laggard stocks turning into blazing top performers - will hold true going forward.

    Take Olam International. It was the worst-performing component stock on the benchmark Straits Times Index (STI) last year, with a 37.2 per cent drop in share price.

    But in the first quarter, it was the top gainer among STI component stocks with a 45.1 per cent gain.

    It started its climb early last month, and its gains were cemented by a takeover offer made by a consortium of investors led by Temasek Holdings, its second-biggest shareholder, this month.

    Not that Olam was an outlier where outperforming laggard blue chips are concerned: Last year's second-worst-performing STI counter - Jardine Cycle & Carriage, which registered a 25.6 per cent loss - turned out to be the first quarter's second-best-performing STI counter with a 23.4 per cent gain.

    Jardine C&C has considerable exposure to Indonesia because it is the biggest shareholder of giant automotive distributor Astra International. It got a big boost when the Jakarta bourse became one of the region's best-performing markets, gaining 11.56 per cent during the quarter.

    There is also the upswing registered by another commodities play, Noble Group, which has risen 13.6 per cent so far this year, after losing 8.94 per cent last year. This was on the back of a report that the company was in talks to sell its agri-business arm to China's biggest grain trader, Cofco Corp.

    On the flip side, the converse is true, too: Last year's top STI performers are among some of the worst performers recently.

    Global Logistic Properties (GLP), for example, has fallen 8.71 per cent so far this year, after a 5.47 per cent gain last year as investors chased its price up because of its exposure to the Japanese real-estate market.

    But Japan became its Achilles' heel in the first quarter, with GLP getting tarnished by the lacklustre performance of the Tokyo stock market, which has fallen almost 10 per cent so far this year, after gaining 56 per cent last year.

    Banks - which were among the big gainers last year - have also not fared so well in the first quarter.

    DBS Group Holdings, which had risen 14.2 per cent last year, is down 5.41 per cent so far this year, as investors fretted about its trade-finance loan exposure in China, where the weakening yuan and growing spate of bad loans were becoming a concern.

    So does it pay to use the same contrarian strategy and bet on laggard plays in the second quarter?

    In the past three years, April had marked the high-water mark for the STI before it succumbed to jitters the following month, on a host of worries. These had included the various sovereign debt crises in the euro zone in 2011 and 2012, and jitters over the impending end to the printing of cheap United States dollars last May.

    This year, the big worry is that Wall Street may snap, as widely watched market barometers such as the S&P 500 flirt with record high levels.

    Nervousness among investors about such a scenario materialising is reflected in the eye-popping US$9.7 billion (S$12 billion) taken out of US exchange-traded funds last week, based on the latest fund flow data made available by Citi Investment Research.

    Neither are conditions likely to improve in Tokyo in the next quarter, where foreigners sold US$956 million of funds which invest in Japanese stocks last week.

    So it behoves investors to tread with care in the second quarter. More wild swings in prices can be expected.