A year of two halves
2015 was a challenging year of two halves. The first half benefited from spillover optimism from 2014, but this quickly evaporated as the market entered into the second half of the year. Sentiment was dragged down by several key events including Yuan devaluation, the sell-down in Chinese equities, slower growth from Emerging Markets and weakness in commodities. Global markets reacted and led to panic selling of equities by Aug/Sep before a recovery in Oct.
Developed Markets not spared
While Developed Markets were considerably less affected, they were not totally spared as seen from the MSCI World Index, which faced selling pressure in 3Q15.
Impending higher rates
The uncertainty on the pace and level of the next rate hike throughout 2015 also created added volatility in the market and led to wide price fluctuations in the market at each FOMC meeting. Recently, with better clarity from the US Federal Reserve, the market is pricing in the next hike in Dec 2015.
Valuations are reasonable
Current valuations are close to trough valuations, largely because the market is pricing in greater uncertainty ahead. However, opportunities exist to accumulate quality stocks as recent cuts in earnings have already taken into account slower corporate earnings growth ahead. Based on current levels, the STI is trading at 11.9x earnings, 1.1x book and with an average dividend yield of 4.3% for FY16. These levels are now close to the levels seen in the previous two crises in 2008/09 and 2011 and we believe this is not warranted.
While there are some risks of further economic growth and earnings cuts in 2016, we believe this is partly reflected in current market valuations, and the region is not in danger of entering a recessionary period as in previous crises. Re-focusing back on core fundamentals, we continue to favor AREIT, CapitaLand, CapitaLand Mall Trust, DBS, Frasers Centrepoint Trust (FCT), Keppel DC REIT, QAF, Raffles Medical, Sheng Siong, Singapore Post, ST Engineering, SingTel, ThaiBev, UOL, Venture and Wing Tai. (Read Report)