With reference to my market outlook published on 7 Nov (see HERE) citing our Singapore market may face near term profit taking, STI dropped 201 points, or 6.6% from 3,242 on 5 Nov to close at 3,041 on 30 Nov.
As we start 2022, various investment banks and research houses have put forth their views on how the various markets will perform. In this write-up, I will share how the markets have performed in 2021 and my market outlook in 2022.
How did the markets perform in 2021?
Based on Table 1 below, it is evident that U.S. markets have outperformed the other markets which I track. This is why some clients are pivoting to the U.S. markets as they believe its easier to trade.
Table 1: S&P500, Hang Seng and STI 2021 performance
Source: Ernest’s compilations
Which market offers potential opportunities?
Personally, my take is that U.S. markets may struggle to outperform this year vis-à-vis other markets, due in part to the following reasons outlined below.
a) U.S. markets trade at high valuations
Based on Bloomberg correct as of 31 Dec 2021, S&P500 trades at 26.2x PE and 4.9x P/BV. S&P500’s average 10Y PE and P/BV are 19.9x and 3.1x respectively. Furthermore, S&P500 trades in excess of 1.5x standard deviation from its 10Y PE and 2.5x standard deviations from its 10Y P/BV. In other words, U.S. markets trade at high valuations.
b) Slower growth in earnings, coupled with difficulty in protecting margins amid inflationary pressures
Based on Figure 1 below, after a year of earnings growth, S&P500 may see a slowdown in earnings growth rate in 2022. In addition, it may be interesting to see whether the companies can defend their margins amid inflationary pressures.
Figure 1: S&P500 earnings growth rate
c) Peak in economic growth
It is extremely likely that the U.S. may have seen peak economic growth in 2021. Furthermore, with Manchin’s refusal to support President Joe Biden US$1.75t domestic investment bill, it is even more likely that we have seen a peak in economic growth. On 20 Dec 2021, it was reported that Goldman Sachs has reduced its real 1Q 2022 GDP forecast from 3% to 2%.
d) Possibility of interest rate hikes in 2022
Based on the latest FOMC meeting, the Fed is widely expected to make three interest rate hikes in 2022. It is noteworthy that interest rate hikes do not necessarily mean the start of a bear market. According to Deutsche Bank, they have studied 13 hiking cycles since 1955 and noted that the S&P500 has gained an average 7.7% in the first year the Fed raises interest rates. Nevertheless, on a relative basis, U.S. market may be less attractive especially when other markets e.g., China is easing its monetary policy.
e) Geopolitical concerns
According to an article on Bloomberg dated 23 Dec, Ukraine tensions continue to flare as Russia builds up its forces close to Ukraine, even as it’s preparing for security talks with the U.S. Besides this, U.S. and China relations continue to be testy as U.S. announced a diplomatic boycott of the 2022 Winter Olympics in China. In addition, based on a Bloomberg article dated 23 Dec, China only fulfilled slightly more than $118b, out of the promise extra $200 billion in manufactured, agricultural and energy goods by the end of 2021. This shortfall may have repercussions in the future trade talks.
2022 beckons, where are the opportunities?
Personally, I believe Singapore and Hong Kong markets may present attractive opportunities and may outperform in 2022 due to their relatively lower valuations vis-v-vis that of U.S. However, stock selection is key.
In line with my usual practice, I have sorted some SGX listed stocks by total potential return using Bloomberg data as of the close of 31 Dec 2021.
I have generated two tables below and have appended the top 10 and bottom 10 stocks for readers. Table 2 lists the top 10 stocks sorted by highest total potential return. These top 10 stocks offer a total potential return of between 41 – 85%, based on the closing prices as of 31 Dec 2021. (Most importantly, please refer to the criteria and caveats below). [My clients will receive the entire list of my compilation of 99 stocks and some highlighted stocks immediately– see important note 4 below.]
Table 2: Top 10 stocks sorted by total potential return
Source: Bloomberg 31 Dec 2021
Table 3 lists the bottom 10 stocks sorted by total potential return. These bottom 10 stocks offer a total potential return of around -7% to +11%, based on the closing prices as of 31 Dec 2021.
Table 3: Bottom 10 stocks sorted by total potential return
Source: Bloomberg 31 Dec 2021
Criteria in generating the above tables
a) Mkt cap >= S$400m to potentially capture more market opportunities;
b) Presence of analyst target price.
Very important notes
a) This compilation is just a first level stock screening, sorted purely by my simple criteria above. It does not necessary mean that Aztech is better than Wilmar in terms of stock selection. Readers are still required to do their own due diligence and form their own independent investment decisions;
b) Even though I put “Ave analyst target price”, some stocks may only be covered by one analyst hence may be subject to sharp changes. Also, analysts may suddenly drop coverage. Furthermore, Bloomberg may not have captured all the analysts’ target prices and some of these target prices may not be the most updated figures;
c) Analyst target prices and estimated dividend yield are subject to change anytime, especially after results announcement, or after significant news announcements. For example, I have previously highlighted in my 7 Nov writeup that even though the average analyst target price for Riverstone is $1.27, odds are likely that analysts may reduce its target price downwards post its 3Q results on 9 Nov (after market). The average analyst target price has indeed been revised 28% downwards to $0.920 post 3Q results;
d) In my list of 99 stocks above, I have highlighted some stocks in green (visible to my clients but not for readers) which my private banking clients and I are looking at. Naturally, as I have a limited portfolio size and bandwidth, I do not intend to buy all the highlighted stocks. However, some of my private banking clients have a bigger portfolio and hence they have the capacity to accumulate 10-20 stocks (not only limited to Singapore) with meaningful quantities. Notwithstanding this, we may change our stocks accordingly as variables change (e.g., newsflow on the specific stocks; prices have moved etc.) Among the green highlighted stocks, I am vested in Mapletree Comm and Yangzijiang;
e) I noted that Digicore Reit is not in the list of 99 stocks. I will put it in my compilation next month.
Readers who wish to receive the entire compilation of the 99 stocks sorted by total potential return can leave their contacts here http://ernest15percent.com/index.php/about-me/. I will send the list out to readers on 9 Jan 2022.
Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider leaving their contacts here http://ernest15percent.com/index.php/about-me/
Please refer to the disclaimer HERE