Singapore Monthly Strategy - Domestic Drivers in Focus
- Focus on domestic factors as ‘Trump rally’ halts.
- Key events in February – Committee on the Future Economy report and Singapore Budget.
- Cautiously optimistic on earnings revision trend for the fourth quarter 2016 results season – Positive on City Development, CapitaLand, China Aviation Oil, Bumitama Agri and MM2 Asia.
- Pullback on bond yields is temporary – OCBC is our preferred pick; limited upside for Ascendas REIT, CapitaLand Commercial Trust, Suntec REIT and Mapletree Logistics Trust.
- US President Trump wasted no time by withdrawing from the Trans-Pacific Partnership (TPP) trade deal and calling for a renegotiation of the North American Free Trade agreement.
- With the “Trump rally” taking a breather as investors seek a clearer picture on the new US President’s policy actions, we believe investors’ focus will turn to domestic drivers such as Committee on the Future Economy (CFE) report, the Singapore Budget and the results season that has just started.
Key events in February
CFE Report and Singapore Budget
- The CFE report will be released in February before the Singapore Budget on 20 Feb. The report will review and make recommendations on five major areas:
- develop innovative capacities, use technology, new business models and partnerships to create value,
- macroeconomic and technological trends will drive the global economy of the future,
- connected as a competitive key hub in the future global economy,
- enhance infrastructure, overcome resource constrains and ensure a highly liveable environment,
- prepare Singapore workers for the future.
- The recommendations made by the CFE could rekindle confidence in the Singapore economy, which is crucial at a time when economic growth is slow, business confidence subdued and the labour market is soft. The Singapore Budget will likely respond to some of the recommendations made by the CFE report.
4Q Results Season - Decelerating trend for earnings downgrades
- The fourth quarter 2016 results season has started. It is still early days as the traditionally stable SREITs are among the first to announce earnings. A mixed start among the few STI component stocks that have reported earnings so far. SPH reported 1QFY17 earnings that were below expectations, down 48.3% y-o-y to S$45.7m, due to a decline in advertising revenue and USD hedging losses. SGX reported a 5.5% y-o-y increase in 2QFY17 earnings to S$88.3m on higher securities market activity.
- On a positive note, there are early indications that the pace of earnings cuts may have peaked in 2Q16, when FY16F and FY17F earnings were slashed by 7.4% and 6.8% respectively, the deepest post-Global Financial Crisis. The downward revision to earnings after the release of third quarter 2016 earnings decelerated to a much tamer 2.2% for FY16F and 2% for FY17F.
- With two consecutive months of positive banks loans growth after a year of contraction, recent NODX and industrial production numbers surprising to the upside, oil price stabilising and the Singapore government offering financial aid to the beleaguered marine & offshore engineering sector, we are cautiously optimistic that the earnings downward revision can further reduce or even flatten out.
Keep watch of President Trump’s first 100 days
- The “Trump’ rally” that lifted the USD and US equities as well as triggered a sell-off in bonds in the past two months has taken a pause. Having ‘bought the news’, investors seem to have started to shift to the sidelines till they have a clearer picture whether President Trump keeps his election promises in the weeks/month ahead.
- Trump’s inauguration speech took on a protectionist and populist tone as he vows to put ‘only Americans first’. Trump wasted no time in fulfilling his campaign promise to withdraw from the Trans-Pacific Partnership (TPP) trade deal and declare a renegotiation of the North American Free Trade Agreement (NAFTA) soon after being sworn in.
- First, investors will be watchful of inflation pressures and rate hike expectations as details of Trump’s fiscal expansion plans start to unfold. These include tax cuts and infrastructure spending. Already, the latest 2.1% y-o-y increase in December CPI has crossed the target threshold that the Fed hoped to reach not last month but over the next 1-2 years! Our economist believes that US CPI could increase to 2.6% y- o-y by March and even further to 3% by year-end if global growth and oil prices hold firm. We continue to expect four rate hikes this year and more beyond that.
- Next, investors will be watchful of Trump’s protectionist policies. He threatened to label China a currency manipulator and slap tariffs of 35% on Mexico and 45% on China. He has also threatened to impose a 35% tax tariff on US companies that shut manufacturing plants and lay off workers only to open facilities abroad.
- While a withdrawal from the TPP is an easy hurdle to cross as Trump does not need congressional approval, slapping import tariffs on other countries is a different matter. Firstly, he will have to convince Congress that raising the cost of Chinese imports by as much as 45% to the American consumers is a wise thing to do. Goods from China account for one-fifth of US imports.
- Trump will also have to contend with corporate America. American MNCs have more than USD228bn in Chinese investments (source: Bloomberg). Much is at stake if a trade war erupts between the two countries; American MNCs will likely fight back hard against Trump’s proposed trade tariffs to remain competitive in China, which is one of the world’s fastest-growing consumer market.
- It is a fine balance as investors weigh the ‘Trump positive’ of fiscal expansion that lifts US growth and benefits her trading partners, against the ‘Trump negative’ of rising inflation and protectionism that can trigger funds outflow from Asia. Trump’s first 100 days in office should provide valuable clues. Keep watch.
Results season watch
- The 4Q results season has started. For stocks under our coverage, our analysts are positive on developers City Development and CapitaLand for large caps, and China Aviation Oil, Bumitama Agri and MM2 Asia for small caps.
- On the flipside, CNMC Goldmine issued a profit warning as it expected to report a net loss for 4Q16 on net unrealized foreign exchange losses and a decline in revenue from lower ore grades.
Bank stocks underpinned by higher NIM, reduce exposure to SREITs on rebound
- The Trump rally that powered local bank stocks higher came to a halt recently. We believe that the pause is temporary and will resume once Trump details his fiscal expansion plans. We expect the 2-year and 10-year SGS yields to rise to 1.95% (current: 1.16%) and 3.05% (current: 2.36%) respectively by year-end, underpinned by the prospect of four FED rate hikes this year.
- We see only a modest pullback in bank stocks given higher NIM expectations and optimism of a turnaround in growth in bank loans. OCBC remains our preferred pick for its lower- than-peers credit cost trends, being a better wealth management play, and possible earnings surprises from its insurance business.
- At the same time, we think that the current rebound in SREITs that coincided with a pullback in bond yields and the prospect of dividend payout in the current results season provides the opportunity for investors to reduce exposure in the sector. The pullback in US and MAS 10-year bond yields look to have found technical support at around 2.30% currently.
- The current rebound in SREITs should fizzle out post dividend payout from the current results season and as bond yields resume their ascend. Large cap SREITs with less than 10% upside to their respective TPs are Ascendas REIT, CapitaLand Commercial Trust, Suntec REIT and Mapletree Logistics Trust.