Business

STI regains footing after Wall Street scare

Index hits intraday low of 2,999 after Dow futures contract loss, but it manages to bounce back

A 50-point loss in the Dow futures contract, which indicated that Wall Street might struggle to make upward gains, yesterday led to selling here, with the Straits Times Index (STI) finishing 11.95 points lower at 3,013.12 in thin volume of 2.8 billion units worth $818 million.

Excluding warrants, there were 162 rises versus 277 falls.

Unit volume was boosted by almost 900 million shares done in LionGold, which closed unchanged at $0.001.

Despite STI's loss, it managed to rebound off its intraday low of 2,999, suggesting that worries over Wall Street may have been slightly exaggerated.

The incentive to sell the index was said to originate from last week's developments in the US, where President-elect Donald Trump failed to provide details of his approach towards managing the economy.

Most analysts expect cautious trading in the days ahead, at least until after Mr Trump assumes office on Friday.

Here, banks have been the STI's main driver on the assumption that higher US interest rates will lead to higher bank earnings.

Phillip Capital, in its report on local banks titled Challenges to Loans and Net Interest Income Growth, recommended an "underweight" on the sector.

"Singapore banks' Asian markets are in a credit cycle contraction, and Singapore banks have less ability to stretch the already high loan-to-deposit ratios (LDRs) further to boost net interest income growth," said Phillip.

"In this situation, a rising interest rate would likely worsen performance rather than improve it."

It also said the banks have expanded their LDRs too early to boost performance when interest rates were low.

"As a result, they have less bandwidth to cut high cost deposits faster than loans. More downside bias to LDR would further reduce net interest income growth and crimp the ability for the banks to set aside more provisions just as NPLs (non-performing loans) are rising.

"We expect a challenging operating environment for the Singapore banks ahead," it said.

Among other blue chips, media firm SPH's shares ended $0.13 or 3.5 per cent weaker at $3.56 on volume of 5.3 million after it reported a 43.8 per cent drop in net profit to $45.7 million for the first quarter ended Nov 30, 2016.

OCBC Investment Research said given the uncertain economic outlook and the continuing disruption of the media industry, it expects conditions to remain challenging for the group's media business ahead.

"Maintain 'sell' on the stock on valuation grounds with an unchanged fair value estimate of $3.41," said the broker.

HEADWINDS

UOB-Kay Hian, in the meantime, noted that the media business continues to face headwinds, while property earnings remain stable.

"SPH's media business remains dependent on the economic prosperity of Singapore, which looks lacklustre. Earnings remain pressured and dividend cuts will be likely. Maintain 'sell'. Target price: $3.29."

In the second line, CLSA initiated coverage of beauty products firm Best World International (BW) with a "buy" and $2.50 target.

It said the market had not recognised the investment merits of the company, the latter having a well-established track record outside of Singapore.

"BW's ability to succeed in highly competitive markets such as Taiwan and China is a testimony of management capabilities. Despite the share-price rally (480 per cent over the past one year), the stock remains undervalued versus regional peers," said CLSA.

"Fundamentals are underpinned by 27 per cent EPS CAGR (compound annual growth rate) over FY16-18 and strong free cashflow and backed by about 40 per cent net cash equity."

BW's shares on Monday jumped $0.08 or 5.5 per cent to $1.54 on volume of 6.9 million.

sivan@sph.com.sg

This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts