Singapore Market Monitor - Slow Grind or Slow Burn
Makings of another lackluster year
- The outlook is mediocre to poor for all four factors we deem important for market performance. Economic growth is sluggish, index valuations uncompelling, earnings recovery expectations weak with downside risk and, on the politics & policy front, rising risks of protectionism in the west, possible cooling-off in China relations plus neighboring countries’ measures should stem capital outflow.
- Against this backdrop, we have a preference for capital preservation over growth optionality and secular over cyclical industry drivers.
Macro backdrop is challenging
- Singapore’s trade-driven economy faces tepid global growth and domestic demand. Retail sales are sluggish, consumer confidence weak and tourist growth slowing as well.
- Interest rates are expected to rise with expected US hikes and, while factors of unemployment and core inflation are low for now, these are both anticipated to inch up in 2017 as well. The government expects 2017 GDP growth in a 1-3% range while we forecast 1.8%.
Seemingly cheap FSSTI valuations not so
- FSSTI trailing P/E valuation of c12.5x appears attractive at almost 1sd below the 3-year mean but this is, to a large extent, due to the de-rating of the banks sector. Excluding banks, FSSTI actually trades at a small premium to the mean while the broader FSTAS index at c15.2x, is almost 1sd above.
- In the ASEAN context, FSSTI is amongst the cheapest and offers the best dividend yield but growth is correspondingly lacking and it is not the ‘safe haven’ in ASEAN as it is often perceived to be.
- Consensus earnings in 2017 point to a modest 4.7% growth (MKE coverage universe at 5.2%) and the risks lie on the downside in our view.
Flattish index target but stock picking could deliver
- We estimate a base case end-2017 FSSTI target of c3,000 which holds barely 2% upside. But we believe selective stock picking could provide 10%+ returns as has been demonstrated YTD 2016, where against a flattish FSSTI YoY, roughly a third of our coverage delivered 14-50% returns driven by company-specific dynamics.
- For sector-driven portfolios, our preference would be overweighting Property REITS, Healthcare, underweighting Financials, Consumer & Gaming and maintaining a neutral stance on Property Developers, TMT, Industrials and Commodities.
Read more @ Singapore Market Monitor (Sector) - Maybank Kim Eng 2016-12-13: Secular over cyclical growth
- Our stock picks are based on screening for low earnings cyclicality, cashflow stability and low balance sheet risk. Our top picks are CapitaLand Commercial Trust, Keppel REIT, Venture Corporation, Raffles Medical Group, United Overseas Land, Bumitama Agri, Jumbo Group and Ezion.
- We also highlight ST Engineering and DBS as two stocks best leveraged to USD strength although we have HOLD ratings on both based on our valuation estimates.
Read more @ Singapore Market Monitor (Stock Picks) - 2016-12-13: Capital preservation bias dominates our picks