Singapore Strategy - DBS Research 2016-06-27: Flight to safety

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Singapore Strategy - Flight to safety

• Brexit impact – support at 2630 (STI) but further downside to 2500 if fear of contagion is triggered
• Companies exposed to UK/Europe – mainly property and hospitality REITS, Comfort Delgro, SCI and HPHT
• Seek shelter in yield plays –M1, ST Engineering, Sheng Siong, ARA Asset Management and Venture Corp
• REITS to benefit if FED pushes back rate hikes – Frasers Centrepoint Trust, Mapletree Greater China Commercial Trust, Ascendas Reit, Parkway Life REIT and Mapletree Commercial Trust.
• Telcos could shine if dialling for no 4 falls through

Looking back at June

• A cautious rebound in the initial 10 days of the month gave way to profit taking that accelerated as the possibility of a BREXIT turned to reality. The STI touched a high of 2880, just 20pts short of our started short-term resistance at 2900 on 9 June before ending down 56pts to 2735 last Friday. 
• Month-to- date, index components UOB, OCBC and SGX were the main drag while Golden Agri, UOL and SGX lost most in percentage terms. 
• Stocks with revenue exposure to the British Pound such as City Developments tumbled 4.4% last Friday once the referendum results were clear. At 2735, STI currently trades at 11.32x (-1.5SD) 12-mth fwd PE.

Outlook

Dealing with BREXIT

• Given that financial markets were cautiously optimistic for a “BREMAIN” leading up to last week’s referendum, investors will have to grapple with the repercussions of a BREXIT in the weeks ahead.

Financial markets bear the brunt

• The immediate reaction is a flight to safety. In the currencies market, the British Pound and Euro took a beating while the Japanese Yen and USD that are viewed as safe haven currencies jumped. Gold price rose and bond yields fell. Risky assets such as equities, oil and commodities took a beating.

Worst is yet to be for the British Pound

• Our currency strategist warned that the worst is yet to be seen for the British Pound (GBP) despite an 8% tumble to 1.368 against the USD. Standard & Poor’s warned that Brexit was likely to hurt its triple-A sovereign debt rating. This will have a further negative knock on impact on UK, considering that the UK current account deficit exceeded 5% of GDP in 2014 and 2015. Meanwhile, the public budget deficit remains a hefty 4.3% of GDP as of 2015.
• A worst case scenario for GBP would be a10-20% depreciation on a trade-weighted basis. This would imply GBP/USD could still fall to 1.15-1.25, with overshooting risks to 1.05.

Limited real economic impact for Singapore

• For Singapore, the impact of BREXIT will be mixed. The financial markets will bear the brunt. The equity market has already responded negatively. The SGD has weakened against the greenback by 1.65%.
• Beyond the immediate responses from the financial markets, BREXIT’s impact on the real economy in contrast is expected to be marginal, at least in the near term. Non-oil domestic exports (NODX) to UK account for about 1% of Singapore’s total NODX. Imports from UK constitute about 2% of Singapore’s total imports. So from the trade perspective, the impact is likely to be benign. FDI from UK accounts for only 6% of total FDI. In addition, Brexit is unlikely to affect British companies already operating in Singapore. In fact, Brexit may even encourage these companies to intensify their investment in Asia to “hedge” against the risk in Europe.
• Even though the EU-Singapore FTA negotiation has completed, the agreement hasn’t been in force yet. If it hasn’t been implemented - no preferential treatment for companies - there can be no negative impact even if it is removed or re- negotiated. EU accounts for 12% of Singapore’s NODX and 31% of total FDI.

“Contagion of Referendums” the new fear

• The key risk going forward is that BREXIT will ignite a chain reaction among the Eurosceptics of political parties from other EU nations demanding to hold their own referendums, leading eventually to a breakup of the EU. In the Netherlands, polls show a majority of voters want a referendum on membership, and voters are evenly split over whether to stay or go. In France, the Front National leader has called for the country to have its own referendum. In Italy, the anti-establishment Five Star movement declared it would demand a referendum on the Euro last Tuesday.

BREXIT is one thing; a “Contagion of Referendums” is another.

• In the worst case scenario whereby more countries leave the EU, trade, investment and human capital flows within Europe will be affected. There will be ripple effect across the global economy, which is still struggling with the structural slowdown in China. This will be a further drag on the already slow global GDP growth. It’ll be a double whammy for emerging Asia.

Valuation near Eurozone lows

Base case No BREXIT contagion – Downside to 2630

• Assuming Brexit does not spiral into a contagion scenario, the STI will be relatively resilient vs Asean markets, and should hold at 2630. This is because the BREXIT’s economic impact on Singapore is limited, and valuation is already at historically low levels, trading at forward PE of 11.3x vs Eurozone low of 10.4x.

Downside to 2500 on BREXIT contagion

• Still, we are watchful of events unfolding that could result in an escalation of the fear that more countries will want to opt out, leading to a break-up of the EU. The other key risk is the domino impact from a weakening CNY, and negative spillover impact on Asean currencies and SGD. All bets are off if this bearish scenario unfolds in the months ahead, we see potential downside risk to 2500 on a deeper downward technical projection, which is even below our current 10.55x (- 2SD) FY17F PE forecast.

Strategy

Risk off – seeking shelter in yield plays pending clarity on Brexit repercussions

• With higher risk aversion, the hunt for yield receives even more attention with BREXIT. We prefer yield plays with net cash and sustainable free cash flows. Below is a list of high dividend yield stocks which we believe are sustainable, based on their earnings model, free cash flow and payout ratio. 
• Our dividend yield picks are M1, ARA Asset Management, Sheng Siong, and ST Engineering which have zero or minimal exposure to Britain. Venture offers high dividend yield of 5.8% and benefits from an appreciating US$. US$ and JPY are safer haven currencies for shelter from the Brexit event.

Expect uptick in interests in SREITS

• Interest on SREITs should also see an uptick as the FED is expected to keep rates low for longer. Consensus now sees the FED holding rates steady this year (source: CME Fedwatch), from 1-2 rate hikes before the Brexit event. Our SREITs picks are Frasers Centrepoint Trust, MAGIC, Parkway Life Reit and Mapletree Commercial Trust. For large caps, we pick AREIT.

Continued on...

• Singapore Strategy - Flight to safety (Con't)

Janice CHUA DBS Vickers | YEO Kee Yan DBS Vickers | http://www.dbsvickers.com/ 2016-06-27

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