Singapore Strategy - UOB Kay Hian 2019-04-01: Yield Plays Are In Play

Singapore Strategy - UOB Kay Hian Research | SGinvestors.io PROPNEX LIMITED (SGX:OYY) HO BEE LAND LIMITED (SGX:H13) SATS LTD. (SGX:S58) NETLINK NBN TRUST (SGX:CJLU) COMFORTDELGRO CORPORATION LTD (SGX:C52)

Singapore Strategy - Yield Plays Are In Play




WHAT’S NEW


An earlier end to quantitative tightening (QT).

  • After much internal discussion, the FED has decided to maintain a larger balance sheet relative to pre-crisis period. A survey indicates that banks have increased their demand for reserves due to stricter regulations, eg higher liquidity buffers to comply with liquidity coverage ratio (LCR) under Basel III.
  • Relatively speaking, FED balance sheet remains small as percentage of GDP compared to that of other central banks, such as the European Central Bank (ECB) and Bank of Japan (BOJ).

Changing the structure of FED’s balance sheet.

  • The FED has announced the revision and replacement of its balance sheet normalisation principles. It will cease downsizing its balance sheet starting Oct 19. It will focus on holding treasury securities, while its holdings of mortgage-backed securities would gradually run-off to zero.
  • The cap on monthly redemption of treasury securities would be reduced from US$30b to US$15b starting May 19. The FED will cease to reduce the size of its aggregate securities holdings by the end of Sep 19.
  • Starting Oct 19, principal repayments received from mortgage-backed securities would be reinvested in treasury securities, subject to a maximum of US$20b/month.

No US rate hikes in 2019.

  • The FOMC observed that the labour market remains strong but recent indicators point to slower growth in household spending and fixed business investments in 1Q19. The committee maintained the target range for the Fed funds rate at 2.25-2.50%.
  • Based on economic projections provided by FOMC participants in Mar 19, the median projection for Fed funds rate was at 2.4% for end-19 (revision: down 0.5ppt) and 2.6% for end-20 (revision: down 0.5ppt), implying no rate hikes in 2019 and one rate hike in 2020.

Easier monetary policy at ECB as well.

  • ECB policymakers unanimously acknowledged that growth momentum has weakened. The ECB has launched a new series of targeted long-term refinancing operations (TLTRO III) starting Sep 19 and ending Mar 21 with maturity of two years. Under TLTRO-III, banks could borrow up to 30% of the stock of eligible loans as of 28 Feb 19.


ACTION


Yield plays are in play.

  • We expect the dovish disposition at both the Fed and the ECB to rekindle interest to invest in yield plays. The abundance of liquidity make the recurrent dividends offered by yield plays more attractive.

Yield plays are more defensive.

  • Dividends usually held up well during market corrections. Fluctuation in dividends is usually mild compared to volatility of share prices. The ability to pay recurrent dividends is also a testimony to the strength of a company’s business franchise. Thus, yield plays are ideal to ride market volatilities.

Yield spread has widened for S-REITs.

  • Yield for 10-year Singapore government bonds has declined by 21bp to 2.05% in Mar 19. Thus, yield spread has slightly widened 4bp to 3.47% despite the recent rally in S-REITs share prices.

Dividends galore.



ASSUMPTION CHANGES

  • We maintain existing earnings forecasts.


RISKS

  • Key risks include:
    1. threat of hard Brexit,
    2. uncertainty over outcome of US-China trade negotiations, and
    3. slowdown in Europe and China.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-04-01
SGX Stock Analyst Report BUY MAINTAIN BUY 0.660 SAME 0.660
BUY MAINTAIN BUY 2.790 SAME 2.790
BUY MAINTAIN BUY 5.600 SAME 5.600
BUY MAINTAIN BUY 0.920 SAME 0.920
BUY MAINTAIN BUY 2.770 SAME 2.770



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