Monthly Strategy - DBS Research 2016-11-01: Hillary Rally or Trump Dump?

.SI

Monthly Strategy - Hillary Rally or Trump Dump?

Straits Times Index to recover towards 2950 on Hillary victory, down to 2670 if Trump wins.
3Q results season - Earnings recession likely to continue but earnings cuts to get more gradual.

The benchmark STI is lower by 53pts month-to-date. Stocks lost ground on the following factors:
1. outcome of the upcoming US Presidential Election,
2. corporate earnings anxiety as the 3Q results season starts and
3. weakening outlook for the Singapore economy and labour market.
In terms of performance, 25 out of 30 STI component stocks lost ground during the month while CPO stocks Wilmar International and Golden Agri were the few stocks that ended higher.
ComfortDelgro lost 7.5% for the month as the stock fell in the lead up to the Public Transport Council’s decision to lower public transport fares by 4.2% in its 2016 fare review exercise.

October’s cautious mood is likely to extend into early November on the back of a weak 3Q results season thus far and until the outcome of the US Presidential Election is known.
Equity markets are likely to “heave a sigh of relief” if Hillary wins but a sell-off should ensue if Trump emerges the victor.
On the interest rates front, the FED is seen leaving rates unchanged at this week’s FOMC meeting, hiking only in December. Meanwhile, the ‘earnings recession’ trend looks likely to continue during the 3Q results season, albeit with a much more gradual pace to earnings cut compared to 2Q.
The 3 key events that could affect the stock market in November are:

The outcome of the next FOMC meeting is on November 2.
Consensus expects the FED to hold rates steady at the November meeting until after the US Presidential Election that is just days away. The probability of a November rate hike is just 8.3% (source: CME FedWatch). The expectation is for the US central bank to raise the FED funds rate rates by 25bps to 0.75% at the final FOMC meeting of the year in mid-December. The probability of a December rate hike is currently 78.3% (source: CME FedWatch).
While a December rate hike is already well anticipated, investors will be paying attention to FED official’s comments to gauge how fast rates will increase going forward.
Consensus sees 1 to 2 rate hikes next year as the FED looks to normalise rates at a gradual pace.

Americans head for the polls on November 8, less than a week after the FOMC meeting. Hillary Clinton, the Democratic Party nominee has pulled ahead of Republican candidate Donald Trump in recent weeks. According to Real Clear Politics poll, the current Clinton-Trump spread for the US presidential poll rose to 5.1ppts from a low of just 0.9ppt in mid-September, in favour of Clinton.
Equity markets are likely to heave a sigh of relief should Hillary Clinton emerge the winner as investors see continuity of economic policies. On the other hand, a Trump victory will likely result in a sell-off for global equity markets as investors dislike uncertainty given his protectionist policies. Trump also strongly opposes the current Trans-Pacific Partnership terms, a FTA between 12 countries that includes Singapore.

The 3Q results season is unfolding. It’s been a rather disappointing start. If the results releases so far are anything to go by, the earnings downward revision trend risks continuing.
SPH, SembCorp Industries, SGX and Keppel Corp were among the STI component stocks that suffered earnings cut while Ascendas REIT received an upward revision to its distribution income. Outside of the STI component stocks, M1 and SembCorp Marine suffered earnings cut as well.
Earnings downward revisions and the impact on STI’s PE valuation levels have been modest so far (refer to table below).
With forward earnings forecasts maintained for index heavyweights UOB and OCBC, the overall downward earnings revision is likely to be much more gradual rate compared to the steep earnings cut of 7.4% for FY16F and 6.8% for FY17F in 2Q for stocks under our coverage.

At our previous October monthly strategy, we had expected the STI to trade within a range from 2750 to 2950 through the rest of the year with technical resistance levels observed at 2865 and 2905. The STI performed as expected, extending its choppy sideways trend with 2 rebound highs at 2860 and 2901 during the past 1 month and the month-to-date low at 2783.
Given the weak 3Q results season thus far and the prospect of a December rate hike, investors’ sentiment is likely to stay cautious in the first week of November until the US Presidential Elections passes. We think the outcome of the US Presidential Elections will have a meaningful influence on equity markets for the rest of the year:
1. Hillary victory – Increases the likelihood for stock prices to firm heading to year-end as equity markets ‘heave a sigh of relief’. This outcome should reinforce our view for the STI to trade within 2750 to 2950 for the rest of the year. The recovery off the 2750 level will likely be choppy with technical support/resistance levels within this range are at 2800, 2865 and 2905.
2. Trump victory – Equity markets will likely face a sell-off as risk aversion increases. A Trump victory, together with a likely continuation of the ‘earnings recession’ and prospect of a December rate hike should send the STI lower to 2670, which coincides with 12.09x (-1SD) FY17F PE.

Janice CHUA DBS Vickers | Yeo Kee Yan CMT DBS Vickers | http://www.dbsvickers.com/ 2016-11-01

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