Singapore Market Outlook - Phillip Securities 2016-01-04: Heading for a 5-year low or time for a rebound?

Singapore Market Outlook - Phillip Securities 2016-01-04: Heading for a 5-year low or time for a rebound? Singapore Market Outlook FIRST REAL ESTATE INV TRUST AW9U .SI  SOILBUILD BUSINESS SPACE REIT SV3U.SI 

Singapore Market Outlook - Heading for a 5-year low or time for a rebound? 

Execution Summary 

  • Global macroeconomic outlook remains uncertain as we see divergent in monetary policies among the G3 nations and the slowdown in China economy. 
  • Singapore economy is expected to end 2015 with a 2% growth rate, supported by expanding fiscal policy. 
  • STI index dipped 15% in year 2015 but opportunities can be found in healthcare and consumer sectors which are generally more resilient in a market down cycle. 

 Global growth expected to improve in 2016, however headwinds remain for Singapore 

  • Global economic growth has been sluggish for 2015, however the US seems to have turn things around with waves of positive economic data rolling out in the past 3 months. On the 16th of December, the Federal Reserve Bank (Fed) has finally hike the interest rate by 0.25% from the unprecedented long period of near-zero interest rate. 
  • As mentioned by Chairman Janet Yellen, this should be seen as a sign of confidence from the Fed on the recovery of the US economy. However she maintained that the Fed will continue to monitor the markets and adjust monetary policies accordingly. 

 Eurozone growth faltered through the year ...

  • ... as weakness from external demand exacerbated to industrial production. This was partially offset by the unexpected stronger consumer and public spending. The sluggishness was experienced across the bloc as both core and peripheral economies expanded at a slower pace. 
  • Nonetheless a recovery is still larger intact with the support from an improved domestic demand. European Central Bank (ECB) has also maintain a loose monetary policy with the extension of the ongoing asset purchase programme by six months to March 2017. 

 Japan’s economy is fighting hard against deflation and a contracting GDP...

  • ..., barely avoiding a technical recession in Q3. “Abenomics” is in its third year running and the “Three Arrows” of monetary easing, fiscal spending and structural reform have been critical to the revival of the Japanese equities over the past year. However the economy is failing to respond to the current monetary easing and an increased in stimulus package is still possible. 

 The economic slowdown in China has been a cause for concern for Singapore ...

  • ... as China is still the largest export partner for the nation state. The world’s second largest economy is expected to end 2015 with a 6.9% annualised growth rate, short of the 7% target set by the Chinese government early this year. 
  • China is in a state of transition as they try to transform from a manufacturing-driven economy to a service-driven economy. It will be a delicate balance between near-term economic performances with the longer-term structural reforms. 
  • All eyes will be on China once again, as the leadership of the Chinese government will be tested through this period of an over leveraged society with an oversupply of properties and overcapacity in the manufacturing industry. 

 Singapore economy outlook will be clouded with the global uncertainties ...

  • ... as the nationstate continue to assess the impact of the diverging monetary policies across the G3 nations. The lift-off of US rate will slowly but surely creep into the economy, especially to businesses that have over borrowed and is now laden with increasing interest expenses. To support the economic growth in 2016, MAS has taken step to reduce the slope of the S$NEER policy band, while keeping it on a modest and gradual appreciation path. This would help keep exports competitive while keeping price stable over the medium term. 

