Singapore

STI drops 0.9% this week on geopolitical worry

Traders are cutting back on their positions due to North Korea's stand-off with the US and upcoming elections in Europe

"Investors are showing love for Europe and scrambling out of US equities, as the majority find US stocks overvalued..."

- Bank of America Merrill Lynch's Michael Hartnett

The ebb and flow of geopolitical events dictated the direction of this week's trading.

With one eye firmly in the direction of North Korea, where there is a stand-off brewing with the US, and the other at the United Kingdom and the rest of Europe, where key elections are upcoming, traders cut back on their positions, resulting in lowered daily liquidity.

Yesterday, the Straits Times Index managed a second consecutive rise after four straight losses, gaining 1.95 points at 3,139.83. For the week, it lost 30 points or 0.9 per cent.

Turnover, however, amounted to a mediocre 2.2 billion units worth $1.09 billion.

Excluding warrants, there were 279 rises versus 167 falls.

The top volume list was regularly occupied by penny speculatives such as Noble Group, Addvalue Tech and ISR Capital.

Among the blue chips, Singtel was in focus because of the increased competition it faces here and in Australia, while Global Logistic Properties remained well supported, thanks to its ongoing takeover talks.

Shares of the Singapore Exchange (SGX) rose $0.02 to $7.47 with 1.2 million traded.

The bourse operator on Thursday reported a 6.8 per cent fall in net profit to $83.1 million for its third quarter ending March 31, largely due to a slump in its derivatives business.

Macquarie Warrants said Macquarie Equities Research (MQ) has downgraded SGX to "neutral" from "outperform", as MQ thinks the re-rating outlook from the clearing of foreign exchange derivatives - which is MQ's key investment case - will be much lower.

"MQ cuts MQ's EPS forecast by up to 7 per cent for 2017-19E, mainly by reducing the contributions from derivatives.

"Accordingly, MQ lowers MQ's target price by 9 per cent from $8.25 to $7.50, which implies a price-to-earnings multiple of 22.3 times."

Investors are showing love for Europe and scrambling out of US equities, as the majority find US stocks overvalued... Bank of America Merrill Lynch's Michael Hartnett

Among other developments of interest, Bank of America Merrill Lynch (BOAML) in its latest fund manager survey found that money is flowing to Europe.

"Investors are showing love for Europe and scrambling out of US equities, as the majority find US stocks overvalued and perceive a risk of delayed US tax reform," said Mr Michael Hartnett, BOAML's chief investment strategist, in a news release.

PRESIDENTIAL ELECTION

In the same release, European equity strategist Ronan Carr added: "In spite of the French presidential election starting in less than a week, investors' perception of Europe is increasingly bullish.

"Although we agree on the allure of Europe's earnings recovery, complacency looks extremely high."

In its Thursday Liquid Insight, BOAML said the market is underpricing "Frexit", or the risk of France exiting the Eurozone, especially now that the polls show a tight race ahead of the first round of France's presidential election tomorrow.

"The worst outcome for markets from the first round is if Ms (Marine) Le Pen and Mr (Jean-Luc) Melenchon make it to the second round, in our view," added BOAML.

"We have already argued that markets would price immediately Eurozone break-up risks if Ms Le Pen were to win the second round.

"Even though getting agreement on a formal referendum on Euro membership in France will be difficult for Ms Le Pen, we believe markets will see the French election as effectively the referendum and would start pricing Frexit risk."

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