Singapore shares gain 0.8% as Fed confirms rate cut possibility

WITH the conclusion of the two-day US Federal Reserve meeting for June, investors got confirmation of what they were expecting - the door for rate cuts in the following months was open. This sent equity markets higher.

Singapore's Straits Times Index (STI) continued to track higher, closing at 3,314.51, adding 26.34 points or 0.8 per cent.

Meanwhile, key markets in the rest of the region - Australia, China, Hong Kong, Japan, Malaysia and South Korea- all ended higher. 

"Markets are now pricing in a very high probability that the Fed will cut rates at their next meeting on July 31, with a good chance that it will be a 50 basis point cut rather than a 25 basis point cut. (Jerome) Powell lent support to the idea that starting with a larger cut might be appropriate under current circumstances," said UBS Global Wealth Management's regional chief investment officer Kelvin Tay.

"Historically, when markets have priced in rate changes going into an FOMC meeting, the Fed has moved in line with market expectations," he said.

Equity markets were also given a lift on the likely meeting between the US and China at the G-20 summit next week. However, it's worth pointing out that a deal is unlikely to be done but the fact that a meeting might take place has calmed nerves, albeit temporarily, though the long-term outlook is still unclear.

It was another day of above-average activity for the Singapore market. Trading volume on the local bourse clocked in at 1.56 billion securities, 30 per cent over the daily average in the first five months of 2019. Total turnover came to S$1.31 billion, 25 per cent over the January-to-May daily average. 

Across the market, advancers trumped decliners 237 to 162. Just four of the STI's 30 components closed in the red.

Financials continued to trend upwards. DBS Group Holdings closed S$0.39 or 1.5 per cent up at S$25.82, OCBC Bank added S$0.06 or 0.5 per cent at S$11.24 while United Overseas Bank (UOB) finished at S$26.22, advancing S$0.08 or 0.3 per cent.

It was UOB's turn on Thursday to receive an upgrade call to "Buy" from OCBC Investment Research. The research house's head Carmen Lee said even after the bank's shares rallied for nine straight days, gaining 9 per cent prior to Thursday's session, it remains "inexpensive". She has maintained the fair-value estimate for UOB at S$28.90.

Bank shares took a hit in May and June but have since reversed course, triggered by attractive valuations. Ms Lee said: "Weakness in the banking sector in May or June was largely due to concerns over trade war, weakening global and regional economic outlook, and more importantly, the rising likelihood of further cuts in interest rates."

CGS-CIMB analysts are of the view that the three local banks have "steady asset quality metrics and robust capital levels to provide some baseline support for the sector at current valuations". CGS-CIMB remains neutral on the local banking sector but favours UOB over OCBC and DBS.

For the most part, real estate investment trusts (Reits) continued to see interest as the Fed confirmed its dovish stance.

A Morgan Stanley research note on Thursday acknowledged that while Singapore Reits (S-Reits) posted disappointing results in the first quarter, with the exception of industrial Reits, current valuations should hold up on a benign interest rate outlook as well as increased redevelopment potential.

Morgan Stanley said that it increased its price targets for S-Reits under its coverage by an average of 10 per cent on increases in dividend/share forecasts and the incorporation of better valuations. Of the eight under the bank's coverage, Ascendas Reit (up S$0.01 or 0.3 per cent to S$3.00) remains a top pick as it is the best proxy for defensive Reits and could benefit from redevelopment project".