Market Outlook & Strategy - RHB Invest 2019-12-19: Expecting A Better 2020

2020 Market Outlook & Strategy - RHB Invest | SGinvestors.io

APAC REALTY LIMITED (SGX:CLN) OXLEY HOLDINGS LIMITED (SGX:5UX) CHINA AVIATION OIL(S) CORP LTD (SGX:G92) HRNETGROUP LIMITED (SGX:CHZ) TALKMED GROUP LIMITED (SGX:5G3)

Market Outlook & Strategy - Expecting A Better 2020

Moderate recovery in economic growth.

We conservatively estimate Singapore’s real GDP growth at 0.8% for 2020 vs. 0.5% in 2019, aided by an increase in domestic investment activity and a bottoming out of the manufacturing sector. Some resolution to trade disputes between the US and China, plus improvements in the global tech cycle, could support a stronger recovery in economic growth.
The Ministry of Trade & Industry has a more optimistic 2020 GDP growth forecast range: 0.5-2.5%.

Position for earnings recovery

At the time of writing this report, the market is expecting the STI’s 2020 net income to grow 5% (calendar year-end and in SGD terms). This earnings growth expectation is similar for the MSCI Singapore Index as well. The 2020 net income growth for Singapore stocks under RHB’s coverage stands at 5.2%.
We and the market are expecting a broad-based earnings recovery, as all sectors are expected to report y-o-y earnings growth. For our coverage universe, strong earnings contributions are expected to come from the capital goods, commodities, and property sectors. While there are still multiple macroeconomic uncertainties, we believe these sectors could deliver meaningful upside as the growth cycle improves and a better-than-expected economic growth gets delivered.
We have an OVERWEIGHT rating on the capital goods sector. See report: Capital Goods Sector 2020 Outlook - Strong Recovery In Earnings Growth. We expect strong earnings growth contributions from KEPPEL CORPORATION, SEMBCORP INDUSTRIES, and ST ENGINEERING, where each company is expected to deliver double-digit earnings growth in 2020. We also expect SEMBCORP MARINE to swing to a profit in 2020 from losses previously. Given the diversified nature of its earnings base, we prefer exposure to KEPPEL CORPORATION over SEMBCORP MARINE.
We have an OVERWEIGHT rating on the commodities sector, as we expect a favourable demand supply situation to keep CPO prices elevated in 2020. See report: Plantation Sector 2020 Outlook - Singapore Planters Still Inexpensive. We have a CPO price assumption of MYR2,400 per tonne for 2020, and expect the commodity to trade between MYR2,200 and MYR2,800 per tonne during the year. Commodity companies are expected to deliver significant earnings growth, aided largely by the improvement in CPO prices. FIRST RESOURCES is the best proxy for rising CPO prices. WILMAR INTERNATIONAL, which should also benefit from rising CPO prices, should see a further re-rating once its China subsidiary, Yihai Kerry, is listed on the Shenzhen Stock Exchange in 1H20.
While we have a NEUTRAL rating on the property sector, we expect property sales volumes to remain resilient, and estimate a 0-3% rise in prices. See report: Real Estate - 2020 A Year Of Two Halves. We prefer property players with well-diversified exposure and strong recurring income growth. CAPITALAND is our preferred pick, as we expect its growing recurring income base from its fund management and lodging sectors, as well as an asset-recycling strategy, to drive future ROE improvements. We estimate the company to deliver 18% y-o-y earnings growth in 2020, which is conservative when compared to the market – the Street is expecting CAPITALAND to deliver 34% y-o-y earnings growth in 2020.
Cyclical BUY stocks (ex-REITs) in our coverage universe
Non-cyclical BUY-rated stocks (ex-REITs) in our coverage universe

Stay invested in yields to protect from macro uncertainties

We believe there are sufficient macroeconomic headwinds that could derail the expected economic recovery in 2020. Therefore, we recommend investors to balance their portfolios by holding REITs and sustainable yield stocks with growth potential that are trading at reasonable valuations.

Trade-related risk persists.

While investors are expecting some easing in the US-China trade dispute from the anticipated Phase One agreement, recent history and President Donald Trump’s mercurial character imply that markets may be less than willing to view it positively until the agreement is finalised. Moreover, there is still scope for a further deterioration in the US-China trade relationship, which could turn business sentiment more bearish and further delay the investment cycle.
Beyond the fractured US-China trade ties, there are other related disputes in various jurisdictions that could have a cumulative effect of further slowing down global trade flows.

US politics.

The commencement of impeachment proceedings against President Trump by the US Congress adds another layer of political uncertainty, which may ultimately have implications on whether or not there is a resolution to the US-China trade dispute.

