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Idea Of The Week: Are Our Top-Rated Markets Still Attractive? [17 Feb 17]
FSM Weekly

Idea Of The Week: Are Our Top-Rated Markets Still Attractive? [17 Feb 17]

In this week’s Idea Of The Week, we take a closer look at the year-to-date performances of some of our top-rated equity markets, and examine if their respective investment cases remain intact.

As January goes, so goes the year for the stock market. If this age-old adage was anything to go by, investors are probably headed for a gratifying year ahead. The US equity market, represented by the S&P 500 Index, was up by a brisk 2.4% in January (in SGD terms), while bourses around the world have also taken their cue from Wall Street, heading higher over the course of the month. In this week's Idea Of The Week, we take a closer look at the year-to-date performances of some of our top-rated equity markets, and examine if their respective investment cases remain intact.

Hong Kong: 5.0 Stars "Very Attractive"

As catalysts started to emerge for a rebound in the Hong Kong stock market, the Hang Seng Index has since staged a breath-taking 34.1% rally after plummeting to a three-and-a-half-year low in February 2016. In 2017 alone, the index delivered returns of 7.3% (in SGD terms since 16 January 2017), lifted by heavyweights such as Tencent Holdings (HKEX.700), HSBC Holdings (HKEX.5) and AIA Group (HKEX.1299). Despite the recent surge, we believe that the Hong Kong stock market remains undervalued and offers tremendous upside potential for investors. As highlighted in one of our articles, we think that the Hang Seng Index will hit 32,000 points by the end of 2018, supported by upward revisions in earnings forecasts for Chinese companies and recent improvements in economic indicators. It is currently trading at a PE ratio of 11.0X (based on 2018 estimated earnings) that is below both its long-term historical average of 13.5X, as well as the 12.0X PE ratio which we think is fair for the market, with an estimated dividend yield of 3.5% in 2017.

The easiest way to obtain exposure to the Hong Kong stock market is through the Tracker Fund of Hong Kong (HKEX.2800), an exchange-traded fund (ETF) that aims to replicate the performance of the Hang Seng Index. The ETF is rather cost-efficient with a low expense ratio of 0.10%. Its rolling one-year tracking error of only 0.0299% (as of end January 2017) is also a reflection of the ETF's ability to closely track the Hang Seng Index. For the stock pickers, a good starting point will be the 50 blue-chip stocks listed on the Hang Seng Index. We have recently highlighted China Overseas Land (HKEX.688) as a potential value opportunity that may pique the interest of value investors. Alternatively, stock pickers can also make use of the stock screener to help them zoom in on the stocks that can potentially fit into their investment portfolios, by focusing on certain fundamental or technical criteria.

China: 5.0 Stars "Very Attractive"

China's equity market has regained some of its swag in 2017, with the HSML100 Index surging 8.5% year-to-date (in SGD terms as of 16 February 2017), as sentiment has largely improved amidst a stabilisation in China's economy. While the economic performance of China in recent quarters is slow relative to previous years, its full-year gross domestic product (GDP) growth of 6.7% in 2016 still makes it one of the fastest growing economies in the world. With the tertiary sector becoming increasingly crucial as China shifts to a consumption-driven economic model, it is worth noting that activity in the services sector has remained expansionary since at least September 2013. Market participants are also expecting operating conditions and profitability to improve over the next two years, with Chinese corporates estimated to record positive earnings growth of 9.0% and 10.0% in 2017 and 2018 respectively (as of 16 February 2017).

Despite a fairly optimistic earnings forecast, the valuations reflected by the HSML100 Index only stands at 10.0X based on 2017 estimated earnings (as of 16 February 2017), a significant discount from our fair PE of 13.0X. Therefore, the Chinese H-share market still remains one of our top rated single-country equity market with a 5.0 Stars "Very Attractive" rating over a three-year investment horizon. Investors who wish to have exposure the Chinese equity market can consider the recommended Neuberger Berman China Eqty A USD Acc. Alternatively, investors can also consider the more diversified First State Regional China Fund, which invests in equity securities issued by companies from the Greater China region.

Singapore: 4.0 Stars "Very Attractive"

Dampened by a tepid economic outlook and external uncertainties, the Singapore equity market has struggled to find a firm footing for the most part of 2016, meandering in a range-bound fashion. The Straits Times Index (STI), however, managed to break through the 3,000-point mark this year for the first time since November 2015, clocking a handsome year-to-date gain of 7.2% (in SGD terms as of 16 February 2017), as expectations for fiscal stimulus and tax cuts, both of which are positive for domestic US growth, have left market participants broadly optimistic over the prospects of the global economy. The likelihood of further rate hikes by the US Federal Reserve has also propped up shares of the three local banks, which collectively constitute more than a third of the STI, as an uptick in interest rates is likely to boost their earnings. Meanwhile, Singapore's economic growth spurt in 4Q 2016 has helped to dissipate some of the gloom that has characterised financial markets last year.

Despite its stellar run this year, the Singapore equity market has further room to run. At its current PE ratio of 14.4X based on estimated earnings in 2017 (as of 16 February 2017), the STI still trades at a significant discount to its fair PE ratio of 16.0X. Moreover, with an estimated dividend yield of 3.6%, investing in the Singapore equity market right now will put time on your side as you are being paid dividends while waiting for the market to return to its fair value. We maintain a 4.0 Stars "Very Attractive" rating on the Singapore equity market, and investors who can afford room in their portfolios for a Singapore equity fund may be interest in the Nikko AM Singapore Dividend Equity, our recommended fund that invests primarily in Singapore equities that offer attractive and sustainable dividend payments.

Overwhelmed By Investment Choices?

With the wide array of investment options available, investors can sometimes be overwhelmed. Fret not, help is here! Along with the launch of our new FSMOne platform, we have introduced a new service for investors who are keen on investing but do not know where to start. FSMOne's MAPS, acronym for My Assisted Portfolio Solution, was developed to help investors navigate the financial landscape in a stress-free manner by offering them a one-stop portfolio solution. Our service features an array of five portfolios, with investors able to select between income-themed and growth-oriented portfolios, based on their individual needs and risk appetite. With as little as $5,000, investors can gain access to a well-diversified portfolio that features a mix of both unit trusts and exchange-traded funds to achieve a good balance between active management, product diversification and flexibility.

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