SINGAPORE: After enduring a roller-coaster ride in the first six months of the year, unnerved stock investors may have to brace for further bumps ahead as trade war fears look set to linger, analysts said.
Phillip Securities' research head Paul Chew, for one, described the US-driven trade confrontation as the “the number one threat” for equity markets given the uncertainties on how it might unfold.
“Markets are unsure about the extent and duration of these tariffs,” he explained. “Initially, everyone thought it was just political rhetoric that (US President Donald Trump) would eventually pull back from. That’s why it’s a surprise that this has been so prolonged and keeps escalating.”
Last month, the trade spat between the United States and other top economies intensified, resulting in a punishing month for global shares as investors rushed to safety. In particular, threats of tit-for-tat tariffs between the US and China fuelled fears that the world’s two biggest economies will spiral into a trade war denting global growth.
With the latest purchasing managers’ index (PMI) out of China showing signs of softening ahead of additional US levies on US$34 billion of Chinese products slated to take effect this week, stock markets around the world stayed mired in the red on Monday (Jul 2), the first trading day of the third quarter.
OCBC Treasury Research wrote that with “the under-currents in the global economy (being) centered” on the fresh tariffs that will kick in on Friday, there is increasing market concern that trade tensions could start to weigh on growth and inflation.
These worries mean that stock markets would be in for periods of volatility in the third quarter, warned DBS Bank’s chief investment officer Hou Wey Fook.
“In a global trade war, who’s the winner? Nobody. But who’s the loser? Everyone,” he said at a media roundtable on Monday for the bank’s latest CIO Insights report.
“If you read the history of financial markets, what triggered the Great Depression was also protectionism so this is something we need to watch carefully and hopefully, rationality will prevail at the end of the day.”
Meanwhile, trade war jitters are compounded by other lingering risks, such as rising US interest rates, the recent rout in emerging market assets and brewing geopolitical uncertainties in Europe, analysts said.
“Higher interest rates have been in the background but with the stronger dollar, emerging markets have sold down recently. So far, they seem to be idiosyncratic issues for specific countries, like Turkey, Brazil and Argentina,” said Mr Chew. “But the worry of a contagion risk remains.”
Meanwhile, the re-emergence of geopolitical risks in Europe have also stirred concerns, said Mr Hou.
Following risk events, such as Britain's vote to leave the European Union (EU) and the Catalan declaration of independence, the election victory of the populist Five Star Movement and far-right League parties earlier this year has ratcheted up policy uncertainties in Italy.
“The fact that there will be noise around whether Italy will exit the EU will be a headwind. If they do take the step, it will be very bad for European markets.”
All these will combine to fuel volatility in the coming months, said Mr Hou, though he does not think that recent losses mark the start of a bear market.
“We think the bull market is in a period of correction and will resume once things stabilise on these fronts,” he added.
IN SINGAPORE MARKET, BRIGHT SPOTS REMAIN
Still, DBS has downgraded its three-month rating on equities to neutral from overweight. Within the asset class, it continues to prefer US over Europe while Asia was cut to neutral on the back of potential headwinds from trade tensions, rising rates and capital outflows.
Also cutting its position on equities to neutral, Schroders said this reflected a “more cautious stance” due to positive earnings revisions becoming less widespread and possible heightened risk aversion due to upcoming political events.
The research house is also positive on the US though it downgraded European, Japan and Asia-Pacific excluding Japan to neutral. Within the region, it added that it favoured the Singapore market where “the outlook has steadily improved”.
DBS’ quarterly CIO Insights report echoed that, citing strong external balance sheets and fiscal balances as Singapore’s resilient factors. Local banking stocks and REITs (Real Estate Investment Trusts), which will benefit from higher interest rates and are less exposed to global trade flows, are among Mr Hou’s top picks.
KGI Securities analyst Joel Ng also advised retail investors to be selective and look out for opportunities to accumulate on companies with strong fundamentals that have been oversold last month.
“It’s very hard to time the market and even harder to catch the bottom but if the valuations are decent, it will be attractive to accumulate some companies that have been sold down,” he said, citing Singtel, Sembcorp Industries and Keppel Corp among his preferred plays.
Looking to revise his year-end target of 3,900 points for the benchmark Straits Times Index (STI) in the near term, Mr Chew said: “Last year was a very benign year, not just for Singapore but markets globally. There was little volatility and there was just one direction that is up.
“This year, there have been various flashpoints causing volatility. The extent of trade tensions was unexpected and not factored into market estimates,” he added.
The benchmark STI dropped 0.9 per cent, or 29.76 points, to close at 3,238.94 on Monday, tracking declines in the region. Year to date, it has fallen more than 5 per cent.