Published October 5, 2009

Muted market ahead after patchy Sept gains

Investors cautious as valuations have risen sharply

By OH BOON PING

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B(SINGAPORE) September did not work its curse on investors' risk appetite this year. During the month, the Straits Times Index closed at 2,672.57 points - up from 2,592.9 at the end of August.

Fear factor: Asian markets fell last Monday after Wall St weakness sparked doubts over the pace of recovery and a strong yen stoked fears for Japanese exporters

But the gains were patchy, tempered by weakness in the final weeks of September.

Last Monday, Asian markets fell after weakness on Wall Street triggered fresh doubts over the pace of economic recovery and a strong yen stoked fears for Japanese exporters.

Hong Kong's Hang Seng Index shed 2.07 per cent, taking its cue from the US, while Shanghai lost 2.65 per cent on shrinking trading volumes. Sydney lost 0.76 per cent while Seoul was down 0.94 per cent.

Said Leng Seng Choon, market strategist with DMG & Partners: 'We are bearish on the Singapore market in the short-term. Having risen to 2,686, the STI price-to-book of 1.65 times is already back to the 12-year average of 1.61 times.'

He noted that some risk factors such as a mild economic recovery could exert downside pressure on the STI, 'possibly down 10 per cent to 2,380 in the short term'.

In OCBC Investment Research's case, it also sees 'softness and consolidation in the market', but thinks that 'the recent high trading volumes, especially for smaller-cap stocks, seem to suggest that there is still interest in the Singapore market,' said research head Carmen Lee.

Moreover, the correction could have resulted from market rallies that saw valuations rise sharply, beyond what investors were prepared to pay for.

'The higher valuations have caused investors to become more cautious as valuations have risen sharply compared to two quarters ago,' said Ms Lee.

In general, the analysts say, the overall tone for the market looks muted at current levels as signals about the strength of the recovery or the potential upside for equities remain mixed.

Still, there are pockets of optimism that have surfaced in recent months.

For one, listings and merger & acquisition activity appear to be on the rise again, as seen from eBay's recent sale of a 65 per cent stake in Skype for about US$2 billion. Telefonica SA, Europe's second-biggest phone company, is paying US$1 billion to boost its stake in China Unicom (Hong Kong).

In Singapore, the IPO market is showing signs of recovery, and a number of initial public offers came into the market including Mary Chia, Lattitude, Passion and China Gaoxian.

Secondly, risk appetite appears to have returned as seen from some of the recent rallies.

DMG thinks that a 12-month STI level of 2,880 is achievable, on stable economic environment and benign interest rates.

This can be justified by the fact that global recovery is still fragile, and therefore government policies should continue to be favourable towards the corporate climate, including the still- low interest rate environment.

'We see adequate liquidity (as measured by M3) helping to drive the STI higher to 2,880 on a 12-month time frame (up from our previous 2,800 target,' said Mr Leng.

OCBC's Ms Lee pointed out that Singapore is still attractively priced (17 times price-earnings) compared with China's 21 times and Nikkei's 44 times.

'Sustained liquidity in the system, M&As and further earnings upgrades may continue to support these valuations.'

Meanwhile, CIMB raised its STI target from 2,700 to 3,200 at end-2010.

'At 3,200, the FSSTI will also still be under 2 times price-book, which is lower than peak price-book achieved in the previous two cycles. We think that this target is reasonable though it could also well represent levels close to the peak in this cycle,' said analyst Kenneth Ng.