Flight to yield

Since peaking at 2,933 on Jan 11, the STI has lost 6.8% to close at 2,734 today. The big question is: Have the markets bottomed? Is the selling over? Credit Suisse analysts Sakthi Siva and Kin Nang Chik attempted to answer these questions by comparing net foreign selling in the past two weeks with what happened in previous corrections.

The duo estimated that net foreign selling in “emerging Asia” was about US$6.9 billion ($9.8 billion) in the period from Jan 19 to Feb 8. Historically, Credit Suisse says the selling associated with four prior corrections were: US$2.4 billion in April 2004, US$4.5 billion in April 2005, US$4.4 billion in October 2005 and US$14.5 billion in May 2006.

But what’s telling is the length of time of the sell-off, says Credit Suisse. In the corrections of April 2004, April 2005, October 2005 and May 2006, Credit Suisse says the “net foreign selling” usually lasts a full month but so far we’ve only had 11 days. Therefore, it appears that the selling isn’t over from past data.

What does this mean for investors? CLSA Research suggests moving into defensive stocks. On that score, Singapore offers the best exposure to some liquid, high-yielding stocks, says CLSA. “Our top picks in this category include Starhub, CapitaMall Trust, Ascendas Reit, SMRT Corp, ST Engineering, and Singapore Telecommunications,” the report states. While it has filtered out 19 stocks where the dividend yield could top 4%, the five mentioned here qualify as its top picks as they are the ones with a combination of sound business fundamentals and reasonable valuations.

But overall, the tone of CLSA’s report is guarded. “We retain our cautious stance on the Singapore market given richer valuations. MSCI Singapore and the FSSTI are now down 8% and 7% from the start of this year. This has resulted in a rising investor interest for some defensive, high dividend yielding stocks. Our recently completed roadshow in Asia highlighted that most portfolios are underweight defensive names,” says CLSA.

DBS Research also expects interest in high-yielding stocks, particularly the telcos. The price to earnings ratio (PER) of telco stocks could narrow as the market focuses on yield and valuations. “SingTel looks attractive at 11.4 times PER for exposure to growth in Indonesia, stronger regional currencies, potential for special dividends in May 2010 and the possible re-listing of Optus,” a DBS Research report dated Feb 10 says. In addition, MobileOne has the potential for a 9% yield through capital management, the report says.

Market View: Choppy trading ahead

Chart patterns are still developing. For instance, Oversea-Chinese Banking Corporation’s chart looks like a head-and-shoulder top formation. Fortunately, the two other banks and the big-cap property counters have similar chart patterns.

The STI’s break below its 50-day and 100-day moving averages is negative and its declining trend is likely to continue with major support appearing at 2,470. But, during this downtrend, prices should still be able to stage rebounds. The 100-day moving average at 2,754 may provide some resistance.

Interestingly, there could be momentary good news for stale bulls. A short-term positive divergence has appeared between the 21-day RSI and index as well as the quarterly momentum and index. But a breakout hasn’t materialised. If it does — and this may take another week to develop — the market could see a better rebound than what we’ve had since it peaked on Jan 11. Meanwhile, the choppy outlook is likely to persist. — (Goola Warden)

The EDGE Mid-Week Comment Feb 10