Investors should buy bullish options on Singapore stocks because the derivatives are inexpensive and the shares may rally on higher earnings growth and a strengthening Singapore dollar, Morgan Stanley said.
Derivatives strategists Viktor Hjort and Philipp Schoenhuber recommended buying three-month over-the-counter call options on the MSCI Singapore Free Index with a strike price 5 percent above the current level, according to a report dated today. The gauge has climbed 2.3 percent from a six-month low on Feb. 24.
The Hong-Kong based strategists cited a separate report today by Morgan Stanley’s Hozefa Topiwalla, who initiated Singapore stocks with a “constructive” rating and said the MSCI gauge may rally 12 percent this year and gain 20 percent including dividends and currency gains.
“Singapore’s equity market has the potential to deliver returns similar to emerging markets with risks similar to developed markets,” Singapore-based Topiwalla wrote in his report. “Considering its near-developed-market risk profile, we believe that its risk-reward appears quite favorable.”
Implied volatility, the key gauge of option prices, for three-month contracts on the MSCI gauge is 17, near “multi-year lows” and ranking at the fourth percentile of all readings over the past five years, Hjort and Schoenhuber wrote. Shorter-dated calls are “among the cheapest in the region,” they said.