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

Market Strategy - DBS Vickers 2017-07-03: Growth Moderates Singapore Market Strategy 2017H1 Review

Singapore Market Strategy - Growth Moderates

  • Signs of growth tapering, potential downside to earnings.
  • Stay defensive in yield plays, bet on alpha picks.
  • M&A still on a roll, rebound trades in oil.

STI’s 1H17 glory. 

But choppy ride ahead. 

  • As growth moderates, the market may face headwinds moving into the second half of the year. DBS’ Singapore economist expects fourth quarter 2017 to show a sharper slowdown, projecting Singapore’s GDP growth to taper off from 2.8% this year to 2.5% in 2018. 
  • Manufacturing index and loans growth are peaking while first quarter 2017’s earnings saw a resumption of the earnings cut trend. We expect higher volatility as investors keep a watchful eye on the Fed’s next move and currency swings. 
  • Expecting more downside risks to earnings, Singapore equities lack catalysts for further re-rating. Coupled with potentially more risks on the horizon, we turn more defensive for third quarter 2017.

Stay safe with yield, bet on alpha. 

Strong M&A momentum, rebounds in oil trades for investors with higher risk appetites.

  • M&A, takeovers, and privatisations were on a roll in first half 2017. We highlight several potential candidates in this report – Banyan Tree, Metro, Bukit Sembawang, Venture Corporation, Hi-P, Sunningdale and Sembcorp Marine
  • Oil price is poised for a rebound, supported by seasonally stronger demand, and with US shale’s productivity improvements near saturation levels. SMM and Keppel Corp have diversified into non drilling solutions, and LNG projects to reduce reliance on oil projects, and are poised to ride on the oil price rebound.

Our 1H 2017 glory – contrarian and early call on STI 

  • Our contrarian positive 1H 2017 stance on the Singapore equity market paid off well (refer to Singapore Strategy – Back on Growth Track dated 14 Dec 2016).
  • Singapore stocks put up a strong performance in the past six months on optimism that the worst of the 2016 slowdown had passed, and global recovery is gaining traction. The Straits Times Index (STI) gained 11.6% to end the half-year mark at 3215, led by banks and property stocks. Regional bourses also enjoyed strong flows helped by a weak USD and lower outlook for bond yields.
  • Six months back, our 1H 2017 STI objective of 3150 was among the highest on the street, which we subsequently revised up to 3250. Our 1H top picks returned 15% (including dividend pay-outs), outperforming STI’s 11.6% gain year-to-date (YTD).
  • We had highlighted ten drivers at that time (5 domestic and 5 external) for 2017 that could have impacted the Singapore equity market. Looking back, the predictions that materialised were domestic positive factors: 
    1. GDP uplift with recovery in both manufacturing and services sectors 
    2. policy relaxation and sentiment turnaround in the property sector, and 
    3. restructuring at Temasek-linked companies.
  • Thankfully, our earlier concerns about anti-globalisation threats did not materialise as US President Trump backed off from branding China a currency manipulator and did not impose tariffs on China and Mexico. Populist parties in Europe have also failed to secure election victories thus far, which helped create a benign environment for global equities YTD. 
  • However, our expectation for a moderate recovery in oil prices failed to materialise in 1H. Brent crude fell 21% YTD to c.USD45pbl and Singapore O&G stocks underperformed in 1H.

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