Singapore Monthly (January 2019) - DBS Research 2019-01-09: Handshake Or Cold Stare?

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SINGAPORE TECH ENGINEERING LTD (SGX:S63) YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) COMFORTDELGRO CORPORATION LTD (SGX:C52) NETLINK NBN TRUST (SGX:CJLU) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Monthly (January 2019) - Handshake Or Cold Stare?

• STI range-bound at 2960-3190 pending outcome of US-China trade talks.
• Adding a Bull-case scenario of STI at 3500.
• Transiting to mid-contraction phase - Sembcorp Industries, NetLink NBN Trust.
• S-REITs still in favour as FED turns dovish - CapitaLand Mall Trust, Mapletree Commercial Trust, Mapletree Logistics Trust, Frasers Logistics & Industrial Trust and Mapletree North Asia Commercial Trust.
• Sticking to defensives - ST Engineering, Yangzijiang Shipbuilding, ComfortDelGro, CapitaLand Mall Trust, Mapletree Logistics Trust, NetLink NBN Trust, UOB.

Downbeat December concludes a year to forget

FTSE ST Indices

• The Straits Times Index (STI) ended December 2018 down 2.1% on the heels of a larger tumble in US equity market indices and oil price. The STI fell 10% y-o-y, down 16% from its YTD high. (See also: Performance of Straits Times Index Constituents in December 2018)
• REITs performed the best as US 10-year bond yield fell 22bps to 2.77%.
• O&G stocks underperformed amid a near 10% decline in Brent crude to US$53pbl.
• Average value of shares on the SGX in 2018 stood at S$1.173bn/day, +2.2% y-o-y.

Asia markets outperformed as US stocks slumped

• Asian stocks took the near-10% December decline in the S&P500 Index in their stride -> Asian stocks had fallen earlier and trading at a lower valuation.
• Asia stock markets outperformed Developed markets since November 2018. Within Asia, Southeast Asia stock markets have outperformed since July.
• US markets trade at 15x (average), Asia Ex-Japan at 11.6x (between -0.5SD and -1SD) and STI at 11.7x (between -1.5SD to -1SD) 12-month forward PE.
• Relative outperformance can continue as the FED turns dovish and the USD weakens.

US-China trade talks in focus this month

• Week of 7 Jan: US delegation to hold mid-level talks in Beijing on 7 Jan in Beijing week to discuss trade (source: SCMP)
• 22-25 Jan: Trump may hold high-level trade talks with Chinese Vice President at the World Economic Forum in Davos from 22-25 January (source: SCMP) -> Developments closely watched as 90-day truce ends on 1 March. We think US equity market’s sharp post-Christmas rebound may not sustain as the outcome of trade truce remains uncertain.
• 29-30 Jan: FED is likely to hold rates steady, dot plot points to 2 hikes this year.

Rangebound pending outcome of 90-day truce

• Straits Times Index started 2019 at 3068 or 11.7x (between - 1.5 to -1SD) 12-month forward PE.
• Conditions currently tilt towards our base-case scenario:
  1. Truce to trade war: 90-day truce ends 1 March.
  2. FED stops at two hikes: Latest dot plot points to two hikes this year (previously three) this year.
  3. Asian currencies stabilise: Bloomberg JPM Asia Dollar Index (ADXY) recovered moderately from 103.2 to 105.2.
• January could see range bound trade between 2960 and 3190.

Transiting to mid-contraction phase

• Signs that say the economy is about to transit from early to mid-contraction phase:
  1. Early contraction phase started in 2H18 when the STI began its downtrend.
  2. Consumer staples (e.g. DAIRY FARM INT'L HOLDINGS LTD (SGX:D01), SHENG SIONG GROUP LTD (SGX:OV8)) outperformed and telco (e.g. STARHUB LTD (SGX:CC3), SINGTEL (SGX:Z74)) outperformed since 3Q18.
  3. Commodity prices tend to fall sharply – CRB Index tumbled 15.4% in 4Q18.
• Utility sector tends to outperform during mid contraction phase (e.g. SEMBCORP INDUSTRIES LTD (SGX:U96), NETLINK NBN TRUST (SGX:CJLU)).

