The first quarter of 2009 was the worst part of global economy when US banks were in danger of bankruptcy, companies revenue and profit were down, companies cutting jobs to save cost and unemployment rate rose. Countries went into recession and global stock markets also crashed to year low during the March period. Coordinated efforts of Governments around the world injecting stimulus and cutting of interest rate to save their respective country's economy were carried out which eventually ended the worst part of the year. Economy growth started to pick up from second quarter onwards so as the stock markets whereby excessive cash flowing back to the stock markets to cause a sharp rebound in the stock prices. Furthermore, all eyes will on China to lead global economies out of recession and China did with their 4 trillion yuan of stimulus being injected by the Government. V-shape recovery or green shoots were talked about while some still cautious of it was just another bear rally. In addition, all eyes also looking at Asia to sustain the global economies. With improving in the economy in the later part of the year, countries started to emerged out of recession, companies revenue and profit level started to improve too. Some countries also started to hike interest rate to curb inflation caused by excessive printing of money.
FTSE STI hit a low of 1,456.95 on 9th March 2009 and since then rebounded 98.89% at the end of 2009. Singapore also officially out of recession in the later part of the year as GDP rebounded from second quarter onwards. However, for full year 2009 GDP, Singapore still stand at -2.1%. Singapore should be able to return to positive growth for 2010 with a projection of between 2.5% to 3.5% when companies start hiring, registering better revenue and profit.
Looking ahead in year 2010, another sharp rally in the stock markets might not be possible as economy growth will be slowing down and stabilized as the Government is expecting to withdraw the stimulus. There will be several factors to be considered in year 2010.
1. Valuation.
The valuation of a stock price is determined by the company earning. In general, companies earning for the first half of 2010 should be better than the same period as of 2009 and this could be providing catalysts for stock prices to march up further as analysts will be upgrading of target prices.
2. Inflation.
With excessive printing of money, inflation will always be the main concern. With economy yet to be fully recovered a sharp rise in inflation coupling with still high unemployment rate will result in stagflation and that will be a bigger problem to solve. Hence, central banks around the world will have to time the hiking of interest rate precisely so that its effect could curb inflation and at the same time will not jeopardize the recovery of the economy. An increase in interest rate will have a downside effect on the stock markets in general and time frame of that happening could be in the second half of 2010.
3. Unemployment rate.
As economy recovered, countries out of recession, unemployment rate still at a considerable high figure as this was the norm of what a recovery economy should be. It will be pro-long period to bring down the unemployment rate in particular in US whereby its unemployment rate skyrocketing to more than 10% in 2009. In Singapore, companies is already showing sign of hiring again and the unemployment rate will be coming down. The opening of the 2 IRs this year has played a big part in bringing down the unemployment rate.
4. Property bubbles.
This could be another potential dent to the recovery of the economic if appropriate measures are not implemented in time to curb it. The excessive cash has caused investors snapping up property assets hence driving up the prices. Measures to curb property bubbles in short-term will have a downside effect on the stock markets but in long-term this will be good as it prevent another deadly bubbles from bursting that could derail the recovery economy.
5. M&A activities
In a crisis, there will be a clear division between strong and weak companies. Companies with strong cash flow will take this opportunities to acquire weaker companies to kill off competition which they faced during economy good times. There should be more M&A activities happening in 2010 as stronger and bigger companies aiming to restructure for the next growth phase while weaker companies hoped to survive by being acquired.
6. USD carry trade
With virtually 0% interest rate, many have borrow USD to pour into stock markets to salvage capital gain. If US Federal Reserve raises interest rate, this will cause investors to withdraw the money from stock markets and that will have a downside impact on the stock prices in general.
As economy recovered in 2009, not all sectors were behaving the same and hence an analysis of the performance in each sector in 2010 is critical for investors. Sector and stock selection would be important in stock market for 2010.
1. Banking sector
Banking sector was the first to get hit in 2009 when the crisis was at its worst part. Default debts and low loan growth were hurting the bank's profit and revenue then and as such, banks have to perform cash call to shore up their cash flow. Bank stock prices also crash to or below than their book value. However, with the recovery in the second half of 2009, banks were amongst the first few to rebound and their stock prices also rebound at least 50% from their respective low prices in 2009. Loan growth will be critical part in how the banks perform in 2010. Stocks on the lookout will be DBS, UOB and OCBC.
2. Property sector
Even though property prices have yet to reach the pre-crisis level in 2007 but there already concern of over-heating and measures have to implemented to curb a bubble being formed. Property sector would be considered a high beta stock in 2010 and investors would have to stomach a bigger risk if investing in it. Property sector should be volatile in 2010 with projects launching providing the upside for the prices whereas measures to curb property bubble and raising of interest rate will weigh heavily on the stock prices. Stocks on the lookout will be CityDev, Capitaland, Kepland, SC Global, UOL, Ho Bee, Allgreen, Yanlord and F&N.
