Monday, December 9, 2013

Market Analysis -- 9th Dec 13

The final analysis for year 2013.  With Friday closing of 3,114.17, STI YTD sank into the red with a -2.74% as compared to US markets which hitting a more than 20% return.  The sour note began in May 2013 when US Fed first started the hint of possible tapering on its stimulus, QE3.  That piece of news rocked the global stock markets in particular emerging markets like South East Asia as funds outflow since then.

With the just released of US better than expected non-farm payroll data last Friday, this further speculate that US Fed could possible start tapering this month and that again strike fear in STI, in particular those rate sensitive stocks like S-Reits.  US Fed will have its last FOMC meeting for 2013 on 17th to 18th this month and then investors will know the answer of will it start to taper this month.

Everything have two sides of a story.  Similarly, the US Fed decision to taper will also carry two sides of a story.  Firstly, the most common view unfortunately is the negative one.  As US Fed starts to taper, this will signal that interest rate will be the next to go up.  As such, no more cheap and easy money resulting in those businesses which leverage on borrowing cheap money will be getting hit.  S-Reits is one of them as the business normally distributed at least 90% of their earnings back to unitholders and have rather thin retained earning in their cash flow.  To expand their assets they need to take capital loan (from bank or from capital market) to finance for it.  The common consensus is without access to easy cheap money, the revenue will take a hit and as such, the amount of earning being distributed back to unitholders will also suffer.  This cause the S-Reits stock prices to under selling pressure whenever news of US Fed will start to taper surface.  In addition to that, should US Fed start to taper it means US economy is improving and strong enough to self-sustain, as such, funds will flow back to US and the place to withdraw will be emerging markets like South East Asia and this is another reason why STI has been weak lately.

So much so for the most common negative views and now let look at the other side of the coin.  US Fed will only taper (taper as in reduce and not totally turn off the tap) IF AND ONLY IF economy data really confirm US economy is recovering and the labor market will continue to recover.  This was the stance of US Fed since day 1 of the QE3 and nothing has been changed but investors somehow distort that stance somewhere down the road and create panic and fear to the stock markets.  US economy recovering will benefit globally and that is for sure (despite the fact that most of the nations are creating their own buffer zone to be less reliance on US economy).  That domino effect will result in business condition improving (revenue, profit margin, etc) and if so, the stock prices will have potentially more upside and the selling down now will only create nothing but attractive valuation.  For the more sensitive S-Reits sector, most analysts are being negative on it now mainly due to the US Fed tapering effect.  Very unfortunately, that view is short-term and incorrectInflation in Singapore is going up and will continue to move up should US economy recover further.  Even with possible bank interest rate hike (due to US Fed interest rate hike), putting money in bank earning the interest will still unable to hedge against inflation (Singapore MAS primarily uses the exchange rate to curb inflation and not interest rate like most of other nations) and hence should one ever listen to those analysts, there is no way you can hedge against inflation and putting money in the bank simply corrode the value of it.  Singapore inflation at the latest is 2%, bank average interest rate as per now is 0.1%, CPF special account rate is 4% and S-Reits average dividend yield is 6.5% now.  Looking at the figure, it is very obvious what have to be done.  Some foresee S-Reits could fall further tto a yield of 7% and suggest to wait.  How can one absolutely sure it will drop to that level ?  If it does, the view will again change that it can drop further and can wait further, and at the end of the day when is correct period to invest ? 

The short-term view which mostly is incorrect cause panic and fear in stock markets but thinking in a more rational and logical way, that can only present cheap bargain opportunity.  Most will use STI level to judge when to buy but that will not work.  One has to know clearly the objective of own investing.  If it is for long-term and hedge against inflation, once the figure is correct then it will be a buy opportunity and no point waiting further.  The usual of wait for this level and once drop to that level, fear over-rule and insists to wait lower and then the next thing you know is you miss the bottom.  A difference of that 0.5% dividend yield over a long period of times will become negligible as the amount of dividend collected will eventually breakeven that.

For STI, prepared for a muted year end but keep a sharp lookout for buying opportunity.  It will slip slide away quietly unexpected.

Most analysts in the beginning of the year expected STI to have a year end rally and look at what has happened now.  Believing in analysts' views ? Think twice !!!

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