Singapore Monthly Outlook - DBS Research 2017-06-05: Shifting Sands

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Singapore Monthly Strategy - Shifting Sands

The benchmark STI ended the month of May17' up 35pts (+1.1%), coming off a high of 3275 and following a mixed outcome from the 1Q17 results season.
Gains in bank stocks were offset by weakness in real estate (Capitaland and UOL) and consumer services (SIA) sectors.
Our positive view on the technology sector last month (refer to Monthly Strategy dated 3 May and entitled “Uplift to 3250”) where we highlighted Venture Corp, UMS and Hi-P paid off as the sector continued its YTD run-up. Shares of UMS shares rallied 27% while Hi-P surged 32% on earnings optimism.

The 1Q17 results season saw a resumption of the downward earnings revision trend for the stocks under our coverage. FY17F earnings were revised down 2.9% while FY18F earnings were cut by 1.5%. This is against earlier optimism that the earnings upward revision witnessed in the previous 4Q16 results season can sustain, given the slew of economic data pointing to a recovery.
Noble Group was a major contributor to the overall earnings cut. The O&G sectors suffered earnings cut through the likes of Ezra, Ezion and PACC offshore. The consumer services sector was dragged down by SIA while the consumer services sector was affected by Japfa. The technology sector benefited from a positive earnings uplift from Venture Corp and UMS.
SREITs sector enjoyed a modest upward revision to DPU from Ascott Residence Trust, CapitaLand Retail China Trust and CDL Hospitality Trusts amongst others.

It’s a quiet month on the events calendar with the mid-month FOMC meeting as the only key event. The FED had recently signalled that it will look past the recent mixed US data and will likely hike rates come June.
We expect the FED to lift the FED funds rate by 25bps to 1.25% rates and go for another two more by year-end. Consensus has priced in a 100% chance of a June rate hike, followed by another by year-end.
Investors will be eying the FED’s comments for indications on the pace of rate hikes going forward.

Singapore’s 1Q GDP growth was revised up to 2.7% y-o-y from the 2.5% advanced estimates. Our Singapore economist expects full-year GDP growth of 2.8%. This, however, is on the premise that global economic conditions continue to improve.
For Singapore, the main concern is that the turnaround thus far has been uneven and restricted to just a few externally driven clusters such as electronics. The rest of the economy has yet to feel the uplift and the labour market has also remained soft.
Our Singapore economist observes signs suggesting the manufacturing sector may be peaking. Tighter credit conditions and stiffer regulations on the property market in China could weigh down on consumer sentiments and indirectly on Singapore’s exports of electronics components.
The latest China Caixin PMI for May, a private gauge of China’s manufacturing, slipped into contraction territory for the first time since June last year (actual 49.6, consensus 50.1).
A difficult Brexit process could be another risk factor. The transport engineering cluster is not entirely out of the woods given that oil prices have turned sideways. Hope is now pinned on companies’ capex spending to increase and for consumer demand in the US to be sustained that will lend some support to the manufacturing sector in the months ahead.

The 1Q17 results season saw a 0.7% downward revision for FY17F and 0.4% downward revision for FY18F. Trading at above 14.02x (+0.25SD) blended FY17/18F PE, May’s high of 3274 now stuck out like a ‘sore thumb’ in the near term, as the earnings revision trend turned negative again.
While the STI can head for 3350, pegged to 14.02x (+0.25SD) FY18F PE, by year-end, we think that the recent high of 3274 should continue to provide a near-term cap.
The 3188 level is key. If this level fails, expect a further pullback to the 13.64x (average) blended FY17/18F PE level at 3160 or lower to 3110 before finding support.

Yeo Kee Yan CMT DBS Vickers | Janice Chua DBS Vickers | http://www.dbsvickers.com/ 2017-06-05