3. Commodity sector
The weakening of the greenback has caused investors to pour their money into commodity stock to fight potential inflation and drove commodity stock prices up. For the first half of 2010, commodity stocks should still be in focus as most do not expect the US Federal Reserve to raise interest rate until the second half of the year. Stocks on the lookout will be Wilmar, NobleGrp, Olam, GoldenArgi, IndoArgi and First Resources.
4. Offshore/Marine and Oil/Gas sector
Crude oil price has retreated from at least USD140/barrel in 2008 to as low as USD60+/barrel in 2009 and currently rebound to between USD70 - USD80/barrel. Crude oil price should be moving up in 2010 to probably USD80 - USD100/barrel range. The recovery of the crude oil price will have a positive impact on Oil/Gas sector whereby potentially more contracts will be rolled out as compared with year 2009. Ship building/repairing and freight demand which were still weak in 2009 should be seeing rebound in 2010 as the economy continues on the mend. Stocks on the lookout will be KepCorp, SembMar, Ezra, Swiber, KS Energy, NOL, Yangzijiang, Cosco and ASL Marine.
5. Aviation and Transport sector
2009 saw many aviation companies suffered loss in their earnings as air travel demand dropped. Airlines have to resort to cutting route/flights to save cost and even slashing airfares to attract travelers. However, recent figure showed that air traveling demand is improving and should continue to improve in 2010. Aviation related companies will also be gaining due to the spill over effect of the recovery. Transportation sector in Singapore might be seeing more demand in 2010 with the opening of the 2 IRs. Stocks on the lookout will be SIA, SIA Engg, ST Engg, SATSvcs, SMRT and ComfortDelgro
6. Retail sector
Retail sector took a hit in 2009 when country went into recession, people cut spending. With economy recovering, people are starting to spend again which provided the recovery for retail sector. In particular the opening of the 2 IRs, the hosting of the Olympics Youth Games, the annual F1 and other mega events would spur more spending in the retail sector. Stocks on the lookout will be CapitaMall Trust, Suntec Reits, CapitaRChina, CapMallsAsia, StarHill Global and FraserCT.
7. Hospitality sector
As per the retail sector, this sector was badly hurt in 2009. With air traveling improving and mega events happening in Singapore in 2010, the demand of hotels should be in focus again. Stock on the lookout will be CDL H Trust.
8. Office/Industrial sector
Office renting and industrial demand have yet to recover as companies still emerging from bad periods and will take some time for them to expand their business. Stocks on the lookout will be AscendasReits, CapitaComm Trust, Suntec Reits, K-Reits, Mapletreelog, Cambridge Industrial Trust and FraserComm.
9. Health Care sector
This sector is pretty much a defensive sector as it was not affected badly in 2009 and will not be a super performer in 2010 either. Health care is essential regardless of what economy condition it is in. Stocks on the lookout will be Parkway, Plife Reit and First Reits
10. Telco sector
This sector should continue to grow in 2010. As technology advances, means to communicate between people will be getting easier and affordable and that will benefit very much the telco sector. The demand of smart phone is current the talk of the town and with the 3 telcos offering affordable subscription plan for that and potentially a better broadband services in 2010, the revenue and profit level for the telco companies should be improving. Stocks on the lookout will be SingTel, StarHub and M1
11. Construction sector
When Singapore went into recession, the Government rolled out infrastructure projects to boast the economy which benefit the construction companies. As the construction of the 2 IRs coming to an end, the demand and performance on construction sector will be relying heavily on property developers and infrastructure projects.
Stocks on the lookout will be Yongnam, CSC, LianBeng and ChipEngSeng.
12. Service and Utilities sector
Sign of service sector recovering could be seen in the later part in 2009, condition will be continue to improve in 2010 but do not expect a fast pace recovery. Stocks on the lookout for service sector will be SPH and SingPost. Utilities sector is pretty defensive in nature as it involves daily essential components like water, electricity, gas, etc. Same as in health care sector, the performance will be a slow and steady one in 2010. Stocks on the lookout for this sector will be SembCorp, Hyflux, Epure and HyfluxWaterT.
Sectors recommended for year 2010 on a medium time frame would be :-
1. Offshore/Marine
2. Oil/Gas
3. Aviation
4. Retail
For longer investment time frame would be :-
1. Office/Industrial
2. Transportation
3. Hospitality
For more defensive play to reduce risk, would be :-
1. Health care
2. Service
3. Utilities
4. Telco
Sectors to remain cautious due to higher risk would be :-
1. Bank
2. Property
3. Commodity
