Indifference after stellar first half

This article is more than 12 months old

More difficult to justify buying stocks now, but investors cannot be wholly negative as overall outlook is improving

Usually at any point in time, it is possible to find compelling reasons to either buy or sell.

That is how markets work - investors with opposing views jostle for the best prices, and as long as the playing field is level and all investors have equal access to the same information, the outcome should be that the market finds its level, which should be a fair reflection of the consensus opinion.

The problem with the present state of the local market - as well as others in the region such as Hong Kong - is that having enjoyed a stellar first half, it is becoming more difficult to justify continued buying; yet nor is it possible to be wholly negative because the fundamental outlook is improving and growth appears to be picking up.

Some might argue that having an indifferent outlook, such as is the case now, is the least desirable position to be in because there is no clarity at all as to what an investor should do.

Moreover, in a market trapped within narrow bands, traders find it difficult to make money as it requires them to have pinpoint timing skills.

The net result is a slowly drifting market punctuated by the occasional burst of buying or selling, depending on news flow.

The bias has been slightly to the downside because of the strong first half turned in by banks and property stocks, while liquidity has dropped off slightly, possibly a reaction to the prospect of the US Federal Reserve hiking rates for a third time this year in December.

Of course, the investment community would always prefer to recommend buying since clients who buy and keep buying are kept in the game and therefore engaged, while those that have sold are out of the game, are no longer committed and have to be enticed to get back in.

So it is that most of the reports on outlook for equities lean towards buying.

This is the case in the US, where hopes are high that the Trump administration's tax plan, which is heavy on promise but light on details, will be approved.

If it is, then the US would have pulled off a neat one-two trick: First, push monetary policy to the limit by massive money printing to repair the damage to the economy caused by its crooked banks.

Once that reaches breaking point, start scaling back but quickly replace it by pushing fiscal policy to the limit to keep the ball rolling. It would appear that in the US, the punch bowl will never be emptied.

This means that as far as US stocks are concerned, reasons can always be found to keep buying, no matter what the track record of the administration and perhaps more importantly, valuations.

For the record, Bloomberg gives the S&P 500 as trading at a price-earnings (PE) of 22 and the Dow Jones Industrial Average at 19 - both figures high by any standard.

In contrast, valuations do matter for the local market.

Bloomberg's estimate for the Straits Times Index (STI) PE is 11 - not overly taxing and under different circumstances, surely the basis for a "buy". To the best of our knowledge, however, there are only a few houses willing to stick their necks out and recommend a buy, among them Macquarie Equities Research, which a little more than a week ago raised its STI target to 3,400 based on a positive "top-down" story - gross domestic product growth being revised upwards and improving export figures.

So far, investors have not responded in any significant fashion to the improving economic numbers. However, when they translate to better earnings, there could well be a re-rating.

Perhaps then we will see more houses finding reasons to get back in instead of waiting on the sidelines.

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