Singapore Stocks Monthly Strategy - DBS Research 2018-04-03: Sit Tight ~ Directional Break Ahead

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Singapore Stock Market Dividend Stocks April 2018 Outlook STI Year-End Target UNITED OVERSEAS BANK LTD U11.SI SINGAPORE TECH ENGINEERING LTD S63.SI HONG LEONG FINANCE LIMITED S41.SI CHIP ENG SENG CORPORATION LTD C29.SI FIRST RESOURCES LIMITED EB5.SI SUNNINGDALE TECH LTD BHQ.SI

Singapore Monthly Strategy - Sit Tight ~ Directional Break Ahead

• STI to break out from 3400-3500 tightening consolidation in 1-2 months.
• Hedging against inflation – Gold, oil, commodities and farmland, real estate.
• US-China trade war on the horizon.
• Stocks to position ahead of upcoming ex-dividend dates – UOB, ST Engineering, Chip Eng Seng, First Resources, Hong Leong Finance, Sunningdale.

Tumultuous March 2018

• Earnings recovery optimism gave way to uncertainties on more aggressive rate hikes and trade war worries.
• STI fell 91points (-2.6%) in March 2018, -25pts (-0.7%) YTD.
• Telco (e.g. SingTel) and REITs were stable while consumer services (e.g. Genting Singapore) and O&G (e.g. SembCorp Industries) underperformed.

April 2018 Market Outlook 

April 2018 Key Events 

• Consensus expects monetary policy to return to a gradual appreciation (from flat) of the SGD NEER – We think the exact timing depends on inflation/labour market.
• 1Q18 results season 
  • Positive earnings revision trend from 4Q17 could continue, consensus expects 1Q GDP to expand by 2.1% q-o-q, 3.6% y-o-y.
  • Trade war worries could cloud outlook of export-oriented companies such as technology, shipping.

US-Sino trade war - Uncertain for Singapore 

• US to impose US$50bn tariffs on Chinese exporters. 
• Escalation of US-China trade war negative for global economy, including Singapore. 
• US action targeted at China – Negative for companies with operations and revenue in China and end-product destination in US. 
• Some degree of trade diversion rather than import substitution  
  • Singapore, with its longstanding US-Singapore Free Trade Agreement (USSFTA), could see benefit in its higher tech sectors. 
  • Positive for companies with operations in US and whose competitors are Chinese companies.

Inflation is the buzzword you will hear more of 

• FED raises 2019 FED funds rate projection by 20bps to 2.9% and 2020 by 30bps to 3.4%, puts focus on inflation. 
• Tariffs have inflationary impact as costs of goods go up. 
• Increased demand driven by economic recovery, tariffs and tightening labour market could exert upward pressure on core CPI beyond the FED’s threshold of +2% y-o-y, faster than expected.

Tactical outlook: 

• STI’s directional break from tightening consolidation depends on unfolding of trade war rhetoric and earnings outlook. 
• March low of 3382 a near-term attractive level between 13.51x (ave) and 13.14x (-0.25SD) 12- mth fwd PE. 
• STI in narrowing consolidation range from 3400 to 3500. 
• Directional break from current consolidation depends on 
  1. How the US-China trade skirmish unfolds 
  2. 1Q18 earnings season and corporate earnings revision trend 
  3. Expect a breakout this month, latest in May. 
• Base-case assumption for STI year-end objective at 3715 intact.

Strategy 

Hedging against Inflation 

• Inflation has come into focus with the FED raising 2019 interest forecast by 20bps to 2.9% and by 30bps to 3.4% for 2020 on the back of stronger economic growth. Furthermore, the current US-China trade tensions could stretch to or extend beyond the November US mid-term elections. 
• Tariffs have an inflationary impact on the countries affected as costs of goods go up. Worse if the current skirmish leads to a trade war involving multiple nations.
• Stocks/ETFs related to these should benefit as inflationary pressure picks up. These are
  1. Gold - GOLD US$ ETF,
  2. Oil - Positive for rigbuilders Keppel Corp, SembCorp Industries, SembCorp Marine,
  3. Commodities/Farmland - Lyxor Commodity US$ ETF, Lyxor CRB Ex-Energy US$ ETF, Olam, Wilmar, Bumitama, First Resources
  4. Commercial/Residential properties – CityDev, UOL, Roxy Pacific, CapitaLand, Hong Fok.

US-China Trade War 

• The US has directed the first major salvo at China by targeting US$50bn tariffs on Chinese exporters. China has responded with “token” reciprocal tariffs on 128 US products worth US$3bn. The concern is that the current “skirmish” could drag on with tit-for-tat moves till the US mid-term election in November or worsen into a trade war involving multiple nations. An escalation of US-China trade war is negative for the global economy, including Singapore.
• The US trade tariff on China is negative for Singapore manufacturing companies with China operations and endproduct destination in US as order visibility turns cloudier.
• For stocks under our coverage, Hi-P has nine manufacturing facilities with six in China. Sunningdale looks lesser affected with 16 global manufacturing facilities, out of which 6 are in China and 1 in the US. Still, the final impact for these two companies is hard to pin down because
  1. the current trade skirmish is a developing story that could also cool off as both sides reach a compromise,
  2. it is not possible to determine what percentage of their customers’ end-products is shipped to the US.
• Impact on Venture Corp is likely very limited as its operations are geographically diversified across the US, Europe (Spain, Netherlands, Hungary), China (Shanghai, Suzhou, Shenzhen), Malaysia and Singapore. UMS has no manufacturing facilities in China.
• Meanwhile, as the US tariff is targeted at China as compared to a blanket tariff, the silver lining is that the other US trading partners could benefit from some degree of trade diversion.
• Our economist notes that Singapore, with its long-standing US-Singapore Free Trade Agreement (USSFTA), could benefit. This is positive for companies with operations in the US and whose competitors are Chinese companies.

Stocks to position ahead of upcoming ex-dividend dates 

• Many stocks are going ex-dividend over the next 1-2 months.
• Stocks with good dividend payouts during this period could be supported as investors position ahead of upcoming ex-dividend dates.
  • Large-cap stocks under our coverage with good dividend payouts are UOB and ST Engineering. 
  • For small caps, these are Chip Eng Seng, First Resources, Hong Leong Finance and Sunningdale.

Kee Yan YEO CMT DBS Vickers | Janice CHUA DBS Vickers | http://www.dbsvickers.com/ 2018-04-03

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 29.500 Same 29.500

BUY Maintain BUY 4.100 Same 4.100

BUY Maintain BUY 3.200 Same 3.200

BUY Maintain BUY 1.180 Same 1.180

BUY Maintain BUY 2.180 Same 2.180

BUY Maintain BUY 2.700 Same 2.700