Singapore Market Strategy - RHB Invest 2020-08-24: Stick With Defensives; Selective Cyclical Exposure


Singapore Market Strategy - Stick With Defensives; Selective Cyclical Exposure

  • We note that optimism of the economic recovery is rising amidst Singapore’s declining COVID-19 infections, revision in 2020 NODX forecast to growth from a decline, and rising expectation of strong profit growth in 2021. However, the global COVID-19 situation remains fluid, with a resurgence of cases in some countries.
  • Stay invested in defensive names with selective exposure to cyclical earnings recovery stories. We recommend investors to stick with REITs and defensive stocks, while selectively adding exposure to cyclical recovery names in consumer, property and transport sectors.

Some optimism seems to be building up.

  • The COVID-19 infection rate in Singapore continues to decline allowing the Government to relax more restrictions and support more businesses to return to normalcy. On the external front, the Government has raised 2020 non-oil domestic exports (NODX) forecasts to grow by 3-5% y-o-y, compared with an earlier forecast for a 1-4% y-o-y decline.
  • With Singapore’s worst GDP contraction now behind it, expectations of improvement in GDP over next 12 months should be positive for the equity market as historically STI Index returns have been closely correlated with Singapore’s GDP growth. Unless the expected gradual recovery in economic activity stalls, we believe that downgrades to 2020F EPS, which has been lowered by 39% YTD, should taper off from here.
  • We recommend investors to gradually build positions in CapitaLand (SGX:C31), City Developments (SGX:C09), ComfortDelGro (SGX:C52), Suntec REIT (SGX:T82U) and Thai Beverage (SGX:Y92) – our cyclical recovery picks.

Downside risks still persist.

  • We note that the global COVID-19 situation remains fluid with a resurgence of cases in some countries. On the domestic front, the government support that has helped businesses and Singaporeans get through the tough Circuit Breaker (CB) measures are expected to taper off. Moreover, current unemployment rate of 2.9%, already risen above the historical average, is expected to continue rising. This could keep the business and consumer confidence low and could dampen the expected recovery in economic activity.
  • In addition, there are external risks from the continued deterioration of relationship between the US and China. To cover for such risks, we recommend investors to stay invested in REITs and defensive stocks offering better earnings and dividend visibility. Ascendas REIT (SGX:A17U), Manulife US REIT (SGX:BTOU), Sheng Siong (SGX:OV8), SingTel (SGX:Z74) and ST Engineering (SGX:S63) are our key defensive picks for rest of 2020.

Some Signs Of Optimism

COVID-19 cases in Singapore are on a decline

  • Singapore has managed to reduce the daily COVID-19 infection rate with the implementation of CB measures, aggressive testing of foreign workers residing in dormitories and strong control on inflow of people from overseas.
  • While some economic activities have resumed through a gradual and measured relaxation of CB measures, if the COVID-19 infection rate remains low, then we can expect the Government to relax more restrictions and support more businesses to return to normalcy. This should be positive for improvement in overall economic activity.

Outlook for exports have turned more positive

  • Singapore's NODX has registered growth for most of the year. The Government recently raised Singapore’s 2020 NODX forecasts, now predicted to grow by 3-5% y-o-y, compared with an earlier forecast for a 1-4% y-o-y decline. The forecast were upgraded amidst the better-than-expected performance for specific products and as global trade is unlikely to hit the worst case scenario of 32% y-o-y decline earlier tipped by the WTO.
  • We recently revised our NODX growth estimate to 6.0% y-o-y growth from 10% y-o-y decline for 2020. We have been positive since early part of this year and remain positive on electronic manufacturing sector for rest of 2020.

GDP contraction may be bottoming out

  • Singapore’s stock index returns are closely correlated with the country’s nominal and real GDP growth. With the worst contraction in Singapore’s GDP growth now behind it, we believe the STI could generate positive returns for next 12 months as economic growth continues to improve.

