Singapore equities to face a 'rocky ride' amidst QE tapering woes

Consensus predicts QE tapering in September.

According to DBS, consensus has been expecting for some time that the FED may start its QE tapering process next month, which can be seen as a positive indicator that the US economy is on a stronger footing for recovery.

If this happens, this could provide some stability to the market in September. Recovery names should outperform in this situation while yield sensitive sectors such as SREITs continue to underperform. 

If QE is pushed back, volatility continues. DBS noted that while the Singapore market has outperformed regional bourses, volatility will put Singapore equities through a rocky ride, held hostage by the still developing emerging markets uncertainties.

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In the event that the FED does not administer the expected QE tapering in September, bond yields would likely pullback and that would also cause a knee-jerk positive reaction for equities.

SREITs would react in this situation while recovery names lag. But beyond this knee-jerk positive reaction, uncertainty would return as QE tapering merely gets postponed. 

If the current negative sentiment on emerging markets deteriorates further with current account deficit worries spreading to other ASEAN countries, it won’t be long before Singapore equities are dragged down further by this spiraling fear.

In such a scenario, STI could even sink towards the more extreme 12.3x (-1SD) blended FY13/14F PE near 2900. Such a sell-down would definitely open up great bargain huntingopportunities for the value investor. We keep our STI yearend objective of 13.9x (average) FY14F PE that now reads 3400.