SINGAPORE – Stock market bull runs are always a double-edged sword for investors.
As prices rise, the chances of making a loss rise as well. That generates bouts of profit-taking which lowers prices to a level where returns outweigh the risk of booking a loss.
Hence, most analysts agree that while the government’s decision to tighten Covid-19 restrictions will be a set back, investors should look for buying opportunities that may emerge from the selloff.
Singapore entered a bull market in early June last year when the benchmark Straits Times Index (STI) clocked a 20 per cent rise from a decade-low hit on March 23. And despite the recent selloff, the index is still about 40 per cent higher from that historic low.
Also worth noting is that the bull run started in the second quarter when the economy suffered its worst downturn on record. This shows that smart money is always on the look out for opportunities that lie within the clutter of immediate risks.
Just like Singapore, most economies worldwide are in the midst of an economic recovery from the coronavirus-induced recession and stock markets have risen to their highest in months.
So it is natural that investors would be looking for any excuse to book profits and reassess how the rest of the economic cycle would impact company earnings before taking new bets. Hence, most equity markets across the world are coming off their recent peaks.
In developed markets like the US, investors are booking profits from the year-long bull run as the strength of the economic recovery has raised fears of inflation, and in response, the possibility of policy tightening.
Elsewhere, a new variant and secondary outbreaks of Covid-19 are the cause for a pause and reassessment of opportunities and challenges, both immediate and long term.
In Singapore, the bets are balanced between the possibility of the latest round of mobility curbs ending as scheduled and an extension along with tighter measures to restrict the rise in community cases.
Mr Vasu Menon, executive director of investment strategy and wealth management at OCBC Bank, said the recent volatility in stock markets has spooked some investors and led to fears that we are on the cusp of a sharp correction and possibly a bear market.
“These fears are unfounded, and investors should not lose sight of the medium to long term outlook, which remains positive,” he said.
DBS Bank in a recent report notes that the selloff that started late April was exaggerated because of the seasonal selling pressure that usually surfaces every year in May, when several companies go ex-dividend, recording share ownership for dividend payments.
“We believe this is a near-term blip and a chance to buy on weakness given the progress in vaccinations,” the DBS report said.
The STI dropped 5.2 per cent to a two-month low of 3,055.02 points on Friday (May 14) from this year’s high of 3,221.58 points on April 29, as community cases rose and government officials announced a roll back of most of the relaxations of Covid-19 curbs.
Since then, the index has bounced back and was around 3,124 on Tuesday afternoon.
But the pullback was expected even before the new Covid variant emerged here and mobility curbs were renewed.
The April 29 peak was the highest level for STI since Feb 12, 2020. The market had risen 13.2 per cent in the first four months of 2021, the strongest start to a calendar year for the index since 1999. The dividend distributions last month boosted the market’s total return to 14 per cent.
Add to that the 27 per cent gain the market clocked last year from its March 23 low of 2,233.48.
The STI has been the second-best performer across the Asia Pacific so far this year, and the only other regional benchmark besides Taiwan’s Taiex to post double-digit percentage gains in the period.
Simply put, the one-year-old rally was ripe for profit-taking, repricing and reassessment of upcoming risks and opportunities.
Ms Carmen Lee, head of equity research at OCBC Bank, said that given the surge in Covid-19 cases worldwide and the new community cases in Singapore, the renewal of some restrictions was expected even before the measures were announced.
“As these measures are constantly being reviewed, we believe the impact is likely to be minimal for now,” she said.
Still, this does not mean no one will lose out amid the price gyrations and the reassessment of risks and returns.
For instance, DBS Bank removed Sats – the ground-handling and in-flight catering service provider at Changi Airport – from its list of blue chip picks on May 18.
“We think the reopening of Singapore’s air lanes for air-travel passengers, especially for nonessential travellers, could proceed slowly and with caution even after the current Covid-19 outbreak here comes under control,” said DBS analyst Yeo Kee Yan.
The Sats derating follows the cancellation of the World Economic Forum here in August and the deferment of Singapore’s travel bubble with Hong Kong.
On the flip side DBS Bank believes that prices for real estate investment trusts (Reits) are approaching a near-term bottom and should be seen by investors as a buying opportunity.
It also expects grocery retailers Sheng Siong and Dairy Farm to benefit from the lockdown.
