Strategy Singapore - UOB Kay Hian 2015-10-05: Positioning Ahead Of A Potential Technical Recession

Singapore Strategy Technical Recession

STRATEGY – SINGAPORE ~ Positioning Ahead Of A Potential Technical Recession 

  • We analyse the relative performances of the various sectors vs that of the FSSTI during the previous four recessions. Unsurprisingly, the healthcare sector generally outperformed whereas the banking sector had a tendency to underperform. 


• All eyes on a potential technical recession. 

  • Given the recent weak data points such as industrial production (August industrial production fell 7% yoy) and non-oil domestic exports (August NODX fell 8.4% yoy), there are increasing odds that Singapore may fall into a technical recession when 3Q15 GDP data is announced (expected 12-14 October). This report highlights the performances of the various sectors in the last few recessions. 


• History as a guide. 

  • Over the past 20 years, we have noted four recessions, including the Asian financial crisis (AFC), the 9/11 terrorist attacks in the US, the SARS outbreak and the global financial crisis. Most recessions lasted for two consecutive quarters with the exception of the SARS outbreak, which went on for three consecutive quarters. Our analysis below highlights the performance of the FSSTI (on a qoq basis) in the quarter of the technical recessions (defined as two consecutive quarters of GDP decline) in 1998, 2001, 2003 and 2009. 

• Banks are negatively impacted. 

  • Interestingly, banks have consistently underperformed the FSSTI during the last four technical recessions by 1-13%. This is unsurprising as banks are generally viewed as a proxy for economic outlook. In addition, being the largest (by market capitalisation) and the most liquid sector on the FSSTI, banks’ share price performances are also a reflection of capital flows and portfolio allocation. 

• Downward bias for aviation. 

  • In the last four recessions, the aviation sector underperformed three times. This is not surprising since discretionary travel would be reduced. During the SARS outbreak, most travelling plans for leisure and work were reviewed and only essential travel was unaffected. 

• Outperformers include healthcare, shipyards, plantation and supply chain. 

  • The healthcare sector was a consistent outperformer during recessionary times, which is not surprising given its defensive qualities and in the case of Raffles Medical, its strong financials. Shipyards, plantation and the supply chain sectors are not domestic economycentric and would be more correlated to other global factors including commodity prices and orderbook wins (for the shipyard sector). 

• Further weakness in the S$? 

  • With the on-going emerging markets currency depreciation trend and weak inflation outlook, UOB Global Economic Market Research (UOB GEMR) highlights the Monetary Authority of Singapore (MAS) may have a dovish biasness in its upcoming monetary policy decision in mid-October. This could see further weakness for the Singapore dollar, which has already depreciated 7% ytd against the US dollar. Possible winners of a weakening Singapore dollar against the US dollar include Venture and ST Engineering. 

• Investment themes to consider. 

  • Looking ahead, we see several themes to navigate the current uncertainties. These include: 
    1. resilient yield in low growth environment (picks: SingTel, SATS, CCT), 
    2. favourable risk-reward stocks (picks: CapitaLand, Wing Tai, SCI, Ezion), 
    3. M&A (picks: Guocoland, Wheelock Properties), and 
    4. quality franchise stocks at compelling valuations (picks: DBS, CapitaLand, SingTel, SATS, ST Engineering and ComfortDelGro). 

• P/B valuation back to SARS level. 

  • On a historical P/B basis and comparing previous GDP growth, the market looks inexpensive at 1.08x P/B currently. This compares to the 0.70-1.20x range during the past four downturns (0.70x in Asian financial crisis, 0.87x in the global financial crisis, 1.08x during SARS and 1.20x during 911). 

• Our picks. 

  • We favour liquid big caps given the external uncertainties and have BUYs on CapitaLand, CCT, DBS, First Resources, SingTel, SCI and ST Engineering. We have a SELL on SIA Engineering and would advocate a switch out of SMM into SCI. 


• Limited earnings visibility. 

  • We forecast market EPS to grow a paltry 2.4% yoy in 2015 and 8.9% yoy in 2016. UOB-GEMR forecasts Singapore’s GDP to grow 2.5% in 2015 and 2.9% in 2016 but we see potential downside risks to 2015 GDP. 


• Key risks include: 

  1. sharper-than-expected economic slowdown China, 
  2. timing and quantum of Fed rate hike, 
  3. geopolitical risks, 
  4. lower-than-expected GDP growth in Singapore. 


Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-05
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