Singapore Market Strategy - DBS Research 2017-08-03: Shadow Of Sept Policy Meetings

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Singapore Strategy Market Outlook MAPLETREE GREATER CHINACOMM TR RW0U.SI KEPPEL REIT K71U.SI GENTING SINGAPORE PLC G13.SI SINGAPORE TECH ENGINEERING LTD S63.SI UOL GROUP LIMITED U14.SI

Singapore Strategy - Shadow Of Sept Policy Meetings

• Rally could stall ahead of September policy meetings –STI resistance 3350-3400, support 3200-3255. 
• Steady en-bloc trend and sell-out launches underpin property stocks – City Dev and UOL.
• Interest uptick for rig builders – SembCorp Industries, SembCorp Marine and Keppel Corp.
• Rotate into undervalued S-REITS - MAGIC and KREIT, ride on strong results momentum for Genting SG and ST Engineering. 
• Top slice UOB, as share price has priced in positives.

LOOKING BACK AT JULY

• The benchmark STI ended the month of July up 3.2% to 3330 lifted by properties, banks and rig builders. The uplift was triggered by
  1. news of a buyout offer that lifted the large-cap property stocks,
  2. uptick in the 3M SIBOR that underpinned the index heavyweight bank stocks, and
  3. decline in the USDSGD rate as the FED reassured investors that rates will rise at a gradual pace even as it signalled that it may start to lower the US$4.5tr balance sheet soon. 
• The consumer services sector fared worst, dragged lower by stocks such as SPH, Jardine C&C and ComfortDelgro.

OUTLOOK

Expect 2Q GDP growth of 3% y-o-y 

• Singapore’s 2Q GDP (final) figure will be released in the week 18-25 August. Advanced estimates point to 2Q GDP growth of 2.5% y-o-y and 0.4% q-o-q. Our economist thinks that the final 2Q GDP figure could improve to 3% y-o-y with the strong 13.1% y-o-y rebound in June industrial production figure, this even as he believes that Singapore’s export rally has peaked for the year and tapering off.
• GDP data is a lagging indicator. We think that an upward revision in the final 2Q GDP to 3% y-o-y is unlikely to move the needle for the Singapore market, given that the already firm 2.5% y-o-y advanced estimates was already known a month back.

2Q earnings season – No room for disappointment, mixed showing so far 

• The 2Q results season is currently in progress and will conclude in mid-August. With the Singapore equity market currently trading at 14.41x PE (+0.5SD) 12-mth forward earnings, there will be no room for earnings downward revisions if the STI continues its rise.
• As usual, the S-REITs are among the first to release earnings. Earnings for the sector are coming in mostly in line with a patchy recovery expected for industrial REITs. Our REITs team cautions that rental revision for industrial REITs is expected to remain negative at least till 2019. 
• Banks' results are mixed. While our banking analyst raised OCBC’s earnings by 2-8% across FY17-19F on higher non-interest income prospects, she cuts UOB’s earnings by 2-5% across FY17-19F on muted loans growth and new NPL uptick. (See report: OCBC: Bank On Wealth, UOB: Lacking The Extra Mile)
• We also lowered SPH’s earnings forecast due to its disappointing core ADEX performance. (See report: SPH: Adex, Circulation Leads Disappointment)
• On a positive note, Genting Singapore’s 2Q earnings came ahead of expectations on the back of stronger-than-expected win rate in the VIP and mass business.
• Among the STI component stocks, we are positive on ST Engineering’s upcoming results. The company had guided back May that 1H17 profit before tax (PBT) should be comparable to 1H16, which implies 2Q17 PBT will see a c.20% q-o-q improvement at least.

Will the FED announce balance sheet unwinding in September? 

• DBS Group Research chief economist thinks there’s a chance that the FED will announce the decision to unwind its balance sheet at the September FOMC meeting, followed by implementation from November or December.
• While total QE injections amounted to over US$3.6bn post GFC, our economist says the actual impact on bond yields and liquidity withdrawal from the economy is much lesser than what the figure suggests.
  • Firstly, most studies have put the impact of QE on 10-yr treasury yields (currently at 2.3%) at anywhere between 20- 40bps. 
  • Secondly, some 90% of the US$3.6bn of QE money went straight into the FED’s basement in the form of excess reserves held by banks instead of being ‘injected’ into the economy. So the FED bought US$3.6tr worth of Treasuries (and other longer-term assets) and paid for them with shortterm deposits at the FED itself.
• Our economist’s view is that as QE did little good and little harm on the way in, it should be equally benign on the way out. He has also lowered his FED funds rate forecast with just another one hike in December this year (down from two hikes) following by four hikes in 2018.

