Potential upcoming correction could be opportunity to buy stocks

SINGAPORE (June 12): Bank of Singapore analysts Eli Lee and Conrad Tan believe the halt in the US stock rally on Friday could be part of a bigger pullback.

Corrections above 10% occur frequently enough, and investors could take time to re-look at valuations to evolving market risks, they say in a Friday report.

“This pullback so far is characterized by a sharp reversal of the rotation into Cyclical and Value, which has been in place over the last couple of weeks, but we see the Cyclical/Value rotation re-asserting itself if the economic recovery does pan out over the medium to long term as anticipated,” say the analysts.

Notably, Lee and Tan see the pullback as an opportunity to add “structural long-term winners” on attractive valuations.

Cyclicals and value stocks with resilient balance sheets will, over the long term, benefit from the economic recovery, they say.

“In the near term, we do not see systemic selling to be a serious concern for equities as yet,” they say, noting that the market does not appear to be underhedged at this point.

“Only if the correction deepens further significantly, would we see systemic selling triggered at funds employing strategies such as CTA and risk parity,” they add.

The recent spike in Covid-19 cases in the US has led to concerns of a second wave of infections.

While the situation remains to be seen, Lee and Tan believe that the economy will not be as heavily impacted, should subsequent waves of infection occur, as the public and policy-makers are now more aware of the nature of the virus. Therefore, full shutdowns, as seen in the earlier parts of the year, are unlikely, they say.

Lee and Tan also believe that the equity market is unlikely to bottom out to the levels in March, which reflected greater levels of uncertainties.

“[The market free fall] includes the real risk of a greater financial blow-up stemming from the tremendous liquidity pressures at that time, which is now mostly diminished,” say the analysts. Lee and Tan say that the search for yield is expected to be a powerful market driver in this environment. As such, they have an “overweight” position within their asset allocation strategy on Emerging Market High Yield bonds.

“As valuations become more attractive alongside this sell-off, we will look to add exposure to selective attractive opportunities in this space,” they conclude.