#whatstrending feat. CGS-CIMB Securities

Ever wondered what is currently driving the local and regional markets? #whatstrending is a new series addressing some of the most trending questions/topics on the markets for investors. Designed to be educational, expect to get factual information on what is driving sectors and stocks listed on SGX, featuring insights from professionals in the community.

Today, we hear more from CGS-CIMB Securities. Ernest Lim, Remisier, Private Wealth, shares his thoughts on the latest market movements and drivers, and why he’s bullish on markets. 

Q:  How have markets fared so far and what’s driving it?

From Ernest Lim, Remisier, Private Wealth at CGS-CIMB Securities:

Anxieties over further escalation in the Israel-Gaza war, soaring US bond yields, concerns over China’s property and equities market, worries over sticky inflation and likely weaker economic outlook in 2024 are some of the drivers which have been driving the markets lately.

S&P500 closed at 4,117 on 27 Oct and was the third consecutive day where it closed below its 200-day simple moving average (SMA, currently around 4,240). Based on Chart 1 below, S&P500 is also testing its uptrend line (currently around 4,135) established since Mar 2020.

Over in our local market, the STI has fallen 312 points or 9.3% since 31 Jul through 27 Oct. At 3,062, this is already 2.2% or 68 points below than the 14 Mar 2023 close which was the period of U.S. regional bank crisis.

Chart 1: S&P500 broke below its 200D SMA and tests its 3+ year uptrend line

Q: Should investors be concerned during this period? How should investors position their portfolios?

From Ernest Lim, Remisier, Private Wealth at CGS-CIMB Securities:

Notwithstanding the myriad of risks in the markets, I have a bullish view on the markets and here are 5 reasons why:

• Pessimism abounds – potential contrarian indicator. According to a measure done by the Bank of America, their bull and bear reading was calculated to have dropped to 1.9 as of 18 Oct. A reading below 2.0 is seen as a potential buy signal. Also, according to a Morgan Stanley report, global funds are the least positioned in China since 2020, based on their average position in China. With reference to Chart 2 below, October continues to see the third monthly outflows of foreign funds from China equity markets. CSI 300, down 10% in the year-to-date, is on track for its third yearly losses.

Chart 2: Foreigners’ selloff of Mainland shares in the past three months

• Corporate earnings could be decent amid muted expectations. Based on data compiled by LSEG, approximately half of S&P500 companies have reported results through 27 Oct, 78% surpassed consensus’ profit estimates, compared with 74% over the past four reporting periods. As for Singapore companies, we will look forward to more corporate earnings and their management outlook for 2024.
• China and Hong Kong measures are imminent. For China, market watchers are hoping to see some economic measures announced during the politburo meeting and Third Plenum (dates of both meetings are not yet announced). During the recently concluded China National Policy Committee (NPC) meeting, China approved a CNY 1 trillion sovereign debt issuance and increased its fiscal deficit ratio for 2023 from 3% set in March to about 3.8% of GDP. This mid-year increase in fiscal deficit ratio is significant as it rarely happens (last happened during Asian financial crisis, global financial crisis and during natural disasters). In addition, a potential meeting between both Presidents of US and China at the APEC Summit in November may offer another potential catalyst.
• Indices are reaching key support levels. Firstly, S&P500 closed at 4,117 and is the third consecutive day where it closed below its 200-day SMA (currently around 4,240). It also closed below its uptrend line (currently around 4,135) established since Mar 2020 for the first time since Oct 2022. Secondly, SSE Composite has broken below its 18-year uptrend and closed below this uptrend line for five consecutive days, this is significant as it typically bounces off this uptrend line whenever it tests it since 2005 (Chart 3 below). Thirdly, Hang Seng looks to likely see good near-term support around 16,800 – 17,080. Finally, STI’s key support level is around 3,060, followed by 3,040 – 3,050. At 3,062, STI is already 2.2% or 68 points lower than 14 Mar 2023 close which was the period of U.S. regional bank crisis.

Chart 3: SSE tests 18-year uptrend line

• Valuations for Asia seem decent. With the exception of the US market, the valuations for our Asian markets look decent. SSE Composite trades at almost 0.5x standard deviation below its 5-year average PE of around 14.5x and 2.0x standard deviations below its 5-year P/BV of around 1.5x. Hang Seng trades at 0.9x standard deviation below its 5-year average PE of around 11.2x and 1.0x standard deviation below its 5-year P/BV of around 1.1x. STI trades at approximately 1.1x standard deviation below its 5-year average PE of 16.2x. It trades at 1.1x P/BV in line with its 5-year average P/BV. SSE Composite, Hang Seng and STI have estimated dividend yields of around 3.3%, 4.1% and 5.5% respectively.

Q: Are there risks that investors should take note of?

From Ernest Lim, Remisier, Private Wealth at CGS-CIMB Securities:

Certainly, while there are opportunities, there are also risks that investors should consider. Below are 4 risks that I’d like to highlight.

1. Further escalation of Israel-Gaza war, which may cause oil and inflation concerns to spike. The US dollar may also move up amid flight to safe haven assets.
2. China’s policy measures may underwhelm market. If China announces underwhelming policy measures, this is likely to cast a pallor to their already weak equity markets. China’s US$9 trillion in local government debt and its ailing property market are some of the largest worries in China’s market. A weak China in terms of equity market, economy, and currency is likely to have spillover effects to other markets.
3. Poor than expected corporate results and/or guidance. Notwithstanding the relatively good set of results from most of the companies, Nasdaq dropped 2.9% last week. If companies report poorer than expected results and/or guidance, markets may see further selling.
4. Macroeconomic data is key. Economic growth may slow in 2024, given the lagged effects of monetary policy, a reduction in US consumer spending, and markets remaining concerned about sticky inflation numbers. US Fed rate decisions will also be key and have an impact on the market. Since the last rate hike in July, US 10-year bond yields have soared almost 100 bps in 3 months. The spike has exerted significant pressures on the equity market, and if US 10-year bond yields continue their ascent and at such rates, it could have an adverse impact on equity markets.

To read the full report, click here.

For more insights from Ernest, visit his blog at ernest15percent.com.

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