Market Strategy
Singapore Monthly Strategy - Hitting the Ceiling ~ Outlook
- Tearful 2Q results season – cut FY16F earnings by 5.2% and FY17F by 6.9% till date.
- Post-BREXIT recovery ends - STI downside risk to 2715 and YTD high seen.
Looking back at July
- The Singapore equity market continued its post-BREXIT recovery with the benchmark Straits Times Index higher by more than 70pts month-to-date to 2918 but off the high of 2960. The liquidity-driven run that lifted global equities over the past month was driven by optimism that central banks will coordinate their policy efforts as they attempt to lift economies back to recovery. Investors adopt the view that interest rates will stay “lower for longer”.
- The hunt for yield and “safe havens” remains strong as growth outlook is uncertain. Telcos, real estate and S-REITs were among the top sector performers. Our July strategy to go for yield, S-REITs and telcos has clearly paid off (refer to Monthly Strategy – Flight to Safety dated June 27).
- The O&G sector performed worst, hit by a combination of earnings jitters, the 17% drop in oil price from its early June high, and the latest being the judicial management of Swiber that further aggregated the already poor sentiment for the sector.
Outlook
- As monetary policy meetings for the FED, ECB and BOJ take a breather in August, the 2Q results season will remain in focus for the first half of the month. Unfortunately, it is tears, not cheers. We expect the Singapore market to give back its post- BREXIT recovery for four reasons.
- Firstly, the 2Q results season has witnessed acceleration in earnings cuts so far led by banks and rigbuilders. As such, PE valuation has reached an unattractive level above 12.87x (- 0.5SD) 12-mth fwd PE at the recent high of 2960.
- Secondly, the recent events surrounding Swiber Holdings that caught investors by surprise has dampened investors’ confidence. The fear is that Swiber may not be the only casualty as SMC O&G companies continue to operate in a tough environment are highly geared, with some having bonds maturing over the next two years.
- Next, latest data releases on the Singapore economy provided little reason to be optimistic. More cracks have shown up in the labour market with the unemployment rate for Singapore citizens up 0.5% to 3.1% amid a broad-based slowdown in employment growth across the three sectors.
- Finally, the odds for a FED rate hike have moved higher over the past month as US employment and housing data underpinned optimism that the US economy remains on a gradually recovery path. Consensus now sees a 42% chance for the FED to hike rates once this year, compared to almost nil immediately after the BREXIT referendum. The shifts in rate hike expectations could slow down or even halt the recent pace of fund inflows.
Tearful 2Q results season
- We have another two more weeks to go before the end of the results reporting season. So far, only about 35% of the stocks in our coverage have released their results. Among them, 76% came in within our expectations; 15% below expectations and only 9% beat our numbers. As of now, based on those companies that have already announced their results, we have trimmed FY16F earnings by 5.2% and FY17F by 6.9%. We expect the earnings downgrading trend to continue, and the pace of cutting in earnings to pick up towards the end of the last two weeks of the reporting season.
- The Oil & Gas sector suffered the steepest cut in earnings so far; -17.4% and -15.9% for FY16F and FY17F respectively, mainly due to Keppel Corp and Sembcorp Marine on weak O&M segment. Earnings for Banks were cut by 6.9% for FY16F and 9.3% for FY17F, dented by lower NIM and loan growth.
Strait Times Index – A re-test of BREXIT low
- The post-BREXIT rally lifted the STI to re-test April’s high of around 2960. We believe that the recovery has run its course given the weak earnings trend and PE valuation. The “earnings recession” trend looks set to continue, dragged lower by banks that are index heavyweights and rigbuilders.
- We had warned just a week ago that the STI looks poised for an 85-pt near-term pullback to 2860. We now see more downside risk as the cut in earnings estimates accelerated over the past week:
- Recent high of 2960 risks being the YTD high – With the severe earnings cut, the 2960 level now coincides with 12.87x (-0.5SD) FY17F PE that should be a major upside valuation cap in an ‘earnings recession’ environment.
- Look for a re-test of BREXIT low at 2714 - This level now coincides with 12.09x (-1SD) 12-mth fwd PE, which we believe is a fairer level for the STI given earnings and macro uncertainties. Along the way down, expect temporary support at 2800-2830 with resistance at 2900 capping any minor rebound attempts.
Janice CHUA
DBS Vickers
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YEO Kee Yan CMT
DBS Vickers
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http://www.dbsvickers.com/
2016-08-01
