Published April 8, 2009

Reality check for market rally

Despite the recent powerful rally by S'pore blue chips, yesterday's pullback is making analysts wary of calling a bottom

By LYNETTE KHOO

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(SINGAPORE) The roller-coaster ride on the Singapore stock market continues. Thanks to the recent rally, most blue chips have put on weight, with many index stocks seeing double-digit gains over the past four weeks.

But yesterday's sharp pull-back suggests that the blue chips led rally may be a false dawn, with analysts wary of calling a bottom at this point.

'The lead economic indicators have not shown any sign that there is a bottoming or a recovery, or there are no concrete signs of that,' said SIAS Research vice-president Roger Tan.

Some 25 of the 30 index stocks rose by double-digit percentages between March 9, a year's low for the benchmark Straits Times Index (STI), and April 6.

The banks, with a hefty combined 26.7 per cent weighting on the STI, were among the biggest winners. After giving up some gains yesterday, shares of DBS and OCBC were still higher than their closings on March 9 by 36.9 per cent and 32.7 per cent. UOB was 27.8 per cent higher. Property counters also rebounded from their lows on March 9. Despite yesterday's losses, CapitaLand shares have gained 43.6 per cent since March 9, City Developments 43 per cent and Hongkong Land Holdings 21.5 per cent.

The STI has risen some 27 per cent from March 9 before yesterday's 2.4 per cent dive left it at 1,802.39 points.

In the view of SIAS Research's Mr Tan, this rally was not supported by fundamentals, and was due in part to some pent-up demand from investors who were waiting on the sidelines.

'The last few weeks of upward trend was an extension of what I call a 'hope and fear cycle'. With the economic data coming out and the G-20 meeting, governments will do more and these promises brought back the hope that markets may bottom out or recover earlier than expected,' he said.

DMG & Partners Securities' senior dealing director Gabriel Yap described the low of 1,456.95 points touched on March 9 as 'one of the few inflexion points that could be part of a series of range-trading rallies'. At this point, the technical charts still look bearish in the near term, Kim Eng technical analyst Ken Tai noted.

He fears that this may be a bear trap, as was seen in the last leg of the bear market in 1998, where the market rebounded by 49 per cent within three months only to fall by the same magnitude over the next six months.

'The lead economic indicators have not shown any sign that there is a bottoming or a recovery, or there are no concrete signs of that.' - SIAS Researchvice-president Roger Tan

'At this point, I'm not turning outright bullish,' he added. 'The recent rebound is part and parcel of short-covering . . . rather than the work of genuine investors, which I think are not in the market yet.'

Mr Tai expects the bear market to last for another six months or so, with the STI forming a U-shape recovery. He thinks that the worst is over for the market, so investors should 'look for stocks to buy, not to short'.

But the ride from here will be bumpy.

Some of these bumps may include corporate earnings as the quarterly reporting season kicks in this month, and the stress test of banks in the United States at the end of this month. Recent gains have made the market more vulnerable to a short-term correction, they say.

Mr Yap of DMG said he is already expecting a 28-35 per cent fall in first-quarter earnings year on year for Singapore companies. A below-expectations set of results would stoke the market on the downside.

'This downturn, which lasts 17 months, is the longest since 1937 and 1981. Where we go from here will depend on the news that will come out,' he said. 'But you must be positioned whether it is a bear market trap or it's a turnaround for the market.'

Investors should be more willing to add risk to their portfolio by adopting a higher beta-sensitive portfolio going forward, Mr Yap said, citing highly interest rate-sensitive stocks such as banks, property and Reits, and oil palm stocks such as Noble Group, Olam and Wilmar.

Mr Tan of SIAS Research predicts that a worst-case scenario could see the STI sliding towards 1,300 again.

'But there is no need to avoid equities,' he added. Investors who are taking on a long-term view can consider dollar-cost averaging. This is where an investor works his way into a position by slowly buying small amounts and spreading the costs over a longer period of time.

Alternatively, investors can consider buying put warrants to hedge against the downside, he said.

Mr Tan still advocates a defensive strategy with telcos and banks and recommends buying the STI exchange-traded fund, which capitalises on potential gains in blue chips and involves lower risk than buying into individual stocks.