 Singapore economic overview 

  • The Singapore economy grew by 1.9% q-o-q in Q3 2015, following a 2.6% contraction in Q2 2015. Manufacturing continued to weigh down on production with 4.6% q-o-q contraction. This was partially offset by a pickup in oil-related activities on the back of declining oil price. Financial services registered a mild contraction over the previous quarter while tourism-related activities gain traction, creating positive spillover effect for the domestic retail sector. 
  • According to MAS, the GDP growth is forecasted to be on a modest trajectory and with a growth rate of 2% for the full year 2015 and 1-3% for 2016. 
  • Heading into 2016, the Ministry of Trade and Industry (MTI) expects manufacturing to continue to be a drag on the economy due to slowing external demand. MTI estimates manufacturing to shrink further by 1.2% in 2016. However, the economy is expected to be supported by domestic-oriented sectors in the near term. This will be underpinned by ongoing upgrades to social services and transport infrastructure. 
  • Government spending in healthcare and education sectors are expanding as the government fulfill their plan to meet the demand for such essential services. 
  • The expansion in transport facilities such as the Thomson-East Coast MRT Line and the building of Changi Airport Terminal 4 & 5 will see an increase in spending on the infrastructure sector. 

 Overall labour market remains stable while inflation continues to be suppress 

  • Unemployment rate remain unchanged for Q3 2015 however resident unemployment rate was up to 3.0% from 2.8% in Q2 2015. Manufacturing shed another additional 4,300 jobs, adding to the 4,400 job cuts in Q2 2015. This reflects the ongoing restructuring in the electronics industry, as well as weaker global demand. Service sector saw an increase of 17,000 workers for Q3 mostly employed to support the demand in community, social & personal (CSP) services. 
  • Tight labour conditions support a wage inflationary pressure which was represented by wage growth of 4.1% y-o-y in Q3 2015, up from the 3.7% from the previous quarter. Magnitude of wage gains varied across sectors, with larger gains observed in retail trade, accommodation & food services and professional services. Wage gain for manufacturing and administration & support service experienced lower growth. 
  • The disinflationary effects of low oil prices and a huge budgetary spending from the government have kept a lid on inflation. For 2015, MAS Core Inflation and CPI-all Items inflation are projected at to be around 0.5% and -0.5% respectively. As the one-time measures from government fades, MAS expects core inflation in 2016 to average between 0.5% and 1.5% while CPI-all Items inflation remain relatively flat. 

 STI underperform global equity indices in 2015 

  • At 2,883 pts, STI returned a negative 14.5% for 2015. This ranked it among the 20 worst performing indices in a group of 93 major Indices around the world. The financial sector was the most beaten-down sector, averaging -10% return in 2015. The three local banks, DBS, OCBC and UOB account for about 30% weighting of the STI and have returned -19%, -15.3% and -18.8% respectively. 
  • Among the 30 components of the STI, only SATS, ComfortDelgro, Hong Kong Land and CapitaLand managed a positive return in 2015. 
  • Looking at the boarder FTSE ST All-share Index, a free float adjusted market-capitalisation weighted index representing the performance of approximately 98% of the SGX Mainboard, the story is similar with a negative 13.9% return. 
  • Following the slump in 2015, STI valuation has been seemingly attractive at 13.3x historical P/E ratio and 1.15x price-to-book ratio. This would probably create a pocket of opportunity for some value buyers who wish to enter the market, creating a modest rebound at the start of 2016. However, the overall growth prospect for the nation is still tepid as it depends on the progress of the region as a whole. 
  • Singapore is still an exporting economy and the growth of its trading partners will affect its economy. 

 Stay defensive in the next six months 

  • Amid uncertainty in the global macro environment and oil price outlook, we continue to favour Healthcare and Consumer Good sectors in the coming six months. 
  • Based on marketcap weighted-average return, only Healthcare and Consumer Goods registered positive returns in 2015 out of the 10 industries classification. This is in line with the nature of their businesses in providing essential goods and services. The two sectors will remain a defensive bet in an uncertain market condition as we transit into 2016
  • For REITs, we advise investors to pick those with stronger balance sheet and longer fix rate on their debt financing, such as First REIT (BUY, target price S$1.38) and Soilbuild Business Space REIT (BUY, target price S$0.91).

Pei Sai Teng Phillip Securities | http://www.poems.com.sg/ 2016-01-04
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 1.38 Same 1.38
BUY Maintain BUY 0.91 Same 0.91