Market Focus - DBS Research 2020-10-06: Awaiting The Antidote; 2020 Winners - Which To Keep & Which To Reduce?


Market Focus - Awaiting The Antidote; 2020 Winners - Which To Keep & Which To Reduce?

2020 YTD: A year to forget, a year to remember

  • Six months after stocks reversed from the great ‘COVID-19 pandemic panic’, how global economies steer through its devastating impact continues to be one of the dominant factors driving stocks.
  • In Asia, glove makers enjoyed a ‘never seen before’ bull market and led the rally in the healthcare sector amid a global shortage of personal protective equipment (PPE). The information technology sector saw a splendid recovery as the trend to work-from-home (WFH) spurred demand for memory chips, computing hardware, telecommunication equipment, cloud computing and e-commerce services.
  • At the other end of the spectrum, traditional cyclical sectors were the worst underperformers. The financial sector was weighed down by the FED’s pledge to hold rates near zero through to at least 2023. Real estate was among the COVID-19 casualties as WFH impacted demand for commercial properties while rising unemployment and a drop in rental demand had cast doubts on residential properties. Even as oil prices recovered, the energy sector suffered as demand fell and the secular shift towards clean energy continued.

North Asia outperformed ASEAN

  • North Asian markets powered ahead, led by China’s ability to bring the COVID-19 outbreak under swift control. Domestic demand remained strong as life returns to normal. Meanwhile, the South Korean and Taiwan markets were lifted by the strong run-up in technology stocks.
  • ASEAN equities’ performance paled in comparison given their exposure to the more traditional cyclical sector underperformers (e.g. Singapore), higher reliance on external tourism and as some countries (Indonesia, Philippines) continue to struggle to bring the virus under control. The KLCI outperformed among ASEAN indices, underpinned by the two glove makers.

Taming the pathogen

  • Nine months after the first COVID-19 cluster surfaced in China, the world is no closer to containing the pandemic. There are now more than 32 million confirmed cases globally and the figure is rising at a rate of 200,000 to 350,000 new cases per day.

Second wave in Europe, US cases uncomfortably high

  • The top 15 global economies currently account for c.69% of daily new infections. As the colder autumn and winter months in the northern hemisphere draw closer, several major economies in Europe such as UK, France and Spain are facing a second wave of infections that has resulted in re-introduction of restrictions. We would rather the pre-emptive move takes place now, compared to the risk of a far worse outbreak during the colder months ahead. Meanwhile, US daily new cases currently remains above an uncomfortable 30,000.

North Asian economies managing well

  • The COVID-19 situation in China remains firmly under control with “negligible” daily new cases for months in a row. This has enabled China to be the first major global economy to recover from the pandemic, driven by manufacturing activity and domestic demand. The North Asian economies of Hong Kong, Japan and South Korea seemed to have contained a second wave of infections that surfaced 1-2 months ago.

But two within ASEAN are struggling

  • The situation is mixed within ASEAN. While most countries have effectively contained the outbreak currently, the situation looks precarious for Indonesia, highly uncertain for the Philippines while cases in Malaysia have started to pick up.

All eyes on Phase 3 vaccine trials

  • The light at the end of tunnel is the eventual success among the growing number of COVID-19 vaccine trials. According to the World Health Organization (WHO), there are currently 38 vaccine candidates in clinical evaluation with another 149 candidates in preclinical evaluation.
  • Ten vaccine candidates are now under Phase 3 trials. The outcome of the trials could come as soon as October, starting with the vaccine developed jointly by BioNTech, Pfizer and Fosun Pharma. We could know the outcome of several more candidates starting from the end of 2020.
  • Indeed, the coming months will be interesting times for vaccine development news. We believe that one or more positive outcomes from the Phase 3 trials, followed by approval and adoption by international health authorities for mass public vaccination will be the fuel cells to revive ailing economies and the crippled travel/aviation sector. Pfizer and Johnson & Johnson have targeted to produce 1.3 billion and 1billion doses by end-2021 if their vaccine candidates receive regulatory approval. All these are a big “if” now, but it does shed some light into production speed.

The last lap of a tumultuous year

  • 4Q is the period where investors prepare and position for the coming year by accessing their current investments, positioning into sectors and stocks that are more likely to outperform and shifting out of those that may not.
  • We see three developing themes as markets head closer to the year-end:

Theme 1: COVID-19 vaccine development and deployment

  • You can work-from-home and shop online, but there isn’t such a thing as travel-from-home or holiday online. Pent-up travel demand simply cannot be fulfilled by live streaming, 3D imaging or virtual reality of travel destinations; just as hunger cannot be cured by staring at an image or video of food.
  • We see no structural impact from COVID-19 on the travel and aviation industry. We think international travel will rebound sharply in months, not years, once COVID-19 vaccines are readily available. Empirical evidence can be found in the sharp recovery in domestic travel once travel restrictions are lifted, even in a pre-vaccine environment.
  • According to global travel data firm ForwardKeys, domestic arrivals at Chinese airports reached 86% of last year's levels, while flight bookings hit 98% in the second week of August. The company also predicted that the Chinese domestic aviation market will fully recover by the start of September.

Ascott Residence Trust (SGX:HMN)

Far East Hospitality Trust (SGX:Q5T)


ComfortDelGro (SGX:C52)

Theme 2: US presidential election winners and losers

  • The US election comes into focus in 4Q20 with polling day just a month away. We’re not here to predict who will win the election. Rather, we will look at the potential sector winners and losers based on campaign promises by incumbent and the challenger. A Trump win should lift the energy and 5G infrastructure sectors as well as accelerate the exit of US manufacturing presence in China. On the other hand, a Biden victory is positive for clean energy and sustainable infrastructure sectors.
  • Trade tensions with China will likely continue regardless of who wins but the approach may differ. Asian equity investors may prefer Biden’s multilateral approach in dealing with China vs Trump’s unilateral combative and unpredictable style. Biden has also said he will look to reconsider tariffs with China and end the trade war with the EU as these are impacting both the US consumer and companies.
  • The approach in handling COVID-19 also differs. Trump is betting on a rapid deployment of COVID-19 vaccines while Biden believes that a cohesive COVID-19 testing strategy and systematic vaccine distribution is the way to go.

Energy sector at pivotal point

  • A second term for Trump is benign to the O&G sector while a Biden win is positive for the clean energy sector.
  • Presidential candidate Joe Biden has committed to investing US$400bn in clean energy and innovation over ten years, which would be a welcome boost for the clean energy sector. On the other hand, his plans for the O&G sector include a requirