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Recent sell off in the equity markets due to The recent sell off may be attributable to the following reasons: a) Exodus of funds from equity markets U.S. funds saw the largest weekly outflows amounting to US$12.3b, the largest since 2000. The Asia funds suffered US$4.9b of weekly outflows. b) Technical breakdown in the charts STI has traded within a tight range of approximately 130 points from 2 Jun 2015 to 21 Jul 2015, before it broke down. Coupled with the simultaneous breakdown in the other equity markets’ charts such as S&P500, Hang Seng, China, there was widespread risk aversion. c) 2Q GDP sparks concerns of a possible technical recession Singapore 2Q GDP contracts by 4% q/q, sparking concern of a technical recession if 3Q GDP continues to be negative on a q/q basis. Furthermore, our strengthening SGD against the other ASEAN countries’ currencies and China’s Yuan, reduces our competitive nature. |
Notwithstanding the above factors, Singapore market (as measured by our STI) has fallen around 15% year to date and is likely to be in the process of probing for a bottom. With the recent slide, STI trades at around 1.1x Price to Book Value (“P/BV”) which is on par with that during the Eurozone Crisis. This should provide some downside support to the market in the event of further weakness.
Photo: DBSIn the STI, our three local banks are trading at depressed valuations amid concerns of slower economic growth in Singapore and possibility of rising non-performing loans etc. In addition, according to DBS, as overseas earnings comprise of 1/3 of our local banks’ pre-tax earnings, exposure to HK/China, Indonesia and Malaysia also raise their risk profile.
Notwithstanding the cautious outlook on the three local banks, their recent share price weakness has brought valuations to depressed levels, especially for UOB and OCBC. Both UOB and OCBC are trading near the global financial crisis (“GFC”) lows. It is noteworthy that OCBC and UOB mostly trade above DBS in terms of P/BV valuation since 2002.
In times of capitulation, it is entirely possible that the banks may trade at valuations even lower than GFC lows. What we know for now (based on statistics) is that, the banks are likely trading at levels nearer to the lower end of their historical valuation bands. When sentiment recovers (be it in the coming months or years), it is likely that the local banks may re-rate nearer to their historical means.
In addition, it is unlikely that the slowdown or / and turmoil in the China market are serious enough to bring a global recession as to what we have seen in 2008/2009. There remain sufficient supports from cheaper oil, lower bond yields, monetary easing in Emerging Markets and Europe and strength in the U.S. economy.
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Given the recent multitude of concerns ranging from the impending U.S. rate hike, slowing China economy, turmoil in the China markets (etc., the list goes on…), most investors will prefer to stay mostly, or entirely in cash. Such investors typically belong to the following two groups. |
Lastly, I have just sent my clients my personal compilation of stocks whose past year P/BV are lower than their average five year P/BV (i.e. stocks are cheaper now than their five year historical average) together with this write-up. I will forward my list to the readers on my http://ernest15percent.com/ website signups in the next couple of days.
This article was recently published on Ernest Lim's (left) blog, and is republished with permission. Please refer to the disclaimer here http://ernest15percent.com/index.php/disclaimer/ .
