Singapore Strategy - Maybank Kim Eng 2016-06-26: Brexit (Part 1 of 3) Reverberations from Indirect Exposures

Singapore Strategy - Maybank Kim Eng 2016-06-26: Brexit: Reverberations from Indirect Exposures Singapore Strategy Brexit

Singapore Strategy - Brexit: Reverberations from Indirect Exposures

Environment not for growth but defensive yields

  • The UK has voted 52:48 to leave the EU. Few stocks have significant direct exposure, but the indirect exposure will reverberate. This is an exogenous shock to the global economy which is already late in the cycle. 
  • No doubt economists will be looking for GDP downgrades. 
  • For interest rates, it’s a turnaround from a rate raising cycle to lower for longer with the Fed likely to be on hold. 
  • In the asset markets our macro team expects bond yields to stay compressed and a return to strong safe haven currencies (USD/JPY/SGD) vs regional ones, which tends to be bearish for EM-Asian equities. China will be on alert for capital flight. 
  • In short, its an environment not for growth stocks but for defensive yields: prefer REITs and Telcos to growth oriented plays.

Defensive earnings, low rates: Buy SREITs and Telcos

  • REITs lock their tenants in for 3yrs at least while Telco earnings are also more resilient to a growth shock, which is front and centre of risks at the moment. Low rates will also likely benefit both sectors due to the significant leverage they employ. 
  • For SREITs, top picks are Ascendas REIT (BUY, TP SGD2.57) and Mapletree Industrial Trust (BUY, TP SGD1.78), given tighter supply outlook for business parks and high-spec vs all other sub-asset classes, as well as an SME supportive 2016 budget. That said, retail REITs have the highest proportion of leases to renew during what could be a period of economic weakness, while AREIT does have AUD exposure which is a riskier currency. 
  • By the same token, telcos which are domestically oriented – StarHub (BUY, TP SGD3.54) and M1 (HOLD, TP SGD2.55) – have no currency risk compared to Singtel (BUY, TP SGD3.82) which has significant regional currency exposure.

Direct exposures: City Dev, Ho Bee, Comfort and SCI

  • Ho Bee (BUY, TP SGD2.47) by far has the biggest direct exposure to the UK via its London office portfolio, 35% of non-current assets. 
  • Comfort Delgro (HOLD, TP SGD2.80) is next, 14% non-current assets, 20% of earnings. 
  • City Developments (BUY, TP SGD9.82) has 11% asset exposure to the UK, mainly through Millenium & Copthorne which on the flipside could see increased hotel occupancy due to the cheapened GBP. 
  • Sembcorp Industries (SELL, TP SGD2.35) direct exposure is 5.4% of earnings through a power utility asset, reduced economic activity in the UK could lead to lower demand.

Indirect exposures: growth risks outweigh FX gains

  • Strong USD could be helpful for manufacturers, glove makers, aviation services and O&M as these tend to book revenues in USD and costs in local currencies. Even banks could see translational gains. But ultimately these are growth dependent businesses, and the chief risk now is GDP downgrades. 
  • Finally, the medical tourism and retail tourism sectors, which are only just beginning to recover from strong regional currency depreciation could be hit again due to what could be renewed strong SGD vs regional risk currencies.

Derrick Heng Maybank Kim Eng | Gregory Yap Maybank Kim Eng | John Cheong Maybank Kim Eng | Joshua Tan Maybank Kim Eng | Ng Li Hiang CFA Maybank Kim Eng | Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-06-26
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.57 Same 2.57
BUY Maintain BUY 1.78 Same 1.78