“Healthy economic and earnings outlook is tapered by uncertainties surrounding trade and concerns about monetary policy. Stay cautious on equities”
– Teh Chi-Cheun, CEO and Executive Director, Pacific Mutual Fund Bhd; Member of OCBC Wealth Panel
While the solid economic outlook and healthy earnings growth continue to be supportive, macro headwinds are expected to continue to curb investor risk appetite. Valuations are less demanding following the pullback in recent months. However, with rising interest rates, we do not expect earnings multiples to retest the peak in January and further upside for the markets would be driven primarily by earnings growth.
Boosted by tax cuts, repatriation of overseas cash and higher profits, US companies continued to buy back their own shares. Share repurchasing announcements for S&P500 companies in 2Q 2018 were 50 per cent higher year-on-year. Fundamentally, notwithstanding the emerging recession fears, consensus 2018 and 2019 earnings per share (EPS) for US equities rose steadily since late April, as the growth outlook received a leg up from the Trump Administration’s late-cycle fiscal boost.
Although Europe originally appeared to be collateral damage in the escalating trade spat between the US and China, Trump’s threat of a 20 per cent tariff on all imports of European Union (EU) manufactured cars, in response to the EU’s retaliatory measures against US steel and aluminium tariffs, brought the region back into focus. Political events in Italy also weighed on the market. Despite the slower growth momentum, Europe has continued to catch up with the rest of the developed world. Consensus EPS has been upgraded over the past few weeks as the drag from the Euro appears to have faded. Although coming a bit earlier than expected, European Central Bank’s plans to exit quantitative easing was more dovish than the market had anticipated. Valuations remain less demanding versus developed market peers. Besides Italy, Spain’s political stability is also a near term key risk.
Besides the earnings impact from the escalating trade conflict, a potentially stronger yen has also weighed on the equity market. After a stellar 35 per cent earnings growth last year, FY2018E earnings growth expectations have improved slightly to a modest 4 per cent. Relative valuations are now the cheapest versus peers in developed markets but a sustained re-rating of the market would require more meaningful structural reform to boost overall growth. Near term risks include domestic politics, US protectionism and yen strength.
Asia ex-Japan was the biggest loser in June as risk appetite shrunk. Thailand, the Philippines and Singapore were the biggest losers. India, Taiwan and Malaysia held up relatively better. All markets generated negative returns in 1H2018, with the Philippines suffering the biggest drawdown. Since peaking in early April, consensus 2018 EPS continued to be downgraded. A trade war between the US and China remains the key risk for the region. Further ahead, the potential impact of rising borrowing costs and the unprecedented global central bank balance sheet unwinding are other risks to watch out for.
Renewed concern over the US-China trade war was the main drag on the market, as the MSCI Singapore Index fell in tandem with regional and global markets. Currently, the index has already erased all the gains so far this year and is now in negative territory.
Based on the MSCI Singapore Index, the market is currently trading at 11.7 times FY2018 earnings and 10.8 times FY2019 earnings, which are lower than the recent average of about 14 times earnings. Price to book is at 1.2times and dividend yield is at around 4.5 per cent. Current price-to-book is also near the lower end of the recent 5-year range.
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