Monthly Strategy (November 2018) - DBS Research 2018-11-02: Emerging From Red October

Singapore Market Strategy - DBS Group Research | SGinvestors.io SINGTEL (SGX:Z74) SINGAPORE TECH ENGINEERING LTD (SGX:S63) SHENG SIONG GROUP LTD (SGX:OV8) KOUFU GROUP LIMITED (SGX:VL6) NETLINK NBN TRUST (SGX:CJLU)

Monthly Strategy (November 2018) - Emerging From Red October




November Market Outlook


Telco and SREITs outperform on risk-off mode

  • Singapore market fell 239pts (-7.3%) in Oct, weighed down by trade war worries, rising interest rates and correction in the US stock market.
    • Telecom stocks outperformed, supported by the pre-conditional voluntary offer of Starhub (SGX:CC3)’s cost cutting measures and anticipation that SingTel (SGX:Z74)’s earnings have seen the worst.
    • SREITs outperformed as investors seek safety of yields in an uncertain cyclical growth environment.
    • Property stocks underperformed after the government announced more measures.
    • O&G stocks underperformed on weak earnings and a correction in oil price.

Key Events in November 2018

  • US-China trade war likely to return to focus after the 6 Nov US mid-term elections as the Democratic party is unlikely to win enough seats to secure a two-thirds supermajority needed to halt an escalation of trade tariffs.
  • FED is expected to keep rates on hold at 2.25% on 8 Nov; the next hike expected in December.
  • Mike Pence will represent the US at the 6th US-ASEAN summit where he is expected to unveil new measures and programs for the Indo-Pacific region.
    • ASEAN benefits from trade diversion due to the US-China trade war.
    • Potential beneficiary is Venture Corp as bulk of its manufacturing facilities are in Malaysia.
  • Donald-Xi meeting at the G20 summit will be the first since the mid-term election.
    • Significance: US may announce further tariffs to include all Chinese imports (additional US$257billion) if nothing constructive materialises from the meeting.

SGD weakness likely to continue into 2019

  • Our currency strategist sees continued USD strength in the months ahead as the FED continues to normalise monetary stance.
  • FED funds rate seen rising at a rate of 25 basis points per quarter till end-2019.
  • USD-SGD to rise to 1.40 by year-end and 1.44 by mid-2019 before easing off to 1.42 by end 2019.
  • Continued weakness in the SGD is a potential headwind for Singapore equity market.


Year-end target lowered to 3200 from 3550

  • Lowered 2018 year-end target to 3200 (previous: 3550) pegged to 12x (-1SD) FY19F PE amid uncertainties over impact of the US-China trade war and rising interest rates environment.
  • Bear-case scenario assuming US imposes 25% tariffs on all Chinese imports is 2800 pegged to 10.49x (-2SD) FY19F PE ⇒ bank stocks a possible drag
  • Near-term, valuations have sunk to an attractive level ⇒ At week’s low of 2955, the Singapore market trades below 11.25x (-1.5SD) 12-month forward PE
  • Positive divergence observed on the McClellan Oscillator, a measure of short-term market breadth ⇒ Hints of an impending near-term low.
  • November bounce is possible after the October slaughter, capped at 3130.


Strategy


Defensive names remain in favour amid cautious undertone. 

  • We expect defensive stocks to continue their relative outperformance in the current slowing growth and rising interest rates environment. Growth uncertainties are likely to continue with the ongoing US-China trade war. Meanwhile, the FED is expected to hike the FED funds rate by 25bps before year end to 2.25% with more to come next year.
  • Telco stocks (SingTel (SGX:Z74) and Starhub (SGX:CC3)) and utilities (e.g. Netlink Trust (SGX:CJLU)) have outperformed the broad market thus far since July-18, a sign that investors’ focus had turned to the ‘early contraction’ cycle outperformers.
  • Consumer staples such as Sheng Siong (SGX:OV8) and Koufu (SGX:VL6) as well as defensive name ST Engineering (SGX:S63) should also remain in favour.

Five large cap stocks that have fallen close to/at a 5-year valuation trough.

  • Stock prices have generally fallen across the board with the market downturn in recent months. We look at large cap stocks that have fallen to -2SD of their valuation peg (PB, PE or EV/EBITDA) over a 5-year period. The significance of this is that in the near-term, price action for these stocks tends to be more resilient to negative news as concerns are ‘priced in’ and are candidates for a trade should the stock market rebound from its current oversold level. 
  • Beyond the short term though, the risk is that any change to parameters of the valuation peg will alter the trough valuation level (e.g. P/E will rise at an unchanged stock price as earnings fall).
  • Thai Beverage (SGX:Y92), Genting Singapore (SGX:G13), Starhub (SGX:CC3), UOL (SGX:U14) and City Developments (SGX:C09) are five stocks that appear on our radar.






Kee Yan YEO CMT DBS Group Research | https://www.dbsvickers.com/ 2018-11-02
SGX Stock Analyst Report BUY MAINTAIN BUY 3.640 SAME 3.640
BUY MAINTAIN BUY 4.300 SAME 4.300
BUY MAINTAIN BUY 1.240 SAME 1.240
BUY MAINTAIN BUY 0.840 SAME 0.840
BUY MAINTAIN BUY 0.870 SAME 0.870



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