Straits Times: Sat, Jul 21
DESPITE a slight wobble yesterday, the Straits Times Index (STI) has enjoyed a spectacular rebound since its recent low ebb of 2,698.9 points on June 4.
In the past week, the benchmark for the local stock market finally conquered the magic 3,000 point mark and is now up 11.7 per cent since that low water mark last month.
In the year to date, the STI is up about 14 per cent, at yesterday's close of 3,015.53 points.
That means the STI's gains this year are more than double the gains in Hong Kong's Hang Seng Index, observed a note by Macquarie yesterday. The Hang Seng is up 6.5 per cent this year.
But is this rally sustainable? And just how long can the STI stay above 3,000?
There are two ways to approach this: from a technical and fundamental perspective.
Technical analysis attempts to predict future prices based on patterns seen in price and volume charts. It is more often used for short to medium- term outlooks.
The medium to longer-term outlook tends to depend on fundamental analysis: a study of how macroeconomic events and corporate financials and developments will affect the earnings potential and valuations of companies.
Ms Carmen Lee, head of OCBC Investment Research, said that her research house believes that from a technical perspective, the STI could fluctuate between 2,950 and 3,050 for two to three weeks.
Phillip Securities Research said in a note yesterday that technically the market 'still stands a good chance to head higher'. But it added: 'Our conviction on this rally continuing itself is low from a fundamental point of view.'
Phillip Securities said a rally of more than 10 per cent has already been driven by anticipation that global central banks will step in to stimulate the economy.
The broking house said the global economy is actually moving beyond the help of further quantitative easing, referring to the money-printing programme of the United States Federal Reserve.
China is also 'not in a hurry to re-accelerate the economy beyond what is required to meet the 7.5 per cent (growth) target', Phillip Securities added.
Other fundamental analysts do not rule out further STI rises, but argue the more immediate risk is for some form of correction.
Ms Lee anticipates possible volatility in the results season. 'Now we're in the first phase, where companies with defensive earnings are reporting,' she said.
'From the first to second week of August, we enter the next phase where companies with more volatile earnings will report. If the results are not within expectations, the market could be volatile. The sense is earnings may be softer.'
Given the STI's jump of about 10 per cent since last month, investors may cash out, she said. 'It is quite possible for a correction to take it below 3,000.'
Ms Lee said the STI would enjoy a sustained rise above 3,000 only if there is either a resolution in macroeconomic issues such as Europe's debt problems, or strong company earnings.
UBS wealth management's regional chief investment officer Kelvin Tay said the local market's valuations are not expensive, based on indicators like price to book ratio and price earnings ratio.
The Singdollar is also more resilient than regional currencies.
This means the market may perform better than its regional peers, though some profit-taking may take place soon.
In terms of individual sectors, DBS Vickers Research said that the banks could see upgrades in earnings estimates, if they report rises in net interest margins and strong loan growth. Airlines could benefit if they report lower fuel costs, as could oil and gas companies if they report a strong flow of new contracts.
But the real estate sector may suffer a downgrade in earnings estimates if there is a slowdown in sales and lower average selling prices, and shipping firms may slide if the peak season shipment numbers disappoint.
Mr Herald van der Linde, HSBC's head of equity strategy for the Asia-Pacific, is 'neutral' on the Singapore market. 'While defensive and offering a good yield, it's difficult to find growth opportunities in the two largest sectors - banks and real estate,' he said in a report. 'There are some growth sectors, such as offshore marine.' His year-end target for the STI is 3,100.
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