Asia Equity Strategy - DBS Research 2016-09-21: Pain, but no collapse

Asia Equity Strategy - DBS Research 2016-09-21: Pain, but no collapse Market Strategy

Asia Equity Strategy - Pain, but no collapse

  • Stay cautious in 4Q as market volatility tends to rise.
  • Valuations, the US presidential election, Fed policy and flow reversal are key issues.
  • Cheaper valuations could provide better entry points later on, especially for ASEAN markets.
  • Indonesia, and Hong Kong/China are our top markets for prospects of stronger earnings growth and equity flows next year.
  • Taiwan, Korea and Malaysia remain as Underweight as we find very few reasons to like these markets.
  • Thailand is downgraded to Neutral, Philippines remains an Underweight. Watch for growth surprise and cheaper valuations which could lead us to upgrade these markets.


  • The last quarter has brought us closer to the first rate hike for the year which the strategy team believes to be likely in December. In line with a better-than-expected and improving macro conditions (stable oil price - up from lows in February with a WTI price per barrel of US$42; easing monetary conditions – world of zero-to-negative interest rates and low bond yields; moderate economic recovery – global economies averting a recession), Asia markets have generally performed well year-to-date. However, a lack of earnings growth has given rise to rich valuations, and forward PE valuations are now above their long-term averages, which make these markets vulnerable to negative news, in our view.
  • Thus, we believe it pays to be cautious in 4Q in view of a few unsettled issues on the horizon, as history suggests that September and October are the most volatile months of the year.
  • Nonetheless, fundamentals in Asia markets are improving, which could give rise to better earnings outlook next year. Any weakness should be deemed as a buying opportunity, in our view. 
  • Our top pick markets are Indonesia, China (H-shares and MSCI China), and Hong Kong (HSI, MSCI Hong Kong). Taiwan, Korea and Malaysia are Underweight as we do not see the markets trading out of their respective ranges. Philippines is an Underweight as we see more downside to the index levels in the near term but will be interested to pick up on lower valuations. Singapore, Thailand and India are Neutral.

Singapore (Neutral) 

  • Singapore market has been the worst performing market in Asia this year. The market has been plagued by poor economic growth, weak oil & gas industry imposing on employment and the services sector, cautious financial sector, and weak property market. Consensus earnings growth for MSCI Singapore stands at -5.9% this year, after falling 4.4% last year, and only 4.3% for next year. Earnings recession is likely to be prolonged with GDP growth for next year at 1.9%, only a tad higher than this year’s 1.5%.
  • There are two ways that Singapore tries to differentiate itself: 1) growth through regional exposure especially in the highgrowth areas such as in ASEAN, China and India; and 2) serving as a yields haven in this yield grab environment.
  • These two themes have been working well this year as the regional currencies and economies have been more stable this year. We believe investors can outperform the market with portfolio populated with stocks based on these two themes.
  • DBS economist Irvin Seah continues to warn that risks lie ahead for the Singapore economy as the services sector, which constitutes about two-thirds of the Singapore economy, is already in “technical“ recession, after having already contracted two quarters in a row. Hence, unless the manufacturing sector surprises in a big way, we are unlikely to see the economy recovering this year.
  • Moving on, the strategy team believes big infrastructure projects like the Singapore – KL high speed rail (HSR) may be needed to give a structural lift to growth prospects in the longer term. On this end, there are tentative signs that the project is likely to be a reality after more than 20 years of delay, when the Land Transport Authority of Singapore (LTA) called for tender to be closed in October for a Joint Development Partner for the project. The Singapore government has already started planning works in the Jurong West area, which is designated for the terminus station for the HSR.
  • Other ongoing infrastructure projects include the SmartNation, and the extension of Mass Railway Transport (MRT) lines. Progress on a fourth Telco player and Public Transportation reform have already been made.
  • The government has also announced it will be reviewing the “CPFIS”, an investment option in the Central Provident Fund scheme. This could hopefully unleash more liquidity into the Singapore stock market.
  • Near term, DBS Singapore strategist Janice Chua is cautious on the Singapore market and believes that the Singapore Straits Index (STI) could test the post-Brexit low of 2714 in the next 1-2 months. Two binary events that could induce a major correction includes a possible rate hike in the September Fed meeting (September 22 Asia time), and an informal oil producers meeting at end of September to discuss production freeze, should the outcomes turn against expectations. (See “Shadow of September - October Volatility”, Janice Chua et. al., 29 August).
  • From a regional perspective, Singapore corporates have the worst earnings profile. Nonetheless we like the market for its high yields, and its undemanding valuations which leave room for re-rating should global risk appetite return, and should there more be evidence that the economy has passed its worst.

Regional markets, P/E valuations and earnings growth

Regional markets, P/E valuations and earnings growth - DBS Research

Joanne Goh DBS Vickers | 2016-09-21