Saturday, May 27, 2006

Thoughts and Opinions from this issue of The Edge Singapore

IPO Fatigue ? Maybe.....but hang in there

An article by Ms. Audrina Gan mentions that recent IPOs have not been performing as well as their counterparts which have listed a few months ago (from Jan to Apr 2006). Thai Beer's IPO was priced at the lower range of 26-36 cents, finally settling for 28 cents. Also, Pacific King Shipping has scrapped its IPO plans and ING Investment Management has called off its closed-end equity fund. Yesterday's debutante Pacific Shipping Trust sponsored by Pacific International Lines only managed to close at US$0.425, which was US$0.025 below its IPO price of US$0.45. This is already lower than its previously stated IPO price range of 50 to 52 cents.

So what exactly is happening ? Remember that sentiments were very high at the start of the year due to booming economies and strong growth in all sectors. This translated to consumer confidence which meant that people were generally upbeat and optimistic about the economy. In the stock market, this translated into bullishness and people were rapidly ploughing their money into funds, equities and bonds. You can call it herd mentality of sorts as most of the IPOs then opened nearly 80 to 100% above their offer price, creating a euphoria that when viewed on hindsight, seems to be largely misplaced and overly speculative.

Many investors were thrilled by their swift gains and proceeded to pump even more money into shares, creating a small "bubble" of sorts. IPOs also went this way as many were heavily over-subscribed and opened at extremely high P/E valuations. The conclusion is that most of the heady euphoria was contagious, and this helped to boost sentiments to a point which could not be sustaind indefinitely.

Now that the IPO market is settling back to normalcy, I believe the time has come for investors to take a good hard look at each company's prospectus before taking the plunge. I admit I was one of those who tried to grab some quick gains through IPOs too, but I did not manage to get any and thus avoided getting "burnt" by the fallout.

Buying Opportunity for Quality Stocks ?

The Edge also asks the question which is on everyone's lips: is it a good time to pick up some bargains now that the market has corrected so sharply ? Maybe, and maybe not. My perspective of things is that sentiment itself has to be restored first before any upward momentum can be generated. In physics, momentum is defined as the mass of an object multiplied by its velocity (mv). In the stock market, the "mass" is the bundle of stocks which make up the STI, and the velocity represents the rate at which they move up or down. If a large mass of high value stocks like the STI moves downwards at a high velocity, it would invariably drag down the rest of the market due to their sheer "mass" ! I had witnessed this while watching the trading screen. As the STI fell, the bidding for the buy/sell queues also fell. The effect seems to be widespread over all stocks.

Thus, momentum represents the overall sentiment of the market and if this is not restored, then through simple physics, there will be inertia present to drag down the market for a few more days running. Of course, one could argue that markets do not react according to the laws of physics, but this is just an analogy. There will be downside because of fear and uncertainty, but there will also be days of upside as the market corrects due to some short-term good news.

For the overall market and STI to recover and show a sustained rebound, there has to be a CONFLUENCE of factors to increase investor confidence. These could be (but are not limited to):-
  • A rate-hike stoppage by the Federal Reserve headed by Mr. Ben Bernanke
  • Inflation being kept firmly in control in the USA
  • Investor confidence being restored - shown in increase in property prices and bullishness in technology stocks
  • Good corporate earnings results from local companies
  • Good showings by regional bourses such as Bursa, JSE, Nikkei, HSI and Sensex, just to name a few (markets seem to have a spillover effect somehow)
  • Strong GDP growth and increased CPI indicating consumer confidence
  • No unusual events such as GST, bus and MRT fare increases
  • No major natural or man-made disasters (e.g. terrorism)

Playing China Stocks = Playing with fire ?

Another article in The Edge also mentions China stocks and how some of the selected picks have fallen as much as 52% (Shanghai Turbo) from their 52-week highs. Most of the China stocks which have experienced huge losses seem to be, ironically, the recent IPO debutantes.

My take on this is that these "newbies" have not had much track record to speak of, and investors may still be unsure of their earnings capabilities. The initial euphoria (see my post above on IPOs) has pushed many of these IPO stocks (like Luzhou, Jiutian and Fabchem) more than 80 to 100% of their offer prices. When the correction came, natually these were the stocks to be hammered down first.

My advice: if you own a stock which is seemingly overvalued (trading at a very high P/E), take profits first before the market decides to correct. If you don't have such stocks, stay away from them till the valuations are more reasonable. Also, there are still good China stocks out there, but the problem is that most analysts agree that because of the competitive and uncertain environment the companies are in (the China market is fraught with peril, supposedly), they are supposed to trade at a discount. These put many of the quality gems in the range of 8 to 10 times P/E. So dear investors, wait for more good news or contract wins to reinforce buying support before taking the plunge. Even then, make sure the company has good corporate governance and a good management team.

Yield Plays - Are they really that "defensive" ??

The issue of yield plays has also cropped up in The Edge, and is a long overdue issue with me. The mag's argument is that high yielding stocks such as SMRT, ComfortDelgro and SPH have all fallen less than 10% during the bear period and are all supported by good businesses and at least 6% dividend payouts. Also mentioned are the REITS as well as other yield stocks such as MIIF.

My question is this: would you really buy into a stock for its yield, or for its capital gain ? Most investors would perk up and answer very smartly: I want BOTH ! I have to acknowledge that most people want to have the cake and eat it as well, but generally capital gains are viewed as being more certain and more robust than dividend gains. My mentality is that dividends are ancillary to the capital gains (that is, if you get them, good for you; but if not, no matter because you have capital gains to cushion you).

Think of it this way, capital gains are also not subject to tax (some dividends still are), and they arrive much faster than dividends (T+3 days as compared to nearly 2 months for some dividends to be declared and paid). My personal observation of dividend stocks are that they provide very slow growth (if any) and you might be better off putting your money in a company which shows good earnings potential (like new rig bulders Labroy Marine for example). Another observation is that high yielding stocks have NOT done too well. MIIF is trading at 88.5 cents, down from its offer price of $1.00. SP Ausnet has yet to trade above water, Omega Navigation is also down from its offer price and Pacific Shipping Trust (which boasts of 9% dividend yield), is trading at US$0.025 below offer price.

These are just my personal opinions, feel free to reject or challenge them, but I personally have sold down my yield plays (leaving only 2 lots in a popular local REIT) and have started down the slippery road of taking more risk and hoping for higher returns.

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