STI tipped to drop further in Q4

Winter is coming for the benchmark Straits Times Index (STI), and it is not bringing any Christmas cheer either.

Fears over the global economy, geopolitical instability and the prospect of rising interest rates in the United States are all weighing down the index of 30 blue-chip stocks, which reached a five-month low earlier this week.

On Thursday, the STI fell to 3,228.71, its lowest level since mid-May. It recovered a subdued 0.76 per cent yesterday to end the week at 3,253.24.

However, analysts say that further falls may be in store for the STI, which could dip below the 3,200 level by the end of this month. By year-end, it could even be right where it started in January - at slightly over 3,100, they added.

"The STI has actually already performed well, but recent uncertainty in the region, together with the market's focus on developed markets, has diverted part of the interest away from the local market," said OCBC Investment Research head Carmen Lee.

She said that the current weakness in the Singapore stock market is likely to persist until the end of this year.

The fourth quarter is typically quiet, as traders stay away this month for historical reasons - the month is associated with Wall Street crashes in 1987, 1989 and 2008 - and go on a break closer to the festive period in December.

For the STI to rally, company earnings would need to show growth, Ms Lee said.

Merger and acquisition activity could also lift the languishing market, especially if the valuation for any takeover target is higher than the current market or industry averages, she added.

Analysts said that the STI has been dragged down mainly by macroeconomic factors, including weaker economic growth in China, political instability in areas such as Ukraine and the Middle East, and concerns over the end of the US Federal Reserve's monetary stimulus.

"We had that crisis in Argentina when it missed its bonds repayment, followed by tensions between Russia and Ukraine in August. These two (events) caused global stock indexes to fall," said Phillip Futures senior dealer Lee Choong Kit.

Argentina, Latin America's third-biggest economy, defaulted on its debt for the second time in 13 years in late July.

The damage from that and Russia-Ukraine tensions spilt over to the STI, which has been spiralling downwards since peaking at 3,387 on Aug 1 this year.

The Federal Reserve also said last month that it would end its third round of quantitative easing, known as QE3, this month if the US economy continues to recover. It signalled that when interest rates start rising, they would probably do so at a faster rate than what the Fed had forecast in June.

The end of QE3 could lead to more funds leaving Singapore, which could place a limit on how much the index could rise by in the fourth quarter, Mr Lee said.

IG market strategist Ryan Huang said: "There will be more investors opting to cash out and wait on the sidelines as QE3 winds down."

More recently, the pro-democracy protests that have paralysed parts of Hong Kong have also taken a toll on the STI.

Mr Lee said: "As far as the rising tensions caused by pro-democracy protests in Hong Kong are concerned, we see no signs of a compromise or resolution in sight."

He said the STI could fall further this month to between 3,170 and 3,285 points, and could trade even lower by year-end at between 3,100 and 3,200 points. This could be close to where the STI began the year, at around 3,170 points.

melissat@sph.com.sg

This article was first published on Oct 4, 2014.
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