According to the fund manager, a lot of the bad news have already been priced into the Singapore stock market.
Author : Suryati Mahmud
Untitled Document NOW'S A GOOD TIME
(Fundsupermart.com) "I think the important decision factor would be: is it cheap enough for me to put in the money now? That is the first question you have to answer," says Ng Soo Nam who manages the award-winning Schroder Singapore Trust. Speaking about whether the local stock market has bottomed, he believes that now's a good time to invest in Singapore equities. According to him, that's because a lot of the bad news such as the downward revisions of companies' earnings have already been priced into the stock market.
"A lot of earnings downgrades have taken place and there was a round of earnings downgrades (again) post September 11th. I think the situation has stabilised somewhat but nobody has gone on to readjust the numbers (earnings estimates) up again," he says. He expects analysts tracking the companies here to start adjusting their earnings estimates upwards next year if there are clearer signs of an economic recovery. So going forward he thinks the market is unlikely to get any cheaper, barring a drastic event such as the September 11th terrorist attacks in the US.
Another indication that Ng is currently bullish on local equities is the amount of cash he's holding in the Schroder Singapore Trust. He has pared down that portion of the portfolio from 14% in end-September to about 4% in end-November. "In October, when we started to feel that the situation (the war in Afghanistan) holds some hope of being contained and given that equity values were so attractive at that point in time, we put some money to work into equities," he explains. So which companies will perform well next year? He's keeping an eye on these 3 areas - firms that are restructuring themselves, cyclically sensitive stocks, and value stocks.
RESTRUCTURING - Looking past the downturn
What's important to Ng is looking beyond the next 6 months. If the current downturn lasts longer than expected, he wants to know that the companies he invests in are able to weather it. "Even if the (economic) recovery were to stretch further out, say into the second half of next year, then I want to be confident that they would be able to survive that (protracted downturn); that they would be able to perhaps even stabilise their profits in that sort of environment," he explains.
And he's keeping a close watch on what the listed companies here have done in the current downturn and how they plan to squeeze as much profits as possible once the local economy recovers. He likes those that are repositioning and restructuring themselves to be lean and mean.
One of his favourites in this area is Venture Manufacturing. He points out that the firm has repositioned itself to offer more services to its clients. Over the past few years, it has expanded its activities from manufacturing to design of products (network systems, printers and etc), and e-fulfillment (logistics) services. Ng says this gives the firm a greater competitive advantage. Another reason why he likes Venture Manufacturing is that it's not dependent on the domestic market. According to Ng, the firm is a major producer of Hewlett Packard printers and Cisco's networking products, both of which are sold globally.
CYCLICALLY SENSITIVE STOCKS - Banking sector is key
Ng is also bullish on cyclically sensitive stocks. These refer to companies whose earnings will improve more quickly in an economic rebound.
His favourites in this area include the banks, which he believes would be the backbone of a local stock market recovery. "For Singapore especially, the banks are a very important sector because they occupy a big weighting. They are going above 40% in the MSCI index (MSCI Singapore) against which the Schroder Singapore Trust is measured. In a lot of the (other) major indices (that track the local stock market), they are around there (about 40 %). So I think if the economic recovery comes about, the banks should start to perform again. And they would be a very key anchor to the performance of the Singapore market," Ng says. He cites a pick-up in loans and growing fee income from wealth management products, as some of the factors that would drive the banks' growth. As at the end of October, DBS Group Holdings and United Overseas Bank were the top 2 holdings in the Schroder Singapore Trust.
According to Ng, tech firms which are involved in the consumer electronics industry may also be included in this category. He says one example is contract manufacturer Nasteel Broadway. "Natsteel Broadway has Sony and Funai as its clients. Both are very geared to consumer electronics. (So) if consumer demand globally picks up, then this could filter down to Natsteel Broadway taking more orders."
VALUE - Cheap relative to the prospects
Another area that Ng is positive about is value stocks. He explains that a low price-earnings or PE ratio is not the only deciding factor (PE ratio measures how much you're paying for the firm for every dollar of its earnings). The firm should also be able to sustain its earnings and be well-positioned in the market. "To me, value stocks doesn't necessarily mean low PE. It has to be a stock which is cheap relative to its prospects... I can see a lot of stocks that offer a very attractive entry into that stream of earnings prospects given their positions in the market and the sort of PEs they are trading at," he says.
Within this category, Ng likes Singapore Airport Terminal Services and SIA Engineering. "(Singapore Airport Terminal Services) is the key service provider in Changi Airport in terms of cargo handling and passenger services. SIA Engineering has SIA as their main customer. So I think the earnings stream of these companies is of a very high quality. Yet they're trading at single-digit PEs, and I think that, to me, is not justified." And he believes that their earnings will pick up once the economy recovers. In addition, these stocks are also giving dividends of more than 3% each year. Other personal favourites include Tan Chong International and MCL Land.
Below are the fund's allocations as at 31 Oct 2001.
Top Holdings -
DBS Group Holdings United Overseas Bank Singapore Telecom Venture Manufacturing Singapore Press Holdings Creative Technology Singapore Technologies Engineering Tan Chong International Singapore Exchange MCL Land
Allocation (as at 27 Nov 2001) -
Singapore - 96% Cash - 4%
Since inception in February 1993, the Schroder Singapore Trust has posted an annualised return of 8% against the benchmark's -3.1% and the sector average of 4.4%. Figures are as at 31 Oct 2001. The table below shows the fund's cumulative performance.
Cumulative Performance Of The Schroder Singapore Trust As At 31 Oct 2001
Sector Average (%)
Source: S&P Micropal; Benchmark: DBS CPF Index from launch till 31 Jul 1998, MSCI Singapore Free Index with effect from 1 Aug 1998. SGD, bid to bid, net dividends reinvested.