A good year for stocks so far, but what lies ahead?

A good year for stocks so far, but what lies ahead?

All the buzz for investors so far this year has been over stocks.

Those who have been betting on equities since the start of the year are sitting now on handsome gains.

And plenty more appear willing to punt that the bull charge will keep going for some time to come.

Major central banks around the world sent vast sums of cash pouring into the global system as they tried to kick-start their economies.

This flood of liquidity has sent markets soaring worldwide for several months now, with the United States and Japan bourses the most notable.

Here, the keenly watched Straits Times Index (STI) has soared 7 per cent for the year.

"Investor sentiment in the local stock market, in line with the rest of the world, has been strong and shows no sign of dissipating despite the external headwinds," said Mr Albert Tse, head of intermediary distribution for South-east Asia, at asset management company Schroders.

He added that the Singapore market has performed largely in line with global stocks but has outdone wider Asian equities.

But there are also increasing signs that the liquidity tap could soon be tightened, with the US Federal Reserve possibly starting to taper off its huge stimulus measures.

This has resulted in a recent bout of profit-taking, with the STI sinking 1.8 per cent last Thursday, its worst one-day performance in percentage terms since May last year.

The Sunday Times tackles the top five issues on investors' minds currently.

1. Which sectors have impressed here in the first half?

Telcos, banks and real estate investment trusts (Reits) have shone brightly in 2013 thus far.

DBS Group Holdings and United Overseas Bank both unveiled record first-quarter profits recently, while OCBC Bank outdid market expectations even though it posted a 16 per cent fall in earnings.

The robust numbers powered both DBS and UOB stocks to their highest close since 2007 earlier this month.

The financial sector's performance has pleasantly surprised many analysts.

"The sector has performed spectacularly this round," said OCBC Investment Research head Carmen Lee.

Telco stocks have also shot to record levels, with StarHub and M1 hitting fresh all-time peaks in recent weeks and SingTel rocketing to its highest close since 2007 a few days back.

However, the sector's recent surge has prompted some analysts to downgrade it.

OCBC analyst Carey Wong noted: "The share prices have run up too much, too quickly, and this has driven yields down to below 5 per cent. While these yields are still fairly decent, they are not compelling on a historical basis."

Reits have continued last year's stellar showing, but analysts have warned of narrowing yields in the wake of sharp rises in their share prices.

2. What's the outlook for the Singapore market for the rest of 2013?

Despite Thursday's 1.8 per cent pullback, analysts believe the red ink is temporary and the STI will rally.

Technical chart indicators show that the STI remains on track to challenge the 3,485 and possibly 3,600 level, as long as it remains above the 3,250-3,320 range, noted Phillip Securities Research analyst Ng Weiwen.

He added: "While the STI is not exactly a bargain, it still offers a relatively attractive yield of around 2.9 per cent."

Analysts believe the pace of sluggish global economic growth allows central banks to continue their accommodative stance while not being slow enough as to trigger recession fears. This should provide support to stock markets worldwide, including Singapore.

"We see the trend for liquidity inflows to seek out yield, value and defensive stocks continuing," noted DBS Vickers.

But corporate Singapore's current overall earnings are not giving reasons for the experts to be more bullish.

CIMB research head Kenneth Ng said: "Singapore's first-quarter corporate profits went back to leaning more to disappointments instead of exceeding expectations."

3. Will the STI cross its all-time high of 3,876 in this bull run?

The dizzy heights of the STI's record close on Oct 11, 2007, just before the global financial crisis struck, seem a distant memory.

This is also likely a peak too far for the local market to surpass any time soon, say the experts.

"We don't see a lot more upside for the index as the large index stocks are rightly priced for their growth," said CIMB's Mr Ng.

Gaining another 400-odd points would be highly challenging for the STI, given Singapore's sluggish economy and the lack of sparkling corporate earnings.

OCBC's Ms Lee said: "You need to have very strong earnings to take it to the next level, and we're still getting a mixed view on the earnings front."

But DBS Group Research analyst Yeo Kee Yan did not discount the possibility of the STI crossing its all-time peak in the second half of next year, "based on the current earnings trajectory and barring unforeseen circumstances".

4. Is it time to cash out of local stocks? What sectors should I focus on now?

Investors are becoming more wary of a market correction in the light of the recent run-up.

However, analysts still urge investors to accumulate stocks during times of market weakness.

Phillip's Mr Ng said: "Even if markets do sell off, please don't go away... the key is to stay nimble."

Investors are advised to adopt a trading mindset, given the liquidity-fuelled market environment.

IG Markets Singapore market strategist Kelly Teoh said: "Buying on dips and erring on the side of caution is favoured. Book profits when the market hits new highs."

The experts advise investors to focus on the laggard stocks, tipping the oil and gas sector as one to watch.

DBS Vickers noted: "With oil prices rebounding, and the jack-up rig market tightening, we expect interest in the sector to return."

CIMB's Mr Ng noted that the market is in a "safety bubble", with investors flocking to stocks with yield and earnings visibility.

He said: "As with all bubbles, this one will burst eventually, but in the meantime, as the names go up, it will be painful to sit it out."

5. When will the US Federal Reserve stop its massive economic stimulus measures and what will happen to stocks then?

This topic has been making the headlines in recent days, following Fed chairman Ben Bernanke's remarks on Wednesday that the flow of bond purchases could be slowed if economic conditions improve.

The Fed has been buying US$85 billion (S$106 billion) of bonds a month in a bid to inject cash into the system to kick-start the US economy. This loose monetary policy is called quantitative easing (QE). It has also lowered interest rates to near-zero levels to aid economic recovery.

Analysts widely expect the Fed to hike interest rates only in 2015, at the earliest.

IG Markets' Ms Teoh said: "We don't expect the Fed to withdraw QE anytime soon. In fact, traders are factoring in another round of QE if the US economy continues to drag."

The experts believe a withdrawal will be done gradually, and with advance notice.

Ms Teoh said: "The Fed will communicate this in advance, and it would be seen as good news as the US economy is able to grow on its own."

But they also add that this could cause short-term market turbulence if it is not properly handled.

Phillip's Mr Ng added: "It depends much on the skill of the Fed's timing and reading of the underlying economy.

"The key risk is that an exit strategy, if not carefully calibrated, might have a destabilising effect on both the economy and markets."

alfoo@sph.com.sg


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