THE local equities market is not something younger investors pay heed to – especially not when they can pick up online tips on how to dollar-cost average into exchange-traded funds that track popular indices such as the MSCI World Index or the US-based S&P 500 Index.
This makes sense, because these indices have wildly outperformed the local benchmark Straits Times Index; the broader market of the Singapore bourse has also been anaemic.
Much has been made of why this is so, from low trading liquidity to an unexciting mix of companies that feel staid and unfamiliar to a new generation of investors.
But there are still opportunities to suss out the outperformers of the local markets. As volatility returns to haunt global markets, there could well be more openings to be had at home.
Even after the global market rout of Aug 5, there are still locally-listed companies that have made and held on to strong gains this year.
Beng Kuang Marine, Soilbuild Construction and maker of hard disk parts Broadway Industrial Group are all up more than 100 per cent in the year to date.
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From oil and gas to construction and manufacturing, they are spread across rather disparate industries, with seemingly nothing in common. What they have in common, however, is that they are not very well-known, and their market capitalisations are all below S$200 million.
How should investors go about finding such small- to mid-cap winners in the local market?
Fund manager Azure Capital’s chief executive Terence Wong noted that unlike in the 1990s and 2000s, investors no longer rely on remisiers, who earn a commission on trades and typically share investment recommendations with their clients.
Instead, investors are now more likely to find investing ideas online and trade with online brokerages instead, though they could be missing out on discussions about local markets.
Wong suggested that less-experienced investors adopt a “top-down” approach in the hunt for investment ideas: This means homing in on a sector that is currently in favour, such as the semiconductor industry, and picking the best companies within that industry to research and invest in.
However, he advised investors to do their homework to avoid falling into value traps – companies that trade at low levels for extended periods of time.
Wong said investors should look at companies with good defensive businesses, especially if they are monopolies or duopolies in their market segments.
Good corporate governance and a consistent track record, as well as regular dividend payouts, are also important factors to look out for.
“Especially for small caps, if they have been paying dividends religiously over a long period of time, it means they have real cashflow to pay out,” he said, adding that investors still stand to get some returns before the company’s outperformance becomes common knowledge.
Wong said that investors who are new to analysing companies may find that the analyst research reports put out by brokerages are a starting point for good intel.
Because analysts speak to companies’ management, they get a better sense of why a company performed the way it did, as well as its plans and targets down the road.
Such reports typically have a recommendation to buy, sell or hold a stock and its target price, he said, but these are probably the last things for investors to focus on. They should instead form their own opinions about companies after doing their own research.
Maybank Securities analyst Jarick Seet noted that while new trends and newsy themes often sound compelling, a company’s earnings growth is what investors should look out for
Take for instance, semiconductor companies in Singapore, such as equipment manufacturer Frencken Group.
As more companies diversify their chip production out of China and into South-east Asia, more equipment is going to be needed – and this is what Frencken produces. Such opportunities for earnings growth could, over time, send a company’s share price up.
If inexperienced investors simply invest in trends without looking at a company’s fundamentals, they could well miss the key indicators that a stock has become too expensive.
Seet cited graphics card producer Nvidia, a darling in the artificial intelligence (AI) space, as an example. Its share price took a sharp drop when the AI “bubble” popped in early August, after having enjoyed an extended rally that began in early 2023. At that time, Nvidia was trading at close to 60 times its earnings.
Market routs tend to happen when investors become nervous about high valuations that may not be justifiable. In Nvidia’s case, fears over weaker-than-expected US jobs figures, as well as the Bank of Japan’s hawkish move to raise interest rates, could have sent investors fleeing.
Seet said that investors should instead pay attention to a company’s role in the supply chain, and the market dynamics in play. Leading indicators for such dynamics could show up in the news; reports about supply tightness in certain markets could lead to fatter profits for companies, for example.
The offshore and marine sector has been doing well because of tight supply and high demand, said Seet.
Energy and oil demand have recovered post-pandemic, but the supply of vessels for oil exploration and offshore wind-farm deployments have been stagnant. Companies such as Dyna-Mac, which builds modules for such vessels, as well as Marco Polo, which charters vessels, have both benefited from these market dynamics.
Aside from valuations, investors should also be wary of companies that could be delisted as well.
Even if a company is trading at below book value, Seet said that controlling shareholders should pay attention to past delistings to understand how undervalued rival companies are; this would give a sense of how the market generally values a company in the same sector.
For instance, property companies in Singapore tend to have depressed valuations, even though their property valuations have held up.
As a result, certain players have taken advantage of the situation to privatise at lower valuations to sell the properties and make a profit, said Seet.
