Direction for Singapore Stocks in 2006

The stocks have been running up since end of Dec05 to now. Could this be a so-called January or Capricron effect?

BT published an article on 3 Jan 06, Analysts turn bullish on S'pore stocks in 2006 predicting STI to climb 10% this year (about STI = 2600 points), having advanced 14% in 2005.

Reasons and comments cited included:

- 'There is strong liquidity, investor and consumer confidence has risen sharply, job creation and employment are healthy, and the average Singaporean has seen a strong performance in the equity and property markets.

- 'Now that investors see some of the profits that have been made in the past year in the equity and property markets, we could see a broader investment base that would like to participate, which could lead to more aggressive bull market valuation assumptions.'

- 'Although the Singapore market is more expensive than its regional peers, its current valuations are not excessive. According to Citigroup, a valuation of 15 times earnings for the ST Index is at the lower end of a long-term average range of 13.1-26 times. A dividend yield of 3.6 per cent also provides support for the market.'

- However, Deutsche Asset Management fund manager Amy Low expects Singapore to underperform vis-a-vis regional markets like South Korea and Japan due to its defensive nature.

- Among major developments likely to be played out in 2006 are the peaking of interest rates, an election in Singapore, continued reflation of Singapore asset prices, the emergence of the Japanese and Chinese economies as the engines of growth for Asia, and an increase in merger and acquisition activity.

- The key themes for the Singapore market in 2006 are the reflation story, which will benefit not just property counters but banks as well; oil and gas and the increasing momentum of earnings growth for tech stocks.

It is anybody's guess how the STI will perform at the end of the year as the analysts have also been famous for making grossly wrong prediction. Our PM expects the economy to grow 3-5% while the economists believe the growth should be higher than that.

STI @ 30/12/05 - 2,347.34
STI @ 06/06/05 - 2,420.74, up 3.1%

As of 6th Jan, the penny stocks have run up alot, e.g. Celestial hit 77 cts, Asia Dekor 11.5 cts, Hotung USD12 cts, Unifood 26.5 cts, Sin Soon Huat 22 cts.

My expectation is that from Jan to early Feb06, penny stocks should take a lead in the run as they have been lagged behind STI blue chips over the past year. There should be rotational plays on the theme stocks, e.g. oil & gas, property, China stocks etc. The market should remain strong in 1st Q and firm up to 2nd Q. However, I'm not so sure about how it will perform in 2nd half, although my feeling is that it should be on a gradual decline, depending on when is the election held. Election period tends to boost the stock market historically due to the Government giving out goodies & painting good pictures to make the voters feel good. We are likely to see some meaningful corrections either end of this year or next year as the market may be ripe for "spring cleaning" to weed out excesses.

My Strategy for 2006
- Remain firm & discpline i.e. no chasing of run-up stocks, concentrate on finding value stocks and long term dividend stock-cows at good value

- Reducing my exposure (when opportunity arises) to stocks that are generally weaker in fundamentals or those that I do not have strong convictions about its future, e.g. AGVA, Asia Dekor, Hotung, IDT (?), Sunray, Transview, Westcomb, Zhongguo Powerplus, JEL, Unifood, TT Int'l

Wow, quite a bunch of them!!

- Taking gradual profits on stocks that may have (or if they manage to) run up significantly, e.g. Celestial, China Paper, CG Tech (to keep some for longer term), Nera Elec

By adopting the above strategies, no doubt my year 2006 dividend collection would be reduced. However, I'm taking a longer horizon view to grow my dividend base by channelling my funds into more predictable stocks e.g. REITs and consumer monopolies or market leaders e.g. Vicom and other blue chip stocks when the values present themselves.

I should be building up my cash holding and to reinvest into higher dividend stocks and taking advantage of any correction in the market.

Investment Clock - Where are we now?

At the start of a new year, it is good to set out some expectations for the marco economic conditions and hence the likely impact/ effect on stock market conditions. One very good chart is the Merrill Lynch Investment Clock which shows the different phases of growth in different classes of asset and the interactions with interest rates and inflations.

As it is now, US FED rates have been rising and is now standing at 4.25% compared with 2.25% exactly a year ago. It is expected to increase for another 25 basis points before any pausing. Dow Jones closed at 10,717.50 on 30 Dec 2005 compared with 10,783.01 on 31 Dec 2004, ended the year relatively flat. The US economy is expected to be moderated and slowed down as US tries to reduce its trade deficits via interest rate policy. As interest rate peaks, i.e. at the bottom of the above chart, it may be the best time to invest in US bonds while reducing weightage on stocks.

Over the past few months, Singapore interbank rates have also been increasing. One-year SGS Treasury bill has a 2.85% yield as of Dec'05 compared with only 1.55% in Jan'05. My expectation for short term interest rate is somewhere between 3.50% to 4.00% for the coming year. Domestic interbank rates for 3, 6 and 12 months are now all at 3.25%. In this raising interest environment, business costs are likely to increase, investors may prefer to invest more in interest yield assets and reduce higher risk stocks. Hence, for year 2006, it may be more prudent to maintain some amount of cash instead of being fully invested in stocks as historically, stock market performance has an inverse relationship with interest rate. This phenomenal is yet to be fully seen in US markets. Once US begins to slow down, it may be the signal for SGX to follow likewise. Hence, to thread with care.