Commentary: Is it time for stock market investors to hold or fold?
Inflation has dominated global headlines this year and equities have tumbled. OCBC Investment Research's Carmen Lee discusses where investors can look to for an escape.
SINGAPORE: The Singapore stock market had been dismissed by some investors in the past few years as offering dismal returns, compared to markets in the US and China which offered much higher returns even through the pandemic.
However, with global stock markets having taken a massive beating into bear market territory this year and lots of volatility, the Singapore stock market in comparison has held its own steadily as a harbour in a storm of sorts.
IS THERE NO ESCAPE?
Inflation has dominated global headlines this year and equities and other risk assets have tumbled. Is there no escape in this uncertain environment? Where is the last bastion for investors to seek shelter from this massive storm that seems to be affecting almost all markets? Is it time to panic?
The risk assets sell-off this year has sparked many questions, and with the uncertain and slowing outlook, many investors have opted to stay on the sidelines while waiting for clearer market directions.
Apart from inflation and rising interest rates, geopolitical tensions over Russia’s invasion of Ukraine and growing fears of an energy crisis are also worrying investors.
In Asia, the situation remains tense over US-China tensions, which were exacerbated by US Speaker Nancy Pelosi’s visit to Taiwan in August.
And lest we forget about the pandemic, in China, COVID-19 and lockdown restrictions are some of the factors that concern investors, essentially over the potential impact on economic growth and business activities.
Meanwhile, whispers of a potential recession in the US have become more of a shout in recent weeks. An economic downturn seems inevitable, especially with the US Federal Reserve signalling they may be willing to risk a recession to regain control of inflation.
“No one knows whether this process will lead to a recession or if so, how significant that recession would be,” said Fed Chair Jerome Powell, after the Fed rolled its latest big rate hike. “Nonetheless, we're committed to getting inflation back down to 2 per cent”.
With the Fed’s hawkish stance and other central banks also raising interest rates to control inflation, one clear certainty is that markets are heading into a period of great volatility, and that it is increasingly difficult to navigate in this environment.
A BRUTAL SEPTEMBER
Markets dislike uncertainties. With the above situations remaining largely unchanged, risk assets are likely to continue to see wide swings in prices. As an example, the S&P 500 has traded from a high of 4,819 in early January this year to a low of 3,585.62 on Sep 30, a decline of 25.6 per cent.
Traditionally a rough month, September 2022 was particularly brutal.
In the last 30 years, the S&P 500 has posted average positive gains for all months except February, August, and September.
The S&P 500 was up for four straight days from Sep 7 to 12, enjoying good gains of 5.1 per cent during this period. However, on Sep 13, the index plunged 4.3 per cent in one single day due to the latest inflation data emerging from the US – the sharpest daily decline since Jun 2020.
By the end of September, the S&P 500 had fallen in 13 out of 21 trading days, tumbling 9.3 per cent for the month. This is the S&P 500’s worst September in 20 years since the index fell 11 per cent in September 2002.
The Dow Jones Industrial Average fell 8.8 per cent in September 2022 and the Nasdaq plunged 10.5 per cent.
With inflation remaining a concern and with more hikes ahead, this will certainly add more volatility to the market, especially for risk or interest-rate dependent assets.
WHERE THE BUYS ARE
So, where are the safe havens, particularly when talk is rife of a looming recession?
To have a better understanding of the drastic changes that took place in the last few months that impacted growth prospects, take into consideration that the International Monetary Fund at the beginning of the year estimated global growth for 2022 to be 4.4 per cent. In July, it revised this down to 3.2 per cent.
Consensus forecasts for global growth have been downgraded again since then, with the Organization for Economic Cooperation and Development (OECD) on Sep 26 estimating 3 per cent for this year before slowing further to just 2.2 per cent in 2023.
In Singapore, economists expect GDP to come off from 3.5 per cent in 2022 to 2.8 per cent in 2023.
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Singapore is one market that stands apart from the peers, due to its high dividend yield, healthy corporate earnings growth and attractive valuations.
One of the key attractions of the Singapore market is core representations from a group of stable companies with long business track records and well-established business models
At this year’s highs, the Straits Times Index (STI) was up 11 per cent on Feb 17.
As of end-August, the STI was up 3.1 per cent year-to-date versus -18.7 per cent for the MSCI World Index – one of the few markets that was still in the black and also one of the best performing markets so far this year. While the STI also took a bit of a beating in September, it was still up 0.2 per cent year-to-date.
With the global outlook remaining cloudy for the next two to three quarters, Singapore core blue chips should form part of a diversified portfolio as Singapore stocks are trading at undemanding valuations and with stable earnings streams and dividend income.
Within the Singapore market, we continue to favour the banking sector, which will benefit from higher interest rates. We also favour certain defensive sectors including telecommunications and utilities. In the property sector, most stocks are trading at discounts to book values, and there are selective opportunities to invest in quality companies for the longer term.
Carmen Lee is head of OCBC Investment Research.