Singapore Stock Monthly Strategy (May 2018) - DBS Research 2018-05-03: Take A Break, Enjoy The Game

Singapore Monthly Strategy - DBS Vickers 2018-05-03: Take A Break, Enjoy The Game Singapore Stock Market Dividend Stocks World Cup 2018 STI Target WILMAR INTERNATIONAL LIMITED SGX: F34 THAI BEVERAGE PUBLIC CO LTD SGX: Y92 GENTING SINGAPORE PLC SGX: G13 DAIRY FARM INT'L HOLDINGS LTD SGX: D01

Singapore Monthly Strategy - Take A Break, Enjoy The Game

  • More rate hikes and strengthening USD ahead.
  • STI year-end target raised to 3850 but expect a breather in the next two months, support at 3500.
  • Transiting to mid- to late-cycle plays.
  • S-REITs could continue to underperform if FED signals June hike.
  • Companies in net cash can better weather rising rate environment.

May 2018 Market Outlook

Ex-banks, mid-late cycle outperforming early cycle plays in April 2018

  • STI +192pts (+5.6%) m-o-m as US-China trade war worries subsided and earnings optimism returned. 
  • Bank stocks (c.40% of STI weightage) DBS, UOB and OCBC led gains on NIM, loan growth and earnings optimism. 
  • Mid-late cycle recovery plays O&G (Keppel Corp), consumer services (Genting, ComfortDelgro, SPH), consumer goods (Thai Bev) performed well, gaining 2.5-4% m-o-m. 
  • Muted performance by property sector (City Dev) despite positive news flow on physical residential market. 
  • Technology stocks (Venture Corp, Hi-P, Sunningdale) underperformed on earnings, valuation and trade war concerns. 

MSCI Singapore a top performer YTD 

  • MSCI Singapore Index +7.2% YTD. 
  • Outperforms MSCI World, MSCI Asia Ex-Jap, MSCI Emerging Markets and MSCI South-East Asia Indices. 
  • Seen as a ‘safe haven’ with its strong current account balance and stable currency in a rising interest rate environment. 
  • Bank stocks the key driver behind Singapore market’s strength. 

Key Events in May 2018

FED to hold rates steady

  • Consensus sees 2-3 more hikes this year. 
  • We expect more – 3 more hikes this year ( total 4 ) and another 4 hikes next year. 
  • Oil market eyes Trump’s decision on Iranian sanctions relief – Positive for oil price if sanctions are renewed. 
  • Other factors affecting oil price are US oil production that's been rising (negative for oil) and OPEC production cut (positive for oil). 

FED could halt bull’s party 

  • DBS economic view - FED to keep rates unchanged this week but provide guidance for a June hike .
  • USD strength driven by rising US bond yield, inflation and interest rate outlook. 
  • Technical view - USD Index to recover to 91.9, pullback support 90, followed by further recovery to 94.2 in coming month(s). 
  • Ceteris paribus, a strengthening USD can be negative for EM economies that are net commodity importers. 

STI year-end objective raised to 3850 

  • Strong earnings upward revision boosted almost solely by banks. 
  • Good banks’ 1Q results priced-in, STI trades above average (fair) 12-mth fwd PE. 
  • Year-end objective raised to 3850 (previous 3715) pegged to 13.89x (+0.25SD) FY19F PE. 

Short-term, Zabivaka says “Take a break!” 

  • World Cup and stocks do not mix well – STI fell by an average of 8.6% in the two months between end-April and end-June during the past six World Cup tournaments. 
  • Trading activity tends to dwindle starting May, and extends to June during World Cup month – In 2014, trading value at SGX fell 29% in the two weeks after World Cup started. 
  • Healthy consolidation - Best market re-entry time is at the beginning of July if history repeats. 
  • STI near-term resistance at 3650, pullback support at 3500. 


Transiting to mid- to late-cycle plays

  • As Singapore’s recovery progresses deeper into its second year, we continue to favour mid- to late-cycle plays such as capital goods, basic materials, commodity-related, consumer services and consumer goods stocks. Mid- to late-cycle plays outperformed early-cycle winners such as technology and real estate last month.
  • Our picks are Wilmar and Thai Bev for consumer goods; Genting, Dairy Farm and SIA for consumer services; Keppel Corp, SembCorp Industries and SempCorp Marine for O&G.

S-REITs could continue to underperform if FED signals June hike

  • S-REITs have underperformed other sectors YTD and can continue to do so if our economist’s view for a further three rate hikes this year comes true and the FED signals for a June hike.
  • Technically, long bond yields can rise a further 30bps if the FED turns hawkish with the US 10-year yield heading to 3.3% (currently 2.96%) and the MAS 10-year yield heading for 2.84% (currently 2.54%).
  • The shaded area in the table below shows S-REITs with FY18F and FY19F DPU growth of less than 1%. Among these, Keppel REIT, Suntec REIT and CapitaLand Commercial Trust offer less than 5.5% yield.

Companies in net cash can better weather rising interest rate environment

  • Ceteris paribus, companies in a net cash position can better weather a rising borrowing cost environment. We look through our stock coverage list that satisfies all the following criteria –
    • zero debt or net cash,
    • BUY recommendation,
    • market cap > S$1bn, and
    • at least 10% upside to target price.
  • Besides lenders UOB, OCBC and Hong Leong Finance, other stocks that fit the bill are Genting Singapore, Yangzijiang, Sheng Siong, SIA Engineering and SingPost.

Kee Yan YEO CMT DBS Vickers | Janice CHUA DBS Vickers | https://www.dbsvickers.com/ 2018-05-03
SGX Stock Analyst Report BUY Maintain BUY 3.650 Same 3.650
BUY Maintain BUY 1.020 Same 1.020
BUY Maintain BUY 1.490 Same 1.490
BUY Maintain BUY 9.770 Same 9.770