Adding a Bull-case scenario to the Base and the Bear

• Our base and bear scenarios for the Singapore market this year remain valid with the former being the preferred outcome (refer to report titled ‘2019 Outlook and Strategy: Pitch on Value’ dated 26 November 2018). The following developments in recent weeks have led us to consider a third Bull-case scenario – Low seen at 2850, recovery to 3500 in addition to the prior two:
  1. The FED has turned much more dovish – The FED dialled back its 2019 rate hike projection to just two (previous 3-4 hikes) at the December 2018 FOMC meeting. Last Friday, Jeremy Powell raised the odds that rate hikes might pause this year, saying that the FED is not on a pre-set path to raise rates and the committee will be patient to watch how the US economy evolves
  2. DBS Research lowers rate hike forecast – Our chief economist also recently lowered his rate hike projections to two from four previously, citing the FED’s change of stance.
  3. Developments in US-China trade talks – At the G20 summit on 1 December 2018, a 90-day truce was announced. US tariffs on China imports have paused at 10% (previous intention was 25%) on US$200bn of Chinese imports and a further 25% on US$50bn worth of imports pending the outcome of trade talks during this 90-day period. Mid-and high-level talks are expected this month.

Strategy

S-REITs remain in favour as FED turns dovish

• S-REITs was the second best performing sector (after healthcare sector) in 2H18 and should continue to garner investors’ interest as bond yields are still pressured by the FED turning more dovish. The FED’s latest dot plot points to two (previously three) rate hikes this year that lifts the FED funds rate to 3%. FED Chairman Powell even hinted of a pause in rate hikes following his latest comments that with muted inflation readings, the FED will be patient and watch how the economy evolves.
• This more dovish stance has also taken its toll on long bond yields with the US 10-year yield retreating 64bps to 2.59% and the MAS 10-year yield down by 59bps to 2.05% in recent months. This has lifted S-REIT’s yield spread to 4.2% that is above the 10-year average of 3.8%.
• Giving the uncertain macro growth environment, our REITs analyst prefers the more resilient retail and industrial (warehouse and business parks) sub-segments given their domestic focus and relatively stickier demand respectively. Our picks are CAPITALAND MALL TRUST (SGX:C38U), MAPLETREE COMMERCIAL TRUST (SGX:N2IU), MAPLETREE LOGISTICS TRUST (SGX:M44U), FRASERS LOGISTICS & IND TRUST (SGX:BUOU) and MAPLETREE NORTH ASIA COMM TR (SGX:RW0U).

Stock market transition from early to mid-contraction outperformers positive for utilities

• If our view that the current early-contraction phase of the economic cycle should come to an end in 1Q and the mid-contraction phase is next, then utility stocks could start to outperform soon. There are not many utility stocks listed but SEMBCORP INDUSTRIES LTD (SGX:U96) and NETLINK NBN TRUST (SGX:CJLU) are two large caps that come to mind.

Sticking to defensives

• We continue to adopt a more guarded stance to our stock preferences even though there is tentative sign of some light at the end of the tunnel for US-China trade relations and interest rates may rise at a slower pace. More companies could sound the caution bell at the upcoming the FY results season and the earnings recession trend could continue for at least two more quarters.
• Thus, we continue to prefer stocks with earnings visibility as well as yield plays with growth. Our picks are SINGAPORE TECH ENGINEERING LTD (SGX:S63) and YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) for the former and COMFORTDELGRO CORPORATION LTD (SGX:C52), CAPITALAND MALL TRUST (SGX:C38U), MAPLETREE LOGISTICS TRUST (SGX:M44U), NETLINK NBN TRUST (SGX:CJLU) and UNITED OVERSEAS BANK LTD (SGX:U11) for the latter.

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2019-01-09

SGX Stock Analyst Report BUY MAINTAIN BUY 4.150 SAME 4.150

BUY MAINTAIN BUY 1.820 SAME 1.820

BUY MAINTAIN BUY 2.560 SAME 2.560

BUY MAINTAIN BUY 0.870 SAME 0.870

BUY MAINTAIN BUY 29.500 SAME 29.500