August rally could stall before September 

• Although this write-up is about August, we look further ahead at several important events in September that may result in a jittery equity market this month. Investors could capitalise on the latest rally to pare down equity exposure ahead of these developments.
  • The first is a confluence of central banks’ policy meetings – FED, ECB and BOJ. We expect the FED to hold rates steady at the 19-20 September FOMC meeting but may announce the commencement of its balance sheet reduction. In Europe, the ECB is expected to make a decision on whether to extend or wind-down asset purchases in 2018 at its policy meeting on 7 September. For Japan, the BOJ policy meeting will be held on 20 September although our economist does not expect the central bank to announce stimulus exit anytime soon.
  • Secondly is rising geopolitical tensions in the Korean peninsula. The latest incident being North Korea’s claim of another successful test of an intercontinental ballistic missile (ICBM) over the weekend that proved its ability to strike America's mainland. The US raised the pressure on China to condemn North Korea for its repeated missile tests and flew bombers over the Korean peninsula. Any further incidents that lead to a worsening of the already tense situation could tip investors to pare down exposure on equities.
  • Third is the German elections. While Angela Merkel is widely expected to win, it also means that there will be ‘relief’ rally or upside surprises similar to those seen in other European elections earlier this year.

VIX is too low for comfort 

• Finally, we think the US equity market looks vulnerable to a correction that can have a negative spill-over effect on equity markets elsewhere. The VIX fell to a low of 9, a level not seen since 2014. 
• Historically, such low levels in the VIX have been a prelude to an up-spike in market volatility. While the exact timing of such an event occurring cannot be foretold from the VIX alone, rising geopolitical risks and the uncertainty build-up heading towards the three major central banks' meetings in September could lead to profit taking and provide the impetus for a jump in the VIX.

Continue to expect a choppy 3Q 

• We maintain our view for a choppy 3Q even though the benchmark Straits Times Index blew past our anticipated short-term resistance of 3275 in July. As July is an ‘up’ month, a choppy 3Q suggests that August is likely to go the opposite direction. A near-term pullback to around 3255 is expected with firm support around the 3200 level.
• STI currently trades at a relatively rich valuation of 14.41x PE (+0.5SD) 12-mth forward earnings. Unless the 2Q results season that is currently in progress ends with an impressive upward revision in net overall earnings, we see very little near-term upside over the next one month. 
• Expect the rally to stall around our year-end objective of 3350 pending the outcome of the current earnings season. Slightly above this level, the 3400 is a formidable near-term resistance as it coincides with the STI bottom-up objective and a technical projection target.

STRATEGY 

Steady en-bloc trend and sell-out launches underpin property stocks 

• We believe that residential property stocks should continue their rising trend given the still improving sector sentiment. The robust demand at new launches as well as the string of en-bloc sales YTD continue to bode well for the residential segment. The latest en bloc of Serangoon Ville at S$835 psf ppr including development charges is the seventh in as many months YTD. The recent sell-out launch of Hundred Palms EC within a single day underscores the improving sentiment for residential properties.
• Our property analyst anticipates that Singapore’s residential market will see a 6-10% price increase by 2019 powered by a sustained rise in sales volume, a multi-year low market absorption rate of 2.1%, and an increase of foreigner purchases as a wildcard.
• Our picks are City Developments and UOL. Our fundamental TPs for City Developments and UOL are $12.63 and $8.73 respectively. Technically, City Development’s recent rise above its near-term resistance at $11 is a positive sign and signals further gains towards $12.20 before correcting.

Interest uptick among rig builders 

• As the economic recovery progresses from early towards mid-expansion, interest should expand from banks, properties and technologies to other sectors such as the industrials and capital goods.
• Interest in rig builders, a classification of capital goods, should see an uptick riding on the improving demand-supply situation for oil. 
• Situational interests arising from possible M&A involving the two mega shipyards in Singapore - Keppel O&M and SembCorp Marine is another catalyst that could fire up interest in this sector that has underperformed the STI YTD. (Refer to our report titled Shipyards: Creating Global Champions – Time to reform, restructure and reposition dated 20 July)
  • SembCorp Industries is a proxy that rides on the oil price rebound yet with defensive utilities business. The stock’s technical support is around $3.20. 
  • SembCorp Marine benefits as a pure play to ride on the oil price rebound. The stock’s technical support is around $1.70. 
  • Meanwhile, with c.50% of its earnings forecasted to come from its property division, Keppel Corp looks set to tap on the buoyant property sector as well. The stock’s technical support is around $6.46.

SREITS – rotate into value plays - MAGIC and KREIT 

• Mapletree Greater China Commercial Trust (MAGIC) has become our preferred pick among the large-cap S-REITs. The tenant sales turnaround at Festival Walk has reduced the risk of negative rental reversions. Valuation is attractive, offering a prospective yield of 6.7%, above the average yield of 5.7% and also the highest yield among the large-cap S-REITs.
• Furthermore, with most large-cap SREITs trading close to or at a premium to book value, MAGIC also offers a compelling switch, trading at a 11% discount to book value. (See report: Mapletree Greater China Commercial Trust: Time To Play Catch-Up)
• Keppel REIT is the other large-cap S-REIT that is trading below book at 0.8x BV. (See report: Keppel REIT: Further Market Transactions To Drive Rally)

Yeo Kee Yan CMT DBS Vickers | Janice Chua DBS Vickers | Singapore Research DBS Vickers | http://www.dbsvickers.com/ 2017-08-03

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