Street remains optimistic of a strong profit recovery in 2021

  • We note that Street remains optimistic of a strong profit recovery in 2021, with the STI Index net profit expected to grow by 34% next year. The profit growth is expected to be broad based profit as all sectors represented in the STI Index are expected to see improvements. Consumer, capital goods and real estate sectors are expected to deliver the highest net profit growth in 2021. Although transport sector is expected to remain loss making, dragged by Singapore Airlines (SGX:C6L), the sector’s losses are expected to decline y-o-y.
  • STI Index’s 2020 EPS has seen a 39% decline since start of this year, while 2021 EPS has been downgraded by 24% YTD. Capital goods, banks and property developers have seen highest downgrades in last month.
  • Unless the gradual recovery in domestic and global economic activity stalls, we believe the downgrades to 2020 should taper off from here. Downside risks to 2021 EPS estimates will start showing up as we get closer to end-2020.

Downside Risks Persist

Government support is expected to gradually taper off

  • In 2020, the Singapore Government announced c.SGD100bn worth of measures to support Singaporeans and businesses that are impacted by the COVID-19 pandemic. The largest support came from the Job Support Scheme (JSS), which has helped to subsidise wages, thus enabling companies to retain their workers despite challenging business conditions. Under this scheme, the Government will co-fund between 25% and 75% of the first SGD4,600 of an employee’s gross monthly wages, with three main payouts in April, July and October.
  • This scheme, that was scheduled to expire by end-Aug, has now been extended by up to seven months, with targeted measures announced for most impacted sectors. However, during the announcement about the extension of JSS to next year, Deputy Prime Minister, Heng Swee Keat stated that the Government may not be able to sustain the current level of support indefinitely.
  • As more sectors re-open gradually, the Government will have to evolve and taper the support provided. There exists a risk that economic activity may still take longer than expected to recover as business and consumer confidence remain low for prolonged period. The tapering of Government support in such a scenario could materially derail the expected earnings recovery for 2021.

Sharp rise in unemployment could delay economic recovery

  • With tapering of government support, we expect retrenchments, which increased materially during 2Q20, are likely to continue rising for rest of 2020. This is largely emanating from the fact that the depth of current recession is set to be longer than the ones Singapore experienced during the Asian Financial Crisis and the Global Financial Crisis. The Asian Financial Crisis in 1997 and 1998 saw around 30,000 retrenchments, while the Global Financial Crisis in 2008 and 2009 claimed around 40,000 jobs. In 1H20, there have already been almost 10,000 retrenchments.
  • Current unemployment number of 2.9%, which has already risen above the historical average, is expected to continue rising. This could translate into sustained weakness in consumer confidence, weak consumer discretionary spending and likely weaker demand for property sector.

External risks that cannot be controlled still persist

  • Given Singapore’s high dependence on external side of the economy, elevated amount of external risks, especially from a rise in COVID-19 infections in countries that are its key trade partners or countries that account for the highest amount of tourist inflows could derail the expectation of economic recovery that is currently in place.
  • While WTO does not believe that the earlier expected worst case scenario for trade decline would play out, any reversal in this view could materially affect the positive view that has been investors for the electronics and pharmaceutical manufacturing sectors.
  • In addition, we believe external risks exist from the continued deterioration of relationship between the US and China as well as a China backlash amidst growing geopolitical tensions while countries also delve into investigating COVID-19’s origin.

STI remains the cheapest ASEAN market with highest yield in Asia.

  • Given that current close-to-zero interest rate environment is expected to persist beyond 2021, rising global liquidity should bring investors to high yielding markets.
  • STI’s 13.9x 1-year forward P/E sits above its historical average. Much of the P/E increase this year has come from the sharp downgrades to 2020 earnings estimates. With expectations of a rebound in GDP growth and investors finally building up the confidence in sustained earnings growth for 2021, we believe there is potential for the P/E to increase further.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-08-24
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