Look at US and European stocks

It has been a season of red over the past week or so, not simply because the colour traditionally viewed as auspicious by the Chinese has been in fashion during the Chinese New Year festivities.

Investors, too, have been seeing red as large blotches of red ink across the Singapore stock market have made for a grim start to the Year of the Horse for investors.

Since the eve of Chinese New Year, the Straits Times Index (STI) has gone into positive territory just twice.

Friday's 0.83 per cent gain, lifting the STI back above the 3,000-point mark, will give heart to some investors, but it is far too soon to say the turbulence is over.

The benchmark index has stayed above water only eight times so far this year.

Each time the STI rose, it was almost always followed by a loss the following day, preventing momentum from gaining ground.

The exception was last Thursday and Friday, the first time this year that back-to-back gains were made.

Losses have topped 4.9 per cent so far, as the STI has dropped 154 points since the start of the year to 3,013.

This year's sell-off has been sparked by concerns over policy changes in the two biggest economies in the world - the United States and China.

A decision in December to cut the US Federal Reserve's massive bond-buying programme from US$85 billion (S$107.8 billion) a month to US$75 billion was enough to cause punters to pull their money off the table.

This was followed last month by the Fed announcing a further US$10 billion monthly reduction.

Turmoil in emerging markets ensued, as investors withdrew from such riskier regions with the flow of cheap liquidity ebbing.

Slowing growth in China, which reported a 7.7 per cent gross domestic product last year - the lowest in 14 years - further weighed on the market.

Beijing is expected to embark on reforms that focus more on domestic consumption rather than being driven mainly by credit and investment growth, a move that could spell lower economic growth.

Weaker job, factory and manufacturing data from the US and China over the past week added to the cacophony of naysayers.

Hopes that expected stronger growth in the US, Europe and Japan this year will lift markets have proved elusive so far, leaving investors scratching their heads.

With the continued decline in stocks, The Sunday Times asks experts for advice on ways to stay afloat amid choppy waters this year.

Is the worst over?

Analysts are reticent about crystal-ball gazing, noting that sentiment can turn quickly on an unexpected piece of news.

A clue though, is that the five-year rally staged since the trough reached in March 2009 could be losing steam, said CIMB research head Kenneth Ng.

"One only has to look back at the last 16 years to realise that the longest uninterrupted bull market from 2003 to 2007 was 4.7 years.

"Five years into the rally, the bull market might become tired and it's increasingly more risky to put all one's eggs in one basket."

Add to that Singapore companies' exposure to emerging markets like Indonesia and Thailand, and there could be headwinds, as those countries' currencies weaken on the back of the Fed tapering.

UBS Wealth Management regional chief investment officer Kelvin Tay thinks the Singapore stock market has more or less bottomed out.

But it is unlikely to outperform Asian markets such as South Korea and Taiwan, whose electronics sectors are expected to benefit more from growing global demand for tablets and smartphones.

Singapore's electronics sector is by and large still in the production of personal computers where global demand is dwindling.

"The Singapore stock market is going to trade between 2,900 and 3,200 over the next six to 12 months, so if you buy closer to 2,900 you could make gains.

"But there's no discernible catalyst to push the markets much higher," Mr Tay said.

A good time to enter now?

The recent falls have made Singapore stocks more affordable, though the nagging worry for some investors is that prices may drop further.

Given that it is next to impossible to tell when the actual trough of this down-cycle will be, experts point out that valuations for many companies are looking cheap.

Fundsupermart general manager Wong Sui Jau said: "The Singapore market is right now trading 13 to 13.5 times their price-to-earnings (P-E) ratio.

"That's fairly cheap because historically, the Singapore market should trade 15 to 16 times their P-E and during a bull run like in 2007, it's 18 to 20 times P-E."

The P-E ratio is a widely used measure of share value.

In deciding the timing of your entry to the market, bear in mind too the macro-economic landscape that is affecting the stock market.

Sentiment may be negative now owing to an absence of sustained good news. But other factors look good, according to Mr Vasu Menon, vice-president for wealth management in Singapore at OCBC Bank.

"Fundamentals look good, with the US, Japan and Europe growing and these are all major economies, which will benefit this part of the world," he said.

"When you look at liquidity, which has driven the markets, the Fed is still injecting money, though at a slower pace, while the Bank of Japan, the European Central Bank and the Bank of England still have accommodative policies, so that's a plus too."

Which sectors will do better?

Look for stocks that will benefit from the growth in the developed markets of US, Japan and Europe.

They may include companies whose fortunes will do better when global demand picks up. These are known as cyclical stocks.

Analysts are unanimously upbeat about banking stocks and those in the offshore and marine sector which has seen a steady flow of orders as nations around the world continue to trawl for oil.

Banks, meanwhile, could see better earnings and margins with interest rates rising.

Selected consumer stocks may also do well, such as Singapore Airlines, which could get a lift to its bottom line if passenger flight demand takes off.

To ride out the rocky patch, consider also defensive stocks such as those in the telecommunications or health-care sectors which typically are resilient to wild swings in economic cycles and give good dividends.

DMG & Partners research head Terence Wong said: "There are going to be gems out there. Things are getting cheaper than at the start of the year, so look to pick stocks on the cheap."

He advises looking at a company's fundamentals, to see whether it has a strong balance sheet or earnings and high growth potential.

Also, see if the stock is trading at low valuations, which would mean better upside chances for its price.

Cash out and switch to other assets?

All the market uncertainty and volatility may prompt the risk-averse to stay away from equities and look for alternative investments.

Returns from other assets, however, may not hold as much promise as stocks, said the experts consulted.

Bonds, which are safer instruments, could see yields fall owing to expected rises in interest rates, making them less attractive to investors.

The property market here has been subject to a series of cooling measures. This, along with higher interest rates likely pushing mortgage rates up, means demand is falling.

Mr Steve Brice, Standard Chartered Bank's chief investment strategist in the wealth management division, said one option is for investors to look beyond the Singapore stock market.

"We prefer more developed markets like US and European stocks, because we believe global growth will be driven by those markets.

"Against that backdrop, we're suggesting to clients to increase their allocation now to US and Europe, and to adopt more of a wait-and-see approach within Asia."

CMC Markets analyst Desmond Chua advises investors to be well-acquainted with trading rules elsewhere before taking a dive into new territories.

"We always advocate that you should trade what you are really familiar with and, if a customer wants to go to other markets, it's good to do your homework.

"Find out the commissions involved and see if you are better suited to a traditional brokerage model or a contract for a different type of trading."