Phillip 2018 Singapore Strategy - Phillip Securities 2017-12-18: From Liquidity To A Business Cycle, The Phillip Absolute 10

Phillip 2018 Singapore Strategy - Phillip Securities 2017-12-18: From Liquidity To A Business Cycle Singapore Stock Market 2018 Outlook 2018 Top Stock Picks Phillip Absolute 10 STI Target CHIP ENG SENG CORPORATION LTD C29.SI MICRO-MECHANICS (HOLDINGS) LTD 5DD.SI BANYAN TREE HOLDINGS LIMITED B58.SI ASIAN PAY TELEVISION TRUST S7OU.SI

Phillip 2018 Singapore Strategy - From Liquidity To A Business Cycle

  • In summary, we expect a continuation of the global growth in 2018. Forward indicators point to at least a healthy 1Q18. 
  • For growth to be sustainable, we would need investments and wage improvements. So far, only capital investment has recovered. We believe wage growth will return after a lag. This can bolster growth, even in the face of rising interest rates.

2017 REVIEW 

  • 2017 kicked off with exuberance over the Trump reflation trade, matched by angst over the EU’s with looming elections and the populist wave. The Trump reflation trade was a head fake. US Treasury yields and US dollar reversed their ascent, and any planned infrastructure stimulus fizzled out. Macron's overwhelming parliament majority in France ended the debate on EU disintegration. Instead, it rekindled hopes of some fiscal union in the future.
  • Over in Singapore, the outlook was tepid, at best. Consensus expectations for GDP in 2017 was a sombre 1% - 2%. This was warranted as most indicators were languishing. Loans growth were only growing at 1%, consistent with industrial production paltry 1% climb. And exports moving sideways. However, as the year progress, it became more evident an economic recovery underway, trending far better than expected. 
  • Global economic growth breached several years’ high, accompanied by low inflation. Such conditions ignited the performance of cyclicals, in particular electronics. Another notable event in Singapore was the relaxation of property measures in March. Initial market response was lukewarm, but as the months ploughed on, pent-up demand started to fuel primary and secondary private residential sales. Sales surged to four-year highs and averaging 2300 units per month, up 36% from a year ago.


The cyclical uplift for Singapore is well and underway. 

  • We are enjoying the best growth rates in five years. For investors, the crucial question is the longevity of this expansion.
  • We used several indicators to give us a peek into the near-term. Singapore new orders PMI suggest economic vibrancy at least till 1Q18. Another gauge, IFO business expectations, similarly points to sustainable strength in 1Q18.
  • Sustainability, we think, would require a positive feedback loop. Rising sales need to be followed up with employment or wage growth and further capital investment. This will keep an economy on a self-sustaining path. Therefore, two sources of demand need to be trending upwards in 2018, namely wages and capital spending. Capital investment has started its recovery. Employment is at a multi-year high. Only wage growth has been below trend.

Capital Investment: 

  • Going by the US proxy, global investment cycle recovered early this year, after drifting for almost three years. We see this in both nominal private fixed investments and spending on durable goods.


  • Wage growth has been sanguine in most parts of the world. US wage growth after GFC has been stuck in a 2% to 2.9% range the past eight years. Singapore’s has averaged 3% p.a. for the past three years. It historically lags GDP by three quarters. 
  • We are upbeat, holding the view that wage growth will recover, albeit after a longer lag. We feel there are two secular reasons for the longer lag in wages, notably
    1. the build-up of automation in both manufacturing and services sector;
    2. expansion of the global pool of labour with the opening of several developing countries to globalization.


  • Under such a macro scenario that we construct our playbook for 2018. 
  • The sector we favour the most is banks. Banks will be surfing the wave of rising interest rates, recovery in asset quality and higher loan volumes. The concoction could not get any better. 
  • Property stocks we believe can perform until at least the 1H18. We still view them as a trade because of high vacancy rates, stretched affordability and fluid demand. We fear these could be roadblocks to any secular story. 
  • Our other Overweight is consumer. With wage growth improving (personal wish too), consumers in Singapore should open up their wallets again. This is our laggard Overweight as data has not revealed itself yet.


  • In Singapore, our Overweights are in Commodities (Coal), Consumer, Finance, Industrial (Electronics) and Property. All these sectors are riding on a healthy sales moment. Only consumer is less apparent as any improvement will be lagging.
  • For 2018 absolute return portfolio, our top 10 picks (The Phillip Absolute 10) are: 
    1. Asian PayTV and Ascendas REIT: These are not cyclical bets but they provide attractive dividend yields with healthy capital appreciation.
    2. Chip Eng Seng, Dairy Farm, DBS Group, GEO Energy and Micro-Mechanics: These are stocks that will register earnings growth at attractive valuations.
    3. Banyan Tree, CapitaLand and ComfortDelGro: We believe these companies will benefit from a market re-rating in 2018.


  • Our STI target for end 2018 is 3900, an upside of 14%. This a STI bottoms-up target, based on consensus and our target prices. At 3900, PE for STI will be around 17x. 
  • The largest index contributors to STI in 2018 will be finance, telecommunications, conglomerates, and property. 
  • In terms of percentage upside, the largest comes from industrial (+38%), commodities (+35%) and shipping (+33%). REITs’ performance is expected to be mixed.

Paul Chew Phillip Securities | http://www.poems.com.sg/ 2017-12-18
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 1.210 Same 1.210
BUY Maintain BUY 2.500 Same 2.500
ACCUMULATE Maintain ACCUMULATE 0.710 Same 0.710
ACCUMULATE Maintain ACCUMULATE 0.640 Same 0.640