Singapore Market Strategy - DBS Research 2017-07-03: (2) 3Q17 Market Outlook

Market Strategy - DBS Vickers 2017-07-03: Growth Moderates Singapore Market Strategy Straits Times Index 2017 Target

Singapore Market Strategy - 3Q17 Market Outlook

Continue From... Singapore Market Strategy - DBS Research 2017-07-03: (1) Growth Moderates

Choppy Ride Ahead 

  • Recovery optimism and the benign bond yields environment lifted equity markets in 1H17. While we observe that there are signs of a moderation in growth, our Singapore economist expects the outlook to remain sanguine with GDP growth seen at 2.8% this year, and 2.5% in the next.
  • Still, with the positive drivers well anticipated and known, we expect the YTD rally to come to a pause in 3Q17. Several risk events lay ahead that can turn the stock market’s YTD rising trend into a choppy one.

The potential moderate to high risk events are: 

  1. High risk that YTD GDP growth recovery moderates – Singapore’s PMI has retreated from its March high (51.2 down to 50.8) while NODX turned negative in April (-0.8% y-o-y) and May (-1.2%). The electronics cluster has remained fairly resilient. Even so, a high base comparison in 4Q16 means headline growth will dip towards the end of the year. Meanwhile, the services sector is experiencing a two-speed recovery with financial and trade-related services expected to improve while recovery should be weaker for domestic services clusters such as retail and F&B. Bank loan growth moderated slightly for the first time this year to +6.8% y-o-y in May from +7% y-o-y in April.
  2. Moderate risk of FED hiking rates in September 2017 – Investor sentiment could turn cautious and stock markets consolidate in the weeks leading to the September FOMC meeting. Consensus currently still expect the FED to raise rates just once more in Dec and another three times next year. DBS economist sees a faster pace at 1 rate hike per quarter till early 2019. FED officials have commented that recent data suggesting a slowdown in the US economy is transient and they expect growth to resume. Furthermore, in a move seldom seen, several FED officials including Janet Yellen commented that the US stock market valuation is looking rich. The USD will strengthen and equity markets correct if the FED surprises with a September hike.
  3. Moderate risk of corporate earnings cut – The earnings downward revision trend resumed with 1Q17 results season as FY17F earnings were revised down 2.9% and FY18F earnings were cut by 1.5% for stocks under our coverage. There is a risk that the downward revision trend could continue in 2H17 as the YTD recovery moderates. Sectors at risk include (i) banks on net interest margin (NIM) disappointment from slower-than-expected pass through of SIBOR/SOR following Fed rate hikes because of SGD’s relative strength to USD, (ii) telcos on competition ahead of TPG's entry and (iii) O&G on weak oil price sentiment, and oil majors’ capex increases have lagged our expectations.
  4. Low risk of Trump impeachment and Angela Merkel suffers election defect – We assign a low risk level for these two events. We think Trump is unlikely to be impeached because the congress is controlled by his own Republican party. The risk of Angela Merkel losing the German federal election in September appears low as the latest opinion polls show her Christian Democratic Union/Christian Social Union (CDU/CSU) party pulling an impressive 11% lead over the closest rival Martin Schulz of the Social Democratic Party (SPD). Support for the populist far right AfD party has fallen to just 9%.

Growth and Valuation 

  • For stocks under our coverage, we currently expect EPS growth of 13.4% for 2017F and 6.3% for 2018F. Our forecast EPS growth for the STI is 9.1% (above consensus of 6.7%) for 2017F and 6.4% (below consensus of 7.5%) for 2018F.
  • The consumer goods sector’s 25% EPS growth for 2017F is driven by the anticipated earnings recovery in plantation stocks from output growth and diverging trends in currency movements over the next 1-2 years. 
  • The consumer services sector is forecast to expand 17% in 2017F lifted by companies such as Breadtalk and Genting Singapore. Earnings for banks is seen picking up by 15.6% this year, driven by a recovery in loan growth and the anticipated increase in NIM tracking higher interest rates going forward.

Technical view: Straits Times Index – Turning sideways from 3130 to 3275 in 3Q 

  • At 3210, the benchmark Straits Times Index trades between 13.64x (average) and 14.02x (+0.25SD) blended FY17F/18F PE, while the recent high of 3274 in May stretched STI’s valuation above 14.02x (+0.25SD) blended FY17F/18F PE.
  • Against the backdrop of growth moderation, earnings uncertainty, and possible caution heading towards the September FOMC meeting, we maintain our view that May’s high of 3274 should continue to be the near-cap for the STI.
  • The decline in the 65-day rate-of change indicator from a high reading of 10 to 3.25 currently indicates that STI’s YTD rally has lost steam. The short-term trend has turned sideways from 3185 to 3275 but should the lower band fail, weakness to 3130 is seen before support emerges. Given the sanguine growth outlook, we see any decline down to 3130 as the ‘worst-case’ correction.
  • We thus peg a sideways range from 3130 to 3275 in 3Q.

Janice Chua DBS Vickers | Yeo Kee Yan CMT DBS Vickers | Lee Keng LING DBS Vickers | 2017-07-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.120 Same 4.120