Singapore Market Focus - DBS Research 2017-07-10: USD Rebound And Choppy Quarter For Equities

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Singapore Stock Market Outlook Singapore Yield Stocks SHENG SIONG GROUP LTD OV8.SI SINGAPORE TECH ENGINEERING LTD S63.SI KEPPEL REIT K71U.SI MAPLETREE GREATER CHINACOMM TR RW0U.SI MAPLETREE LOGISTICS TRUST M44U.SI

Singapore Market Focus - USD Rebound And Choppy Quarter For Equities

• Currency markets signal a choppy third quarter for equities – ADXY to pullback to 104.5, USDSGD to rebound to 1.41.
• Sideways trend temporary – ADXY to resume recovery post pullback, STI to trade towards 3130 to 3275 in third quarter and 3350 by year-end.
• Prefer yield and alpha picks during this period.

Currency movement tells of a choppy 3Q for equities 

• Our latest Singapore Strategy (titled: Growth Moderates, dated 3 July) spoke about the Singapore equity market turning sideways in 3Q on the back of growth moderation, earnings uncertainty, and possible caution heading towards the September FOMC meeting. We pegged a range of 3130 to 3275 for the STI over the next 2-3 months.
• We think currency market movements also point to a choppy 3Q for equities. The USD could strengthen against Asian currencies, including the Singapore Dollar in the month(s) ahead amid uncertainty heading to towards the September FOMC meeting. 
• The anticipated rebound in the USD is likely short-term in nature and Asian currencies should resume their recovery in 4Q. We take a closer look.

ADXY poised for a pullback to 104.5 in coming month(s) 

• The Bloomberg JPM Asian Dollar Index (ADXY) tracks the performance of a basket of 10 Asian currencies (including the Singapore Dollar) against the USD. The weekly chart shows that the YTD rally that lifted the ADXY from 102.5 to 106.4 coincided with a major 23.6% upward retracement. 
• Elliot wave projection points to a pullback from the recent high of 106.4 down to 104.5 in the month(s) ahead before the prospect of another rally that can lift it to 108.8 by mid-2018. 

USDSGD rebound to 1.41 

• The USDSGD fell to a low of 1.37 in mid-June, near the lower band of our currency strategist’s 3Q forecast range from 1.36 to 1.41. The USDSGD’s rate-of-change indicator is showing positive divergence, a sign that the YTD downtrend is losing momentum. 
• Technically, we see a rebound in the USDSGD to 1.41 in coming month(s). This is in line with the anticipated pullback in ADXY. The anticipated rebound in the USDSGD is likely short-term in nature. If our technical view on the ADXY is correct, the USD could weaken against Asian currencies once again in 4Q.

STI and USDSGD tend to move in opposite directions 

• The chart that plots the STI against the USDSGD from 2015 shows the STI and USDSGD trending in opposite directions with 4Q16 being the exception. 
• We also observed that the STI had started to turn sideways from May even as the USDSGD continued its downtrend. This divergence is a tell-tale sign that STI has hit a short-term ceiling at May’s high of 3275.
• The anticipated rebound in the USDSGD towards 1.41 (from 1.37) in coming month(s) spells a period of choppiness for the STI from 3130 to 3275. The choppy spell is likely short-term in nature and we see the STI heading towards 3350 by year-end.

Stick to Yield and Alpha picks 

• Our strategy during this period is thus to stick with defensive yield names and alpha picks with catalysts. 
• Our yield picks are Sheng Siong, ST Engineering, Keppel REIT, Mapletree Greater China Commercial Trust, and Mapletree Logistics Trust. 
• Alpha picks with catalysts are Breadtalk, CapitaLand, City Developments, Dairy Farm, Genting Singapore, and Thai Beverage.

Yeo Kee Yan CMT DBS Vickers | http://www.dbsvickers.com/ 2017-07-10

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