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

DBS Group Research Monthly Stock Strategy (Singapore) | SGinvestors.io FIRST RESOURCES LIMITED SGX:EB5 WILMAR INTERNATIONAL LIMITED SGX:F34 SINGAPORE AIRLINES LTD SGX:C6L VENTURE CORPORATION LIMITED SGX:V03

Monthly Strategy -  October Armistice 

  • Expect STI to recover towards 3300, support 3180.


Outlook


Unnerved by trade war escalation

  • 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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MAS likely to maintain gradual appreciation stance 

  • 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. 


3 Reasons Why We think October Will Be Positive


First reason: Seasonality

  • 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).

Second reason: Focus turns to US mid-term election from trade war worries 

  • 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 .



Third reason: Reasonable valuation

  • 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
SGX Stock Analyst Report BUY Maintain BUY 2.000 Same 2.000
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BUY Maintain BUY 22.900 Same 22.900



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