Singapore Strategy - DBS Research 2017-03-17: Banking in on Fed rate hikes

Singapore Strategy - DBS Vickers 2017-03-17: Banking in on Fed rate hikes Singapore Stocks Rate Hike Impact GENTING SINGAPORE PLC G13.SI SINGAPORE O&G LTD. 41X.SI UOL GROUP LIMITED U14.SI UNITED OVERSEAS BANK LTD U11.SI FRASERS CENTREPOINT LIMITED TQ5.SI

Singapore Strategy - Banking in on Fed rate hikes

  • The Fed forecasts three rate hikes in 2017 and 2018, reassures on accommodative policy.
  • Favouring stocks with yield and net cash - Genting Singapore, SGX, ComfortDelgro, Sheng Siong, China Aviation Oil, Singapore O&G, Sunningdale, Fu Yu and OKP.
  • Expect banks to enjoy visible NIM uptick in 2H – pick UOB.
  • Buy property stocks on pullback - Frasers Centrepoint Limited and UOL.
  • Stay selective on S-REITs - Ascendas REIT, Croesus Retail Trust, Frasers Logistics & Industrial Trust, Keppel DC REIT and Mapletree Commercial Trust.

FED’s 25 bp hike in the price 

  • The Federal Reserve raised the Fed funds rate by 25bps to 1% last night and sounded off another two more this year, in line with consensus expectations. More importantly, Yellen calmed concerns among investors that the pace of rate hike will be gradual.
  • Yellen said the central bank was willing to tolerate inflation going above its 2% goal temporarily and that it intended to keep its policy accommodative for ‘some time’. Fed policy makers pencilled in two more quarter-point rate increases this year and three in 2018, unchanged from their projections in December 2016.
  • Financial markets reacted with the yield on 10-year US Treasury notes falling 9bps to 2.51%. The US Dollar Index fell 0.25% to 101 on the back of a “dovish” outlook from the Fed.

Favouring Yield with Net Cash 

  • Stocks that offer both yield and net cash should be underpinned in the current environment whereby interest rates are rising at a ‘gradual controlled’ pace on the expectation of improving growth and rising inflation. 
  • We screen through the stocks under our coverage that are in a net cash position and with at least 3% yield. Our picks are Genting Singapore, SGX, and ComfortDelgro for large caps and Sheng Siong, China Aviation Oil, Singapore O&G, Sunningdale, Fu Yu and OKP for small caps. Among these, Genting Singapore and Singapore O&G further offer double-digit EPS growth for both FY17F and FY18F.

Implication for banks – Expect visible NIM uptick in 2H 

  • Rising interest rates are positive for banks. Our bank analyst expects a visible uptick to NIM in the second half of this year that will see a re-pricing of 50% of the banks’ overall loan book. Sensitivity analysis points to an increase in net profit by c.2% for UOB and OCBC for every 25-bp hike in SIBOR/SOR, HK$ and US$ loan rates collectively.
  • We currently have a BUY on UOB (TP S$22.70) and a HOLD on OCBC (TP S$10.30). 
  • UOB has turned more optimistic on asset quality outlook and has a larger provision reserves buffer. The opposite seems to be the case for OCBC where the worst of NPLs may not be over. Positively, both banks are expected to grow loans at mid-single digits. 
  • Stronger than expected multiplier GDP effect trickling in to better loan growth should provide upside surprise. Every additional 1ppt in loan growth would add to 0.7-0.8% to earnings.

Implication for S-REITs – Stay selective 

  • S-REITs should be supported in the near term as the earlier concern about a more hawkish Fed eases. With Singapore’s GDP growth revised upwards, our S-REITs team recommends positioning into the more cyclical office and industrial REITs - specifically the business parks and hi-tech segments. With the supply for both sectors easing from next year, the prospects of a recovery in spot rents next year is increasing.
  • While a relief rebound for retail REITs is possible in the near term, we believe the upside will be capped. Suburban malls are affected by heightened competition from the online space given the imminent launch of Amazon in Singapore.
  • Meanwhile, the hospitality REITs are more of a 2H17 story as there remains potential downside risk to RevPAR expectations.
  • Growth and value are our themes for the REITs. Our sector picks remain Ascendas REIT, Croesus Retail Trust, Frasers Logistics & Industrial Trust, Keppel DC REIT and Mapletree Commercial Trust.

Implication for property – Buy on pullback

  • Property stocks have performed well YTD that make them more vulnerable to profit taking. But the impact of rising mortgage rates will be mitigated by hopes that the Singapore government has started a gradual process to unwind property measures. 
  • Our property team advocates a buy-on-pullback stance as they see further sector upside.
  • Our picks are developers with a pipeline of launches in 2017 such as Frasers Centrepoint Limited (FCL) where positive sell-through rates for upcoming new launches could be positive drivers to share prices. We also like UOL Group as a deep value stock.
  • Rising Fed funds rate will exert upward pressure on the SIBOR/SOR that will bring about a rise in mortgage rates. For a S$1m loan with a 25-year tenure, a 1% mortgage rate increase will bring about a S$500 mortgage increase. This can have a negative impact on the physical property market. Countering this, the property relaxation steps announced last week is a clear message from the Singapore government that they stand ready to support the property market and prevent an unintended crash in prices if the market outlook turns. 
  • Our property team thinks this signals the start of a multi-year relaxation trend of the current property curbs. This can lead to continued sector-wide rerating opportunities that will maintain investors’ positive sentiment among the developers.

Janice CHUA DBS Vickers | Yeo Kee Yan CMT DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-03-17
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