By Lorna Tan

Investors were subjected to a dizzy roller-coaster ride in the past fortnight as equity markets gave way to wild swings.

Two Fridays ago, the Straits Times Index (STI) tumbled to close at 2,574.21 - the lowest in about 23 months since the index finished at 2,559 on Oct 4, 2006. The day before, the STI had plummeted 80 points or 3 per cent.
Elsewhere in the region on the same day, Hong Kong's Hang Seng Index closed at an 18-month low of 19,933.28 while Japan's Nikkei 225 ended at a six-month low of 12,212.23.

The bloodletting gave way to some respite last week when the markets responded positively on Monday to the announcement from the United States government that it would bail out troubled mortgage giants Fannie Mae and Freddie Mac. Still, the market rally was short-lived and the gains petered out over the next three days.

Last Friday, the STI clawed back some losses to close at 2,570.67, while the Hang Seng Index closed at 19,352.9 and the Nikkei 225 ended at 12,214.76.

The events have left many investors scratching their heads as to where the market is headed and whether the bottom is near. After all, it has been almost a year since stock prices started heading south.

Experts believe that markets will remain weak and volatile in the short term. They cite mixed signals and poor sentiment.

Said Ms Carmen Lee, head of research at OCBC Investment Research: 'One of the key factors remains that investors are still nervous and unwilling to re-enter or take a longer-term view of the market.

'This has led to the recent quick exit from the market, which effectively capped gains. As investors worry about the sustainability of any short-term rally, due to the slowdown in the US economy, most are not looking to hold on to their positions for more than a few days.'

Against this backdrop, the STI looks unlikely to re-capture the 3,000 level by the end of the year, she added.

Mr William Cai, GYC Financial Advisory's director of private client services, was more optimistic. He believes that the bottom is near, barring the occurrence of extreme events.

He expects to see the STI hit a bottom of between 2,321 and 2,441 by the end of next month, on the back of poorer third-quarter corporate news.

'Thereafter, the STI could find a base and end up between 2,550 and 2,600 by the year end as it prepares for a recovery,' he said. 'If historical recoveries of the stock market are used as a guide, the STI could jump 30 to 50 per cent by the end of next year.'

For example, the STI recovered from 700 in July 1988 to 1,003 in August 1989, a 43 per cent jump.

Looking at technical charts, Mr Ben Fok, chief executive of Grandtag Financial Consultancy, said the STI's immediate support would be at 2,500. However, as in all bear markets, the STI might still overshoot itself and fall below 2,500, before recovering.

Ms Janice Chua, DBS Vickers' head of research, summed up the main reasons for the volatility as 'fears of a global recession, volatile currency markets, swings in oil and commodity prices, and the possibility of rising interest rates'.

She added that for this round, the selling was exacerbated by a drastic drop in commodities which had led to market concerns over slowing economic growth.

For instance, oil has declined in recent weeks from this year's high of US$145 per barrel to US$102 currently.

'With the weight of a slowing US economy and the slump in commodity prices, there is increasing concern about the negative impact on corporate earnings,' said Ms Lee.

In such a situation, what should investors do?

Hold cash

For now, Mr Cai and Ms Chua's advice to investors is to stay clear from the market and hold cash.

'Wait till we have clearer visibility of growth in the global economies, oil prices and inflation,' said Ms Chua.

Be selective

However, for those who are keen to gain some exposure now, Mr Steed Koh, Phillip Securities' head of proprietary trading and principal investments, proposed that they look at defensive stocks with high dividends. Defensive stocks are companies with sound businesses and strong income streams.

The latest research report from investment bank Lehman Brothers recommends a portfolio of stocks that have been sold down sharply but can recover quickly when sentiment improves.

With this portfolio, investors can be 'protected on the downside with good dividend support, but have upside when market sentiment improves', says the report, which was prepared by Singapore and South-east Asia equity research head Lim Jit Soon and his team.

The proposed portfolio comprised eight counters, including CapitaLand, ST Engineering, Keppel Corp, Singapore Press Holdings (SPH) and Singapore Exchange.

Lehman's report favours conglomerates like ST Engineering and Keppel Corp as well as real estate investment trusts (Reits) like Suntec Reit for their resilient earnings and high dividend yields.

Fundsupermart research manager Mah Ching Cheng also likes Reits. This is because the yield is attractive at 6 to 12 per cent as at early this month, which makes them more attractive than last year's yield of 4 to 5 per cent.

Ms Chua singled out SPH, ComfortDelGro, SMRT and Cerebos for their high dividends and defensive plays. She estimated that the target prices of these stocks would be $5.75 (SPH), $1.90 (ComfortDelGro), $2 (SMRT) and $4.65 (Cerebos) a year from now.

On the other hand, Mr Winston Chong, a director of financial advisory company Life Planning Associates, urged investors to be aware that the dividend rate is likely to be reduced or eliminated in the current year due to the poor market conditions.

Still, one cannot go wrong if the firm is fundamentally sound, he added.

'Assuming that investors have a long-term time horizon, they should go for counters that are priced much lower than what their assets are worth, and where their income sources are relatively secure.

'This could be companies in the staple food business or those that have a reasonable stream of rental income from quality customers or tenants...It does require you to know your companies - their assets and liabilities, management and industry characteristics,' Mr Chong said.

Spread out your investments

Those who are keen to enter the market now are reminded to do so progressively.

For example, Mr Dennis Ng, an avid investor and founder of mortgage consultancy portal www.HousingLoanSG.com, says that instead of investing all of his money in the market at one go, he would invest about one-third of it first.

'If the stocks bottom and go up from here, I'll already have one-third participation and I can decide to invest more money. If the stocks go nowhere, well, I'll still have two-thirds of my savings intact. If the stocks go down further, say, by over 20 per cent, I might then invest another one-third of my money, to average down my costs,' he said.

This article was first published in The Straits Times on September 14, 2008.