The Small Long

Charging bull By Aseba - http://www.flickr.com/photos/aseba/6179708990/, CC BY-SA 2.0, https://en.wikipedia.org/w/index.php?curid=28333508

Currently, there are a few consecutive days of gains in the Singapore stock exchange. However, a few trading sessions are not large enough to compensate for the market free fall in the past two months. Given that Singapore is dependent on oil, gas and marine, as well as commodities, and our banks have a large loan book from these sectors, notably DBS with 8% of its loans to the oil and gas sector and 4% to commodities, there had been asset deterioration.

The banking sector in Singapore now has a P/E ratio below 10, around the bottom P/E level of bear markets. Among all the banks, DBS has the lowest P/E at 8.56 currently.

However, future earnings in banks seem uncertain. Oil and gas prices collapsed and will probably stay low for a long time. Our banks have substantial exposure to China - 17% for DBS especially, and there is an expected slowdown in the Chinese economy. Also, there is no substantial new economic activity in Singapore, as Singapore is still struggling in healthcare, education and technology sectors. Where can banks find higher quality, more financially sustainable sources of loan?

Even with the recent gains in Straits Times Index (STI), I doubt the gains will go on for a long time. If you ever invest in stock markets now, you may consider long the market, but not for long.

Only when DBS reaches around 8 dollars then I may consider buy back DBS, such is the lack of market confidence in the Singapore stock market that we should be wary of false hope.