Has the volatility of the market eased? Probably.
THOSE WHO have been on a rollercoaster know what it’s like to experience the gamut of emotions from fear, ecstasy, relief, and to even regret. While it can be a cliché to liken the stock market to that of a roller-coaster ride, investors who stayed on board the past month would attest to the extreme topsy turvy nature of the markets.
The Vix, as the Chicago Board Options Exchange Volatility Index is known, breached the 80 mark for the first time in its 18-year history on October 15, after staying around the 40 range for much of the year.
Th e index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, with a higher reading indicating greater implied volatility. In fact, ten of the twelve highest ever closing readings of the index were registered in the past month.
Back home, the week ended October 17 saw Singapore’s benchmark Straits Times Index (STI) rallying over 13 per cent in the first two days. Investors were buoyed by the unprecedented moves by governments in Europe and the US to shore up the irrespective banking sectors by acquiring direct stakes in several banks.
However, the index erased all its gains within the next three days as economic fears gripped the market prompting investors to take profitsoff the table.The sell-off was also compounded by increasing capital outflows from Asian markets hit by fund redemptions and a general loss of confidence in equities.
Investors’ apparent flight to quality has seen Singapore-listed China stocks, generally known as S-chips, take a pounding. The cause of S-chips was also not helped when steel maker FerroChina revealed it was having trouble repaying working capital loans worth RMB706 million ($153 million), signalling the adverse eff ect the liquidity crisis was having on some businesses in China.
The company has since stopped all its production activities while its stock has suspended trading, pending the management’s efforts to find additional funding in a tight credit market to meet its near-term debt obligations.
As a result, smaller and medium sized S-chips have faced significant downward pressure arising from the FerroChina announcement. The Prime Partner China Index (PPCI) – which measures the performance of S-chips – fell sharply by 24 per cent from October 8 and 17 as a second Chinese company, China Printing & Dyeing, made a similar revelation about its inability to fulfil debt obligations.
The three banking stocks of DBS, UOB and OCBC also took a brief hit as some were concerned about possible deposit outflow from these banks. Th at has of course been laid to rest after the Monetary Authority of Singapore (MAS) eventually announced a move to guarantee all Singapore dollar and foreign currency bank deposits for the next three years.
Raffles Medical and SMRT are recommended by DBS Research.
FINDING SAFE OPTIONS
At a time when credit markets are largely frozen and banks are not as liberal with their lending activities, companies in strong cash positions are obviously in a safer position than those with higher gearing, especially if debt obligations require near term refinancing.
According to OCBC Research, companies under its coverage who are in a strong cash position include Biosensors International, Ezra, SembCorp Marine and Singapore Press Holdings (SPH).
On its part, DBS Research has highlighted its preference for companies in consumer services after evaluating several key metrics such as cash positions, working capital requirements and capital expenditure plans.
“In general, consumer services companies under our coverage (land/air transport, media and healthcare) have reasonable working capital requirements and a healthy balance sheet; and we believe all will weather the current credit crunch,” it concluded in a recent note to clients.
These companies include Singapore Airlines (SIA), ComfortDelgro, SMRT, SPH, Raffles Medical and Parkway.
With oil prices on the slide, UOB KayHian analyst Nancy Wei believes that shipyard stocks would likely tumble further should oil prices fall below the critical level of US$60 to US$70 a barrel.
Amongst the off shore & marine stocks, UOB Kay Hian prefers SembCorp Marine for its attractive valuations. Looking at property counters, share prices of large-cap property stocks have fallen some 70 to 80 per cent from their peak in the fourth quarter last year. While their price to book valuations are still above those recorded during the Asian financial crisis when property counters took a severe hit, these companies today boast much stronger fundamentals.
Th is time round, property developers areless vulnerable given their strong balance sheets and Singapore’s interest rates are still low,” says Ms Wei.
WHERE TO NEXT?
The market is obviously facing a severe crisis of confidence which means that any piece of bad news is likely to be met with a strong sell-off. Head of research with AmFraser, Najeeb Jarhom, feels that most investors are likely to be wary of buying into the market this year, though he does not rule out the possibility of a brief year-end rally.
“Those who actively trade may be waiting for the year-end rally because it’s hard to believe that the current market situation will go on for another two months,” he says. “I think people will believe then that the worse is possibly over and that there are positives to look forward to such as inflation coming off, lower oil and commodity prices and a more stable outlook for banks.
”In the short-term, most analysts concur that volatility would continue to exist –meaning short-term investors ought to buckle up for more rough rides ahead.
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This article was recently published in Smart Investor magazine and is reproduced here as part of a special collaboration between the magazine and NextInsight.
