Weekend Comment Jan 6: Bright start to the new year

IF THE LOCAL stock market’s performance in the first week of the New Year is anything to go by, strategists who have been advocating a defensive investment approach for fear of whiplash from Europe’s debt crisis have got it all wrong.

The Straits Times Index started the first trading day of 2012 with a bang, up 1.6% at 2,688.36, its highest close in three weeks. It ended above the 2,700 level daily for the rest of the shortened trading week, closing on Friday at 2,715.59, a weekly gain of 2.6%. 

The STI’s performance so far may be nothing more than a result of the Capricorn Effect. Still, it could also suggest that investors have somewhat got accustomed to the slew of bad news from the beleaguered euro zone and would rather put some of their money to work than sit on it while waiting for events there to unfold.

 

Indeed, the Greek prime minister’s warning that the country could run out of cash in March, lacklustre demand for France’s €7.96-billion ($13.2 billion) bond sale, and even Singapore’s 4.9% q-o-q economic contraction in 4Q2011 – all reported this week – hardly kept investors away from the market. 

 

“While there are still a lot of uncertainties out there, it may not be the best strategy to huddle in defensives,” says Terence Wong, research head at DMG & Partners. Based on down periods over the past 15 years, Wong says the stock market typically rebounds when the economy is at its worst.

 

“The inflection point for the STI in the past three crises coincided with the worst quarter in terms of GDP change year-on-year,” he says. The current quarter, according to DMG’s economics team, is likely to be the worst for the Singapore economy this year. If that’s the case, a rebound in the market could be imminent. “If history is anything to go by, the Singapore market may turn around as soon as the first quarter of 2012,” says Wong.

 

For small caps, DMG’s top stock picks are those in the technology and construction sectors. Tech stocks covered by DMG have lost about 20% in value since August 2011, hurt partly by the fallout from the floods in Thailand. 

 

“HDD major Western Digital, which was the most severely affected by the floods in Thailand, is recovering much faster than expected. The component suppliers will thus start ramping up their production in the current quarter,” says Wong. “That is the inflection point I have been looking out for, and should result in interest returning to the tech sector.” 

 

DMG’s tech favourites include Hi-P International, Nera Telecommunications, Trek 2000 International and Adampak. As for stocks in the construction industry, it likes BBR Holdings, Kian Ann Engineering, KSH Holdings, Lian Beng Group and OKP Holdings. “Given the strong pipeline of contracts, especially from the government sector, the construction players will not go hungry even if we head into a recession,” Wong says. 

 

In the event of a recession in Singapore, Daiwa believes companies whose fortunes are tied to domestic consumption in Asian economies will still do well. It expects the city-state to slip into recession in 1H2012 as Europe’s debt woes and the US economy’s benign growth take a toll on its exports. 

 

Sectors that Daiwa are upbeat on include palm oil, real estate investment trusts focused on the office, industrial and hospitality markets, and even banking. “Notwithstanding the challenges for loan growth given the economic slowdown and our bearish outlook for the housing market, these risks for the Singapore banks appear priced in with the sector trading at a 1.1x price-to-book ratio.”

 

Daiwa’s top stock picks include DBS Group Holdings, CapitaCommercial Trust, CDL Hospitality Trusts, Suntec REIT and Golden Agri-Resources.