Singapore Market Focus - DBS Research 2017-11-06: November Market Outlook ~ Broader-based Recovery

Singapore Market Focus - DBS Vickers 2017-11-06: Outlook ~ Broader-based Recovery

Singapore Market Focus - Outlook ~ Broader-based Recovery

  • Economic recovery broadens to include services, marine offshore engineering, construction.
  • STI support 3325; 3500 before end-1H18.
  • OCBC and UOB - Improving NIM, strong loan growth and stabilized NPLs.

Looking back at October 

  • The benchmark Straits Times Index ended firmly higher by 154pts (+4.8%) to end at 3374 in October 2017
  • The strength was broad based as more sectors participated in the rally. The O&G sector was the top performer, led by rallies in the large-cap yards Keppel Corp, SembCorp Marine and SembCorp Industries on optimism that the rig market is finally on the recovery mode and as the price of Brent crude rose to a fresh YTD high. 
  • Thai Beverage lifted the consumer goods sector as the 1-year mourning period for the late Thai King came to an end.
  • On the domestic front, banks OCBC and UOB rose on optimism of improving NIM, higher loan growth and falling NPLs. The latest September loan growth was 8.1% y-o-y and 0.6% m-o-m. 
  • The Residential property stocks City Developments and UOL also performed well riding on improving sentiment in the private residential market. The positive sentiment spilled over to small-cap names such as Chip Eng Seng, Lian Beng, Tuan Sing and Heeton.
  • Construction stocks also rose as infrastructure projects and the recent en-bloc activities could mean more construction activities going forward.


Eyes on OPEC 

  • With oil price nudging to a fresh YTD high, attention turns to the outcome of the OPEC meeting on 30 November. OPEC, Russia and nine other producers have cut overall output by about 1.8m bpd since January. According to Reuters, quoting Gulf OPEC sources, the cartel is likely to extend the current production cut by a further nine months till end-2018 despite potential output disruptions next year. 
  • OPEC secretary general had said OPEC members and other producers may have to take some "extraordinary measures" to ensure the long-term balance of the market. The Saudi Crown Prince said recently that the kingdom supports the idea of extending the OPEC-led pact.
  • Extending the production cut period should see oil price continuing its current rising trend and fuel further interest in O&M stocks. Technically, we see Brent heading for US$65.5pbl followed by US$75pbl in 2H18. Our picks are SembCorp Marine, SembCorp Industries and POSH.

Jerome Powell is the next Fed Chair 

  • Donald Trump has picked Jerome Powell as the next Fed Chair. Powell is expected to stay the course on monetary policy if the economy continues its steady growth. He has been a member of the Fed’s board of governors since 2012 and supports Janet Yellen’s stance to raise interest rates and lower the Fed’s balance sheet at a gradual pace. 
  • DBS interest rate strategist believes that the Fed will hike rates at a modest pace over the next two years. He expects a December rate hike that lifts the FED funds rate to 1.5% by year-end. Three more rates hikes are expected next year followed by another two in 2019.

Singapore’s recovery turns broader based 

  • Singapore’s economic recovery that started from the electronics-related segment earlier this year has broadened to include more industries, according to the MAS in its latest macroeconomic review
  • The financial services and retail segments are expected to benefit from the improvement in the overall business climate as well as underlying strength in regional trade and growth. While the marine and offshore engineering sector continues to struggle, it is expected to exert less of a drag next year. 
  • Meanwhile, the construction sector should benefit from large-scale public-sector projects such as the 21.5km North-South Corridor next year and the stream of progress payments from earlier rail-related contracts awarded in 2016.
  • MAS’s comments vindicate our Singapore economist’s earlier observations that Singapore’s recovery is improving in quality (refer to Economics Markets Strategy 4Q 2017 dated 7 September). Besides manufacturing, the services sector has also turned the corner, led by financial, business and wholesale/retail services.

Transiting to “mid-expansion” recovery phase 

  • We think Singapore’s economic recovery is transiting from the early expansion to the mid-expansion phase. This occurs when the recovery broadens from the late contraction to early expansion outperformers such as banks, residential property and technology, to other sectors such as industrials, capital goods (e.g. yards, machinery) and construction sectors. 
  • MAS recently commented that Singapore’s recovery has broadened from electronics to other segments and that even the marine/offshore engineering and construction sectors are turning better, reinforces our view.
  • Stock prices of yards Keppel Corp, SembCorp Marine and SembCorp Industries, construction (e.g. Yong Nam) and crane company (e.g. Sin Heng Heavy Machinery) sprang to life in recent weeks to test or break into fresh 52-week highs, which is a positive sign. Expect interest in these sectors to continue.
  • For the property sector, en-bloc activities have broadened to the commercial space. 
  • In the consumer goods sector, interest in Thai Beverage has also picked up in the past month in anticipation of higher beer consumption as the late Thai King’s mourning period comes to an end.

Straits Times Index – Going beyond 3400 

  • Our year-end objective of 3400 was realised last week (STI touched 3395). The year-end holiday lull period typically starts from the last week of November till mid-December. The current rally should take a pause as the month of November progresses. But we expect the pullback to be shallow given improving optimism about the Singapore economy that is seen broadening into more sectors next year. 
  • Investors are likely to capitalise on the year-end lull to position into stocks on minor dips in anticipation of a “Capricorn rally”. 
  • We see technical support at 3325. Below this, 3280 is the next technical support, although short of an external shock event, we think the odds of this level getting tested is low.
  • At 3400, the STI is trading at 14.4x (+0.5SD) FY18F PE. Either a further re-rating of the Singapore market to 14.8x (+0.75SD) FY18F PE or a net upward earnings revision for the STI component stocks is necessary to lift the index beyond 3400. It could well be a combination of both. The next level beyond is 3500 that coincides with 14.8x (+0.75SD) FY18F PE as well as 14x (+0.25SD) FY19F PE that could be attained before 1H18.

Yeo Kee Yan CMT DBS Vickers | 2017-11-06