Singapore Stock Strategy - UOB Kay Hian 2020-06-16: Taking Stock Near The Half-Year Mark

Singapore Stock Strategy - UOB Kay Hian Research | DBS GROUP HOLDINGS LTD (SGX:D05)

Singapore Stock Strategy - Taking Stock Near The Half-Year Mark

  • Despite its recent correction, the STI is not expected to plumb new depths in the near term. Phase 2 re-opening of the Singapore economy announced yesterday may improve market sentiment, while fiscal and monetary policies enacted on a global scale should benefit equities.
  • Our key themes for a post-COVID-19 recovery remain F&B and consumer spending, retail in suburban Singapore, healthcare, China-sourced earnings, and companies with solid financials.
  • We also highlight stocks with sustainable dividends and robust ROEs.

The rally has fizzled but the STI is unlikely to test new lows, in our view.

  • Renewed fears of a second wave of COVID-19 infections have caused markets to take a breather in the past few trading days. However, poor economic and fundamental data has not stopped global equities rallying more than 25% since reaching the lows in late-Mar 20, retracing nearly 50% of the drawdown from their ytd peaks in late-February to the trough.
  • In our view, Singapore entering a recession is a known factor and thus will be discounted by markets, which will instead look towards 2021 with our base case being a drawn-out ‘U’-shaped recovery, helped by yesterday’s announcement of the Phase 2 re-opening of the Singapore economy on 19 Jun 20.
  • Despite the recent dip, we do not believe the STI will test new lows in the near term.
  • See FTSE ST Indices & STI Constituents, STI Constituents Share Price Performance.

Liquidity is key.

  • In response to the COVID-19 pandemic, an unprecedented US$16t of liquidity – about 20% of world GDP – was released into the financial system. This comprised US$8.7t of fiscal stimuli and US$7.9t of central bank-balance sheet expansion.
  • In the past, the initial stock market rally was the result of easing monetary policy, which eliminated losses from black swan events, boosting asset values and allowing earnings to come through later.
  • In the current market, both monetary and fiscal policies have been put to work to aid government-mandated shutdowns; the Singapore government has undertaken one of the more aggressive fiscal policies globally, putting in nearly S$100b, or 20% of GDP, to work.

STI – Second-worst performer in the region.

  • While the STI’s 31% decline to its trough on 23 Mar 20 was not as precipitous as that of the SET or JCI, it has also not rallied as hard since. From its trough to current levels as well as on a ytd basis, the STI is the second worst performing index among peers and remains inexpensive on a valuation basis. The STI is currently trading at 2021F PE and P/B of 12.2x and 0.8x respectively with a yield of 4.8%.

Ytd, only 5 stocks showed positive absolute share price performance.

Key themes/sectors for a post-COVID-19 recovery

Recent high frequency indicators present bullish signals.

  • China’s supply side was mostly back to capacity in April, especially in the industrial and construction sectors, but notable progress has now been made in services and consumption as well. Over 90% of the country’s consumer services (restaurants, hotels etc) are back in business, with total retail sales rising 13.4% m-o-m (-2.8% y-o-y) in May 20 while e-commerce sales rose nearly 14.7% y-o-y.
  • Taiwan export orders, a leading indicator of global activity, grew 2.3% y-o-y in April, easily beating expectations of a decline for the second month in a row.

Base-case scenario.

  • Our base-case scenario envisages Singapore bumping along until at least end-3Q20 and resumption of growth by 4Q20. With infection rates largely plateauing, and drastically dropping in the case of a few countries, economies could gradually re-open in the next few months and lead to some measure of growth starting 4Q20.
  • While a white swan event could occur with the discovery of a vaccine, the ability of companies or governments to produce and distribute such a vaccine on a massive scale (not to mention pay for it) may lead to delays.
  • Nevertheless, the Singapore government’s announcement that the economy will enter into Phase 2 re-opening starting 19 Jun 20 underpins our base-case scenario.
  • Risks to our base-case scenario include reinfection of the population post re-opening of the economy, longer-than-expected situations such as controlling the infection in foreign workers' facilities, and development and distribution of a vaccine.

Share prices in a "risk free" environment

  • With subdued near-term inflation and aggressive monetary policies globally, interest rates will likely remain very low for an extended period. This may drive market multiples higher despite deteriorating earnings estimates. We continue to believe that equities will benefit relative to cash or bonds.
  • Since the market trough, we have seen material share price performance with the large caps and REIT stocks under our coverage returning an aggregate 24.2% vs the 18.4% return for the STI (over the 23 Mar 20 to 15 Jun 20 period). Despite the recent market weakness, we do not believe the STI will head below 2,500 in the next few months as incrementally better news regarding reopening of economies should help bolster share prices, in our view.
  • See FTSE ST Indices & STI Constituents, STI Constituents Price Targets.

Dividend yield should provide some support.

  • An important difference in this downturn is that prospects for some dividend-paying stocks have changed dramatically. While we were able to rely on certain dividend stocks to provide a cushion against rapidly falling equity prices in prior bear markets, the current downcycle has seen previously reliable dividend-paying companies suspending or cutting those payments in a bid to preserve capital.
  • However, rather than avoiding income stocks altogether, we believe investors should instead consider the fundamental strengths and weaknesses of each company with an eye towards dividend sustainability going forward.

Forecasting a drop in 2020 dividends…

  • In aggregate, the companies we cover paid nearly S$20b in dividends in 2019, a 2.6% y-o-y increase, but below the 10-year (2009-19) CAGR of 4.8%. For 2020, however, we forecast an 18.2% y-o-y decline in dividends across all sectors (vs 19.8% EPS decline), with the major impact coming from the aviation, land transport, shipyard and telco sectors.

…but REITs and financials remain robust.

  • Based on our current forecasts, the REIT sector remains relatively robust as we expect only a 0.6% y-o-y decline in distributions to unitholders in 2020, while DBS (SGX:D05) and OCBC (SGX:O39) will in aggregate deliver about 6% y-o-y growth in dividends, albeit potentially via partial scrip dividends instead of all-cash dividends.

Yield vs ROE.

See also UOBKH's latest Singapore Stock Alpha Picks.

Adrian LOH UOB Kay Hian Research | 2020-06-16
SGX Stock Analyst Report BUY MAINTAIN BUY 22.300 SAME 22.300