Asia Equity Strategy - DBS Research 2017-06-12: Calculating The Risks

Asia Equity Strategy - DBS Vickers 2017-06-12: Calculating The Risks Market Strategy Singapore Market Outlook

Asia Equity Strategy - Calculating The Risks

  • Growth moderation in process but end of cycle not in sight.
  • Valuations should have some room to rise; investors should stay invested and rotate to potential growth pockets and bright spots.
  • Selective in ASEAN markets — Overweight Philippines, downgrade Singapore to Neutral and Thailand to Underweight.
  • Earnings recovery bodes well for Korea but it is in the price for Taiwan; raise Korea to Neutral.
  • More upside potential for China / Hong Kong stocks driven by the new millennials — reiterate Overweight.



The global economy continues to strengthen. 

  • In Asia, the US, Europe and Japan, and virtually all the cyclical data – trade, industrial production, consumption – are showing a pick up.
  • We reckon that growth is likely to have peaked in Q1, and on year-on-year terms, growth would probably start to fall sharply in fourth quarter 2017.
  • We believe valuations still have some room to rise, but investors will have to be selective, taking into account varying growth prospects.
  • We are maintaining our Overweight calls on China / Hong Kong, Philippines, and upgrading Korea to Neutral. 
  • The downgrades this quarter include Thailand (Neutral to Underweight), and Singapore (Overweight to Neutral). 
  • Taiwan, India and Malaysia are maintained at Underweight.


Singapore — Rebound to continue, but slower (Downgrade to Neutral) 

  • The market has been in a consolidation mode with only 2% gain since April, against 5% for the region. Nevertheless, the benchmark Straits Times Index (STI) breached its 20-month high in May at 3271.
  • We believe there is still room for the index to rise further in the second half of the year. A synchronized global recovery that is currently underway, and a buoyant M&A corporate sector scene in Singapore, coupled with inexpensive valuation versus the region, provides an impetus for re-rating. 
  • We see the STI ending the year higher at 3400, which is 0.5SD above the average 12- month forward PE multiple.

Strong inflows registered 

  • Portfolio flows have been strong in the first two quarters of this year. Net portfolio flows was at its strongest in 1Q17, and other commercial sources (EPFR and ETFs) registered further inflows in April and May. 
  • We believe Singapore’s attractiveness as a regional cyclical play should continue to attract investors’ interests following a dip in the business cycle during the last two years.

Economy peaking but growth can be sustained 

  • DBS economist Irvin Seah notes that the Singapore economy could have peaked in 1Q17, but there are signs that the electronic cluster may get a second wind in 2H17 should business investment spending in the US start to pick up.
  • Considering that Singapore is still heavily dependent on electronics exports, growth could be sustained till the third quarter. Moreover, the services sector should rebound as leading indicators such as bank loans are showing good momentum. 
  • DBS’ economist is maintaining his GDP growth forecast of 2.8% and 2.7% for 2017 and 2018 respectively.

Downward revision in earnings 

  • Unfortunately, the 1Q17 results season saw a resumption of the downward earnings revision trend for stocks under our coverage. FY17F earnings were revised down 2.9% while FY18F earnings were cut by 1.5%. However, this was driven by companies in the commodity and oil related sectors, and airlines. 
  • Earnings uplifts were seen accordingly in the Technology sector and the REITS sector, in line with the recovery.

Broad macro trends positive for the market 

  • The index could be stuck in a tight range but specific sector catalysts should support an overall buoyant market sentiment.
  • Visible broad macro trends specific to Singapore of strong SGD and low bond yields should sustain risk appetite. DBS sees USD/SGD ending the year at 1.39 (from 1.38 currently), and Singapore 10-year bond yields at 2.4% (from 2.1% currently).
  • Technically overbought positions in the major markets like Hong Kong, Korea and India could see fund flows rotating to other markets, such as Singapore.

Improving property sector sentiments 

  • Sentiment continues to be positive for property developers since the government relaxed part of the property regulations. Land-deprived Singapore developers have started land banking bid aggressively, having closed three en-bloc sales over the past month. Our property analyst thinks the Singapore government will respond by 
    1. raising the number of available land sites in the 2H17 government public land tender programme and/or 
    2. raising the number of confirmed sites in the pipeline. 
  • We also expect office blocks to change hands potentially in the second half. With property companies pricing in a recovery in 2018, we believe these transactions are likely to fetch higher prices.

Regional growth plays 

  • Singapore, a gateway to ASEAN and regional exposure, houses many companies which are growing outside the region. These include regional Telco, Plantation, and Food & Beverage companies, which are likely to register stronger growth than the overall market.

Tech recovery plays 

  • Ahead of a thriving semiconductor, smartphone and Internet of Things (IoT) end-markets, we believe that the Information Technology sector still has room to run. We prefer tech companies with 
    1. strong earnings momentum, 
    2. turnaround plays with lower execution risk, or 
    3. potential M&A targets.




Joanne Goh DBS Vickers | DBS Vickers | DBS Vickers | http://www.dbsvickers.com/ 2017-06-12



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