Strong Chinese markets sapping the life out of the Straits Times Index

Investors are on a quest for alpha.

Analysts have long been hoping that the equity rally in China and Hong Kong might spillover here and give the lacklustre Straits Times Index (STI) a shot in the arm.

After steep declines in recent sessions, though, another theory is coming to the fore: Instead of giving the local bourse a leg up, the strength in neighbouring markets might actually be sapping the life out of the STI.

Nicholas Teo of CMC Markets said that yesterday’s selldown in the STI has the hallmarks of institutional rebalancing, as investors move funds north and away from the lacklustre local bourse.

“Presumably, North Asian markets continue to draw interest and funds from local equities here. With blue chips like Singtel, DBS, UOB and OCBC dominating the most actives in terms of value traded, and with losses for these names averaging 1.5 to 3%, yesterday’s action suggests that funds are selling into a market place which is devoid of almost any decent-sized buyers,” he said.

He added that this move signals that the prospects of making money here pale in comparison to elsewhere in the region.

“If the above theory is accurate, this could mean that the northbound migration is driven largely by the quest for ‘alpha’ rather than a re-valuation exercise across markets,” he said.

Ironically, the selldown is happening at a time when certain quarters of the investment community have signaled the dangers of an equity bubble in China stocks, with warnings of dire consequences imminently.

“Singapore has in the past, been a proxy hiding place for funds during the worst of ‘risk-off’ times. As we approach the turning point for rates, would the huge beta beaters’ – the Chinese markets’ - bubble burst, sending funds to hide elsewhere? Back here perhaps?” he said.