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Market to stay volatile in weeks ahead: OCBC

Sub-prime fallout still not over; defensive stocks recommended

INVESTORS feeling dizzy over the recent market swings may have to face another 6-10 weeks of market volatility, till the actual impact of the US sub-prime fallout becomes clearer.

But in the medium to longer term, domestic and regional fundamentals could come into play again and lend support, Carmen Lee, head of research at OCBC Investment Research said yesterday.

‘In the short-term, the volatility in the market will likely persist for the next six weeks to another 10 weeks because this sub- prime thing has not really blown over and that there could possibly be more coming up,’ she said.

The equities market went through a month of volatile trading in November on renewed concerns over credit woes arising from fresh concerns over the US sub-prime mortgage problem and high oil prices.

‘I don’t think that the worst of the sub-prime problem is over. It’s probably going to be worst next quarter,’ said Selena Ling, head of treasury research & strategy at OCBC Bank.

‘So far, we have seen from all the news about Goldman Sachs, Merrill Lynch, Morgan Stanley, Citigroup and the like is that they have announced (writedowns of) about US$75 billion for the third and fourth quarter, so there’s probably another half to go that we will see upcoming in the next one or two quarters,’ Ms Ling said.

Last month, trading volume tapered off by 33 per cent month-on-month and 21 per cent of market value was wiped off from a month ago.

Year-to-date, the Straits Times Index is up 12.9 per cent and the small-cap index up 43.6 per cent, down from their high of +31 per cent and +115 per cent respectively.

Another reason for players to hold back their purchases is the typical lull with the holiday season as many fund managers go on leave. But come January next year when broking houses start to look for fresh trading ideas, the equities market could be looking better, Ms Lee said.

By the end of this year, the STI is expected to be hovering around the 3,300-3,500 level. Yesterday, it closed up 43.05 points or 1.24 per cent at 3,521.27 on increased hopes that the Federal Reserve would cut interest rates to spur the US economy.

Speaking to reporters at a market wrap-up yesterday, Ms Lee said that with cautiousness seeping in, she would only recommend buying into selected key sectors, such as oil and gas, banks, defensive stocks like SPH, ST Engineering and SIA, listed trusts and consumer-related China plays.

‘Even if oil prices come down to US$70-80 a barrel, (marine) order books will still remain very good. In the last few years for the orders that came in, oil prices were hovering around US$40-70 a barrel,’ she said.

As she spoke, New York’s main contract, light sweet crude for January delivery, was above US$90 in Asian trading hours yesterday. ‘Even at US$70, we were seeing significant orders coming through. When the market sees a 20-30 per cent correction in oil price, it’s not going to affect the oil and gas industry in Singapore.’

The under-investment in offshore equipment, rigs and vessels as well as the need for renewal of older rigs also mean continuous investment in this market.

Valuation of banking stocks has become more attractive following the recent correction and the counters will continue to benefit from the robust wealth and fund management activities, strong loans growth and the construction boom, Ms Lee said.

Similarly for China stocks listed here, valuations remain compelling compared to their peers listed in China and Hong Kong.

 

Source: Business Times 1 Dec 07

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