Report dated May 8.
THE RECENT share rally in Singapore runs risks approaching “irrational exuberance,” said UBS, though not in as many words.
UBS said last week that given the recent 50% STI rise over the past two months, the likelihood of a tactical correction has “risen sharply.”
It said that recent levels contrast with the low on 9 Mar just two months ago.
“On a 13-week rate of change, the FSSTI is now at +30%. If this bounce proves to be as aggressive as the initial recovery of the (1997-98) Asian crisis, where the 13W change hit +70%, the FSSTI could hit 2,450 before the end of this month.”
It added that currently, 87% of stocks in the FSSTI are trading above their 200-day moving average.
“In past market recoveries, a short term breather was noted when the ratio reached c95% in 1998 and also in 2003. The average correction in the market was around 10%.”
Source: UBS
What goes up…
“In early-1999, the index corrected 11% when the percentage of STI stocks trading above their 200-day MA reached 95%. Today, the ratio is c87%,” UBS said in a note to investors.
It said the near-term rally was based on an improvement in bettering business sentiment and hard numbers.
“We believe cash levels remain too high and the rally is backed by improvement in fundamentals: In Singapore, real estate volume is at its highest since Aug 07, while 1Q09 bank results suggest NPLs are rising only moderately.
"Globally, a powerful inventory rebuild seems underway, China has surprised significantly, while US consumer confidence, home prices and loan surveys in April showed things may be turning less bad even for consumers.”
It added that since Singapore suffered not from structural issues but lack of demand, “a turn in global growth should see meaningful benefits.”
The Swiss banking group said it is cautiously optimistic on the city-state’s economy next year.
“As data validates our estimate that GDP could be mildly positive in 2010 vs the deep recession of 09, stocks could trade to mid-cycle valuations. FSSTI est at 2,650 by mid-2010 (16X PE premised on ‘g’ of 2%; EPS of -19.9% in 09e, +13.9% in 10e).”
Lenders, developers favored
UBS said it continues to look favorably upon real estate firms such as City Dev, CapitaLand as well as financial institutions including DBS and UOB.
“RNAV discounts should narrow, while banks could see EPS upgrades. As capital markets thaw, within properties, REITS will likely play catch-up,” UBS said, citing Suntec REIT as a property play to watch.
Dr Chan Yan Chong
Dr Chan Yan Chong, the MBA Programme Director at City University of Hong Kong and author of a widely followed investment newsletter, has turned bullish on the Singapore market.
In his newsletter dated May 6, he said that “bank and industrial shares that have dropped so much are worth collecting for the first wave of bull market to come.”
While a market correction may come after the recent sharp rally, he said: “bull market lasts for a long time, it will not keep rising all the time, but subject to intervening reversals. You must have the patience and stamina to hold on to your holdings.
"Do not sell off for small gains, and do not hope that you are able to ride on top of the market waves, thinking that you could sell at the highest and buy back at the lowest.”
Recent story: STI to hit 2,500 points - BNP Paribas