Global economic cycle is at a mature stage.

We are now in the 11th year of uninterrupted global economic growth. As the late-stage economic cycle becomes extended, the possibility for the next recession becomes greater. With debt at record levels, the scope for a renewed synchronised global fiscal stimulus is limited, while room for monetary policy easing is also lessening due to recent rounds of easing. Policymakers in many major global jurisdictions have limited policy ammunition, should global growth take a turn for the worse.

Accommodative monetary policy in the US.

With the US Federal Reserve having delivered a third rate cut as part of its “mid-cycle adjustment”, US monetary policy is already seen as being at accommodative levels and sufficient to support the American economy against trade-related risks and slowing global growth. We expect the direction and magnitude of rate changes to be data-dependent.

Hard landing for China’s economy.

A steeper-than-expected slowdown of the Chinese economy could be precipitated by additional tariffs imposed by the US, and a sharper-than-anticipated tightening of financial conditions due to domestic deleveraging efforts. This could, in turn, lead to a sharp fall in Chinese import demand and negatively affect the region’s growth.

We expect the REIT sector to remain in favour in 1H20

We expect the REIT sector to remain in favour in 1H20, aided by persistent low interest rates and a favourable demand-supply outlook. However, we recommend investors to be more selective and prefer the laggards – mainly in the SMID-cap space – with stock-specific catalysts. See report: REITs - Expecting Moderation After An Eventful Year. Additional factors that may provide tailwinds to REITS are an increase in the debt ceiling limit and interest cost savings. Our preference is for industrial, hospitality, office, and US office REITs.
Amongst the industrial REITs, we prefer exposure to ESR-REIT and SUNTEC REIT (our preferred office sector pick). For US office REITs, MANULIFE US REIT remains our preferred exposure. We believe hospitality REITs will see positive revenue per available room (RevPAR) growth in 2020, aided by a strong line-up of events, steady tourism inflows, and favourable industry demand-supply dynamics. CDL HOSPITALITY TRUSTS should gain from this favourable industry outlook.
BUY-rated REITs in our coverage universe

Beyond the REITs sector

Beyond the REITs sector, we look at BUY-rated stocks under our coverage that offer yields that are higher than the STI – ie more than 4.2%. To ensure that these high yields are sustainable, we screened for stocks that offer earnings growth and have a relatively strong balance sheet – ie firms that have low gearing ratios or preferably have a net cash balance sheet.
Amongst the large-cap companies, UOB remains our preferred defensive yield play. Although the market is not expecting any earnings growth, the counter’s below-historical average P/BV and lower exposure to Greater China – vis-à-vis other Singapore-listed banks – should offer investors some comfort. In the SMID-cap space, we favour exposure to AVI-TECH ELECTRONICS, CSE GLOBAL and FU YU.
BUY-rated non-REIT stocks in our coverage universe with +4% yield

STI Market Outlook & Valuations

The STI outperformed other ASEAN markets in local currency terms. Thailand, Indonesia, and the Philippines delivered 0-4% returns vs. the STI’s 5% during the same period, while Malaysia delivered a negative return of 7%. YTD, in USD terms, the STI has underperformed the Thailand and Philippines markets within ASEAN.
Singapore’s stock index returns are closely correlated with the country’s nominal and real GDP growth. With the expectation of an uplift in economic growth in 2020, we believe the STI could generate strong positive returns.
We use a top-down method to derive our STI target, based on a P/E on 2020F EPS. The index’s 12.6x 1-year forward P/E sits marginally above its -1SD band, but below its historical average of 13.3x. With expectations of a rebound in GDP growth, we believe there is potential for the P/E to increase.
We value the STI based on an average forward P/E of 13.5x. Applying this to our 2020 EPS estimate, we derive an STI Index target of 3,460 pts for end-2020 (+7.6% from 13 Dec’s closing price). Including a 4.2% yield for the market, this implies a total shareholder return of 11.8% in 2020F.
The STI is currently trading at a forward yield of 4.2%. This is the highest among all Asian markets, exceeding Australia and Taiwan’s 4.1% yields. We believe such a relatively high yield should provide downside support in case there is a delay in economic growth recovery.

See attached PDF report for complete analysis.

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RHB's Top Picks For 2020 and Sector Outlook Summary.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-12-19

SGX Stock Analyst Report BUY MAINTAIN BUY 0.600 SAME 0.600

BUY MAINTAIN BUY 0.430 SAME 0.430

BUY MAINTAIN BUY 1.550 SAME 1.550

BUY MAINTAIN BUY 0.810 SAME 0.810

BUY MAINTAIN BUY 0.620 SAME 0.620

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