The irrational exuberance of surplus liquidity has finally come to an end, as most markets corrected sharply following a sell-off in technology stocks. But according to OCBC’s head of research Carmen Lee, Singapore stocks could prove a safe harbour to tide over stronger headwinds in the face of more attractive stock valuations. 

“While the Singapore market underperformed during the recent uptrend, it is also less volatile during the Sep 2020 market downtrend, making it ideal as additional holdings to a diversified stock portfolio,” she writes in a 14 September broker’s report. While the S&P 500 fell 6.7% from its September peak, the STI only lost 2% -- a relatively small correction vis-a-vis most markets. 

This stability arose as the SGX missed out on the strong market rally that began in March 2020 due to a lack of tech growth stocks on the index. The Straits Times Index (STI) is still down 23% y-t-d compared to gains for S&P 500 and Chinese, Taiwanese and South Korean markets in the same period due to their stronger tech exposure. Its recovery is also one of the worst in the region, regaining only 11.5% relative to the 12.9% (Hong Kong) to 61.7% (South Korea) recovery across Asia. 

But the result of this underperformance is that the Singapore market encounters less volatility when the markets come back to earth, making it ideal for portfolio diversification. “In addition, mid-to-big cap stocks in Singapore are largely operating in established industries and are less likely to be seeking capital raising during this period,” Lee continues. 

Singapore stocks are also relatively undervalued: the STI’s price-to-book (P/B) ratio of 0.86 2 standard deviations (SD) below its ten-year historical average and its price-to-earnings (P/E) ratio of 13.7 trading slightly under 1 SD above. In contrast, the MSCI is trading 3 SD above ten-year average. This stems from the higher composition of cyclical and value stocks on the SGX such as those associated with real estate and financial services. 

Growth stocks have far outstripped value counters in recent months. At current levels, Lee observes, the gap between S&P 500 Growth Index and the S&P 500 Value Index is also at its widest this year, with an average of 1244 points in Sep 2020 versus the average of 623 in 2019. But as economic activity recovers, she says, cyclical and value stocks will come back into focus and narrow the gap vis-a-vis the galloping growth counters. 

“While the length of this consolidation and recovery period may be longer for value stocks versus growth stocks, at this juncture in the market, where growth stocks have already sharply outpaced value stocks, it is an opportune time to identify the laggards,” comments Lee. The MSCI World Growth Index recovered more quickly than the MSCI World Value Index and MSCI World Index following the Global Financial Crisis, with US stocks outpacing the rest of the world.

But the upcoming US elections in November, as well as the lingering threat of a resurgence in Covid-19 infections and US-China geopolitical tensions could see equity markets remaining volatile. Yet with low interest rates likely to prevail for the foreseeable future, Lee offers a constructive assessment of risky assets, urging investors to diversify their holdings. Investors should seize on market weakness to accumulate and add exposure to quality stocks, she says. 

Despite the international community rushing to develop a Covid-19 vaccine, AstraZeneca’s decision to pause their candidate trial suggests great uncertainty over when one will be available to lead the world out of the pandemic. But should a vaccine be ready earlier than expected, Lee anticipates a selective rotation into cyclicals and value stocks. 

In the long-run, Covid-19 has forever transformed the global economy, leading to the adoption of new communication technologies and remote working practices. Lee thinks that such trends are likely to stick around post-Covid-19. Recent sell-off in technology stocks are unlikely to be omens of bad tidings for the marker: Lee considers the recent gradual sell-off to be healthy especially after recent heady gains. 

“We continue to favour companies with strong management or sponsors, good market shares, well-established businesses or brand names and companies with a more defensive stream of earnings,” she advises. 

Favourites include blue chips such as DBS Group Holdings Ltd, Capitaland Mall Trust, Raffles Medical Group, ST Engineering, Sheng Siong Group, Singtel and Starhill Global REIT. 

As of 3.30pm, the STI is trading 3.06 points higher at 2485.61 with a P/E ratio of 18.75 and a P/B ratio of 0.8601.