October Armistice - DBS Research 2018-09-24: 3 Reasons Why We think October Will Be Positive

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Monthly Strategy - October Armistice

At the lowest point, STI fell 3.4% m-o-m as the US-China trade war escalated with 10% tariffs imposed on US$200bn of Chinese imports.
Asian currencies traded near but held up at recent YTD lows.
Telecom (SingTel), industrials (Venture Corp) and property sectors (City Developments) underperformed while O&G (Sembcorp Marine, Sembcorp Industries) outperformed.

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Monetary policy likely kept on hold given stable inflation and growth slowdown in 2H18.
3Q GDP growth likely weakest before mild uptick in the next few quarters.
Forecast 3% GDP growth this year before easing to 2.7% in 2019.
FY inflation expected to average 0.7% in 2018, before returning to the historical average of 1.8% in 2019.

October has a high tendency to be positive if August and September are both down months ➜ Held true 5 out of 7 times (71% reliability) since year 2001 except for 2008 (GFC) and a flat October in year 2014
4Q has an equally high tendency to be positive q-o-q ➜ True 12 out of 17 times (71% reliability) since year 2001.
YTD, the first month of each quarter has been positive m-o-m (at least 75% reliability).

Trade war doomsayers cover short positions ahead of US mid-term elections – Manufacturing/ technology stocks (e.g. Hi-P, UMS, Venture Corp) worst hit by trade war worries to rebound.
Trade war worries may not resurface till after the 6 November US mid-term elections as the deadline for additional 15% tariffs on US$200bn of Chinese imports is 1 Jan 2019.
Incumbent President’s party tends to lose ground during midterm elections - In the past 21 mid-term elections, the President's party lost an average 30 seats in the lower House and an average 4 seats in the Senate (source: Wikipedia). If history repeats, the Democratic party will occupy 52% (from 45.6%) of congress while Republicans occupy 48% (from 54.4%) after mid-term elections.
Scenario whereby Congress ends the tariffs through a vote with a veto-proof majority looks unlikely ➜ trade war worries could return after the US mid-term election .

STI’s September low at 3100 coincided with 11.62x (-1.25SD) 12-month forward earnings.
Current valuation buffers possibility of earnings cut in the upcoming 3Q results season.
Expect STI to recover to 3230 (23.6% upward retracement) followed by 3300 (38.2% upward retracement), pullback support 3180.

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2018-09-24

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