JUST WHEN IT seems that some semblance of normalcy has returned to stock markets after the massive selloff in August and September, fears over the debt debacle in the euro zone have once again cast a pall over investors.
The MSCI World Index rose 10.3% in October after declining 15.5% in the previous two months. But markets worldwide suffered another bout of haemorrhaging this week, the sharpest pullback so far this quarter, as the prospect of Italy becoming the new centre of concern -- after Greece -- in the debt crisis send investors rushing for the exit.
The trigger was a surge in Italy’s bond yields past 7%. Greece, Portugal and Ireland required bailouts when interest rates on their bonds headed past that level. Naturally, investors took the spike in Italy’s borrowing costs as a cue that Europe’s third-largest economy might have to secure a life line to prevent a default by the government on its loans.
Major stock indexes in Europe declined more than 2% on Nov 9, while the Dow Jones Industrial Average lost 3.2%, its biggest single-session fall since Sep 22. Bourses in Asia tanked the day after, led by Hong Kong. Here in Singapore, the Straits Times Index pulled back 2.5%.
While markets rebounded slightly at the end of the week, visibility in the near term is expected to be clouded. Despite a successful bond sale by Italy on Nov 10, which enabled it to borrow €5 billion ($8.8 billion) at rates lower than analysts had expected, and Greece installing a new prime minister to lead the rebuilding of its economy, investors are likely to tread ever more carefully until they see evidence of progress in the euro zone.
According to Morgan Stanley, markets will likely shift their focus from sovereign risks in Europe to earnings risks in the next few quarters. Within Southeast Asian markets, it notes that Singapore faces the highest earnings risks given its linkages to the more-vulnerable developed world.
“We recommend investors sell the recent bounce,” says Morgan Stanley. “We continue to be ‘overweight’ telecom and bank stocks in Singapore as these are likely to be relatively defensive in these potentially volatile markets.”
Amid the uncertainties, though, other broking houses have picked out stocks in Singapore they think investors should start collecting.
“We are probably too early to call a bottom, but neither is the current inflationary environment conducive for staying in cash for too long. It is in this spirit that we recommend our ‘crisis recovery’ stocks,” says Kim Eng Securities. A “convincing indicator” of when value has emerged is when insiders, particularly executives running the business or major shareholders, start using their own money to buy back shares of their company, it adds.
Stocks in Kim Eng’s recovery portfolio comprise CapitaLand, DBS Group Holdings, Genting Singapore, Keppel Corp, Noble Group, Sembcorp Marine, Singapore Airlines, Singapore Exchange and Venture Corp.
The broking house has also recommended both an entry price and a floor price in a worst-case scenario for each of these counters -- $2.30 and $1.97 respectively for CapitaLand, $10.20 and $7.70 for DBS, $6.39 and $5.60 for Keppel, $1.25 and $0.50 for Noble, $3.50 and $3.00 for SembMarine, $5.85 and $4.00 for SGX, and $5.25 and $4.42 for Venture. Its proposed entry and floor prices are similar for both Genting and SIA, at $1.00 and $9.50 respectively.
Meanwhile, CLSA has identified Genting, Fraser & Neave, Keppel, Wilmar International and United Overseas Bank as stocks to own for the next five years. Of the companies in Singapore with a market value of more than US$2 billion ($2.6 billion) and a daily trading volume worth more than US$4 million, the five were selected based on a quantitative analysis of their revenue growth, margin stability and/or improvement, dividend payout, return on equity/capital, and earnings volatility. CLSA also took into account sector trends and dynamics over the next five years in picking these stocks.
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