Singapore Stocks 2018 Strategy - OCBC Investment 2017-12-13: Sailing Into Another Good Year

2018 Strategy - OCBC Investment 2017-12-13: Sailing Into Another Good Year Singapore Stocks 2018 Market Strategy DBS GROUP HOLDINGS LTD D05.SI CAPITALAND LIMITED C31.SI CITY DEVELOPMENTS LIMITED C09.SI UOL GROUP LIMITED U14.SI WHEELOCK PROPERTIES (S) LTD M35.SI

2018 Strategy - Sailing Into Another Good Year

A stellar year for equities 

Key markets rallied; Asia outperformed 

  • Equities rallied strongly this year buoyed by optimism of better global economic outlook and also supported by healthy corporate earnings growth in a generally benign operating environment.
  • The MSCI World Index is up 19% so far this year, making it the best performance for the index since 2009 when markets recovered sharply after the Global Financial Crisis in 2008.

Asia outperformed the rest of the key markets this year. 

After strong growth, what’s next? 

Index, earnings and market cap are up 

  • After the strong performance this year, with double-digit gains for most market indices and the jump in corporate earnings, the market capitalisations of both the Hong Kong and Singapore markets have also moved up sharply.

After such strong gains (the second highest percentage gains after the 2009 Global Financial Crisis), is it realistic to expect another strong double-digit performance in 2018? 

  • Historically, we have noticed that it is rather difficult to sustain two consecutive years of strong gains. However, with the current risk appetite, supported by healthy earnings outlook and a cut in US corporate taxes in 2018, there is an increased chance of another year of decent gains for the market.

Singapore: Finance and Property lifted the STI

Banks staged strong gains 

  • The Straits Times Index (STI) started 2017 well and broke through the 3000 level easily but has not been able to pierce the 2015 high of 3550 this year. Still, it was a strong 20% gain for the STI. 
  • Gains were supported by the strong performance of the financial sector with YTD gains of 31% - the best performing sub-index in the Singapore market. This was followed by the Real Estate Holding and Development Index which surged 27%. S-REIT did well, up 19%.
  • Despite the strong double-digit gains, valuations are still inexpensive. The STI is currently trading at forward PER of 14.4x (FY18) and 13.4x (FY19), giving a decent dividend yield of 3.3%. Price to book has moved up from 1.1x as at end-2016 to about 1.3x currently.

Singapore Banks: Outperformer, entering 2018 on stronger footing 

Worst appears to be over for O&G exposure 

  • Net Interest Margins (NIM) have shown improvement in 2017 and banks have reflected the bulk of their exposures to the beleaguered oil and gas (O&G) sector.
  • Several business units have contributed to this year’s good performance and will likely to continue to drive banks’ earnings in 2018. This includes fee income coming from wealth, credit cards, Investment banking, etc. Crossselling of products leveraging on online platforms is something that the banks are also focusing on.
  • Having taken the hit from the O&G sector, we expect allowances to revert to the norm from next year. Overall, we are projecting for a 9% and 25% increase in net earnings for UOB and DBS for FY18.
  • DBS remains our pick in the sector.

Singapore Property: First increase in 16 quarters 

Busy year of collective sales 

  • The pace of en-bloc sales (collective sales) has quickened in 2H 2017 with several big transactions of S$1b each. As of now, close to S$7b of en-bloc transactions have already been announced this year – the second highest year (2007 topped the list with total sales of S$11.5b). 
  • Historically, en-bloc uptrend tends to point to market recovery. With current higher land transaction prices, this also indicates that average selling prices are likely to head higher when these properties are re-launched in the coming years.
  • Based on the official URA Private Property Index, the index saw its first uptick in almost four years when it finally turned up in 3Q 2017.
  • We have BUY ratings on CapitaLand, City Developments, UOL, Wheelock and Wing Tai.

Carmen Lee OCBC Investment | http://www.ocbcresearch.com/ 2017-12-13
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 27.400 Same 27.400
BUY Maintain BUY 4.130 Same 4.130
BUY Maintain BUY 13.500 Same 13.500
BUY Maintain BUY 9.700 Same 9.700
BUY Maintain BUY 2.270 Same 2.270