WILL THE SINGAPORE STOCK MARKET HEAD HIGHER?

Ng Soo Nam, fund manager for the popular Schroder Singapore Trust, shared his views with Vasu Menon, finatiQ's chief editor. Vasu: What's behind the recent rebound on the local bourse? Soo Nam: The recent rebound took place because stocks had been sold down sharply and valuations were attractive. When the local bourse did not react negatively to the Bali blast, investors took it as a cue that the market had already discounted all the bad news, and that provided the impetus for the local bourse to rebound. This coupled with better-than-expected third quarter earnings from some US companies, helped to send local stocks higher. Vasu: Does the recent Bali blast bother you? What are the implications for the Singapore stock market? Soo Nam: Yes, the Bali blast bothered me because it was so close to home. It's difficult to quantify the impact. It may not lead to political upheaval in Indonesia. If anything, it has strengthened the Indonesian government's political resolve to tackle potential terrorist threats in the country. The government cannot ignore the problem as tourism is a major source of revenue for Indonesia, especially at a time when the economy is not in the best shape. While the Bali blast on its own has not raised the region's risk premium, it remains unclear if this will escalate into something bigger. If it does, the risk premium for regional bourses, including the local bourse could go up and that will impact stock prices negatively. Investors should be mindful of this risk when making asset allocation decisions. Most investors in the Schroder Singapore Trust would hold it only as part of their total investment portfolio, and we advise that they should treat it as a fully invested equity exposure. Our role is really to pick the best stocks to invest in the Schroder Singapore Trust. We are not in the position to manage the client's asset allocation as we are not in control of their total portofolio. Vasu: Is this a good time to invest in the local bourse? Soo Nam: It is very difficult to time the market precisely. Sometimes waiting too long may mean missing the boat. It is best to invest based on fundamentals rather than to be swayed by market sentiment. But eventually each individual has to make his own decision and he has to bear in mind that the market may head lower and volatility will continue. In my view, one of the most compelling reasons to invest in the market at this juncture is valuations. But the macro picture is less compelling with the earnings outlook unclear and capital spending still muted. The situation is unlikely to improve in the next three months. But things could change six months later and that could give the market a boost. Vasu: Is the recent rally sustainable? Soo Nam: The fourth quarter is a seasonally good quarter because the Christmas season makes people feel better and spurs demand. This year, the market has done reasonably well in the fourth quarter so far. At this juncture, valuations are low and so are expectations. The situation is very similar to last year when the market saw a valuation-led rally after a steep decline post September 11. But whether there will be follow-through buying from here on is dependent on clearer signs of an economic and earnings recovery. Vasu: Is the Schroder Singapore Trust invested largely in blue chips? Soo Nam: Yes, the fund is focused on blue chips. Our top ten holdings include big caps like the local banks, Venture Manufacturing, SIA and City Developments. But we also have some exposure to small caps like Informatics and Jurong Technologies. These companies have strong balance sheets and healthy cash positions. They also enjoy good growth prospects. Vasu: Singtel is among your top ten holdings. But some would argue that it may not be the best stock to own at this juncture. Soo Nam: I tend to disagree. Singtel's regional strategy has taken shape and the company can now claim to be a regional cellular player with good coverage of the Asia ex-Japan region. Pricing pressure has moderated for Singtel, now that M1 and Starhub have taken a step back on their pricing strategies. Telecom service companies are now focused on offering better services and more innovative packages, rather than to pursue aggressive price discounting. Singtel's future capital expenditure needs have moderated and this augurs well for its cashflow stream. Vasu: The third quarter wasn't a very good quarter for the Schroder Singapore Trust. Were there specific reasons for this? Soo Nam: Yes, it was primarily due to our exposure to Chartered Semiconductor Manufacturing and Sembcorp Industries. The portfolio has since been restructured and these stocks will no longer make a significant impact on the fund. In the case of Chartered Semiconductor, it is no longer among the top ten holdings as we have reduced our exposure substantially. The third quarter performance aside, the fund's performance year-to-date has been on par with the benchmark index. Its strong long term performance has also remained intact, and we are determined to defend it tenaciously. Vasu: What is Singapore's attraction compared with markets in the region? Soo Nam: To some, the Singapore market may appear dull and unexciting, but this may have to do with our relative stability, which the market tends to under appreciate especially when times are good. The blue chips that we have are also very good quality companies. Vasu: Where do you see the ST Index headed by year-end? Soo Nam: It's hard to pin it down, but if I will to hazard a guess, I'll say upside could be about 1,500 while downside could be limited to 1,300. But if the risk of war in Iraq diminishes, then the ST Index could do better than 1,500.