Over the course of 1Q17, indices appear to be gaining the market’s attention. Specifically amongst Asian bourses, the local Straits Times Index (STI) had risen to be one of the top performers, ending the first quarter up 10.2 percent and printing the best quarterly performance since 2012. Certainly, a confluence of factors has brought about the strong gains we have seen but the question lies in whether this upward trend in the index can continue for the rest of the year?

Rising From The Ashes

The phenomenal Trump-rally and an improvement in global growth outlook had been triggers for the global stock market rally. This turnaround in growth situation has also given the market confidence in emerging Asian markets once again. The outperformance of 1Q gross domestic product (GDP) in the region had been a stark contrast with the market’s expectations at the end of 2016. China’s 6.9 percent year-on-year (YoY) 1Q GDP had been a poignant example, providing room for the Asian giant to reach its full-year 6.5 percent target. Advanced estimates for Singapore’s 1Q growth meanwhile sat at 2.5 percent YoY, above the 2 percent full-year by private forecasters. Not to mention, high frequency industrial production and purchasing managers’ index (PMI) numbers have all pointed to a better situation for Asia, showing that engines in the region have been revving up.

As of the end of April, multiple bourses in the region were seen printing fresh multi-year highs. The strongest year-to-date (YTD) percentage change amongst Asian indices include India’s Nifty (13.6 percent) and Hong Kong’s HSI (11.9 percent) as of 28 April 2017 close. The local STI and MSCI Singapore Free Index, which IG clients can gain exposure to via the related index CFD – the Singapore Index and Singapore Blue Chip Index, have clocked 10.2 percent and 9.4 percent gains respectively.

Source: Bloomberg (As of April 2017)

Source: Bloomberg (As of April 2017)

Sell In May And Go Away?

The market has a saying, ‘sell in May and go away’, which seeks to warn investors of a seasonal decline in equity markets between the typically volatile period of May and October. A quick analysis of the past five and 10 years of data for the STI have found this to be rather untrue.

Source: Bloomberg (10-year data taken between 2007 and 2016)

Source: Bloomberg (10-year data taken between 2007 and 2016)

The past month had certainly been one which calls into question the growth drivers for stock prices, but investors may not find selling in May a compelling action to take this year. A zoom-in to the growth drivers for the local STI had identified obstacles such as President Donald Trump’s pro-growth policies meeting with delays and production improvements (as indicated by the PMI of major Asian economies) appear to be plateauing. However will this carry forth to the rest of 2017 and cripple prices?

With infrastructure policies being placed aside and tax reform chosen as the policy to tackle, the new administration had not particularly impressed markets with their one-page tax plan. Certainly the market had rallied strongly on Trump’s campaign promises including the tax plan which is projected to benefit businesses with the corporate tax cut. The gaping hole had been how the new administration could achieve deficit neutrality for this tax plan that is estimated to pile on $7.2 trillion of debt over the next decade. This would be the key to attaining Congressional support to see the eventual establishment of this reform. That said, there could potentially be stronger economic momentum from reduced tax inducement for capital expenditure. 1Q17 US earnings have also surprised on the upside. The US Federal Reserve appears to remain on track to lift interest rates owing to the acceleration of prices and tighter labour market. . Unless we find ourselves facing severe disappointments with President Trump’s campaign promises, the market could continue sitting tight awaiting the realisation of Trump’s plans.

Besides the US, the Singapore economy’s growth is influenced by a multitude of international headwind which in turn translates to drivers for the benchmark STI. Recent concern appears to have landed on the slowdown in production in the Asian region. China’s latest April PMI figures have raised eyebrows as to whether we have come to the end of the cyclical recovery in production. Although the PMI figures continue to reflect a manufacturing sector thriving in expansionary zone, the pace of expansion had visibly slowed. Official Chinese PMI was last seen easing to a six-month 51.2 for the month of April. Nevertheless, one cannot help but note that the number remain well above 50, the threshold for the expansion territory, and the bias is on the upside with demand expected to remain steady. For the trade dependent Singapore, investors may continue to retain their confidence. Notably, the IMF recently lifted their global growth forecast for 2017 to 3.5 percent, with the improved outlook underpinned by rosier expectations of growth in advanced economies.

Sectoral Play

With 30 stocks on the STI, sectoral play may not be as defined as compared to that of the comprehensive S&P 500 index in the US. Nevertheless, REITs and banking stocks certainly play a huge part in the STI.

Real estate investment trusts (REITs) have served the market well in turbulent times and continue to remain attractive despite the strong gains on the STI. The high dividend nature of REITs allows the stocks to hold their appeal. Notwithstanding the wavering of sentiment on the back of geopolitical tensions and the gradual rise of US interest rates, interests in REITs continue to remain strong. Nevertheless, there remain risks for buying into the business of renting spaces. A sharp downturn in economic conditions could dent the demand for retail and industrial spaces alike while any steeper path chosen by the Fed would transpire to higher interest rates for the local market, hurting REITs.

Compared to the abovementioned, the three local bank stocks have lost some of their shine this year after their 4Q16 earnings disappointed markets. The considerable weight exerted by a deteriorating oil and gas sector had called for the need to debt provision allowances, a symptom cutting across the three local banks. Longer-term outlook for banks, however, appears to be bias on the upside.

3 local banks

Besides the apparent improvement in domestic growth outlook, the expected rise in interest rates also leads the market to believe that net-interest margins (NIM) could trend higher, improving earnings prospects. Indeed, first quarter earnings from both United Overseas Bank and DBS Group Holdings have surprised on the upside with net interest income driving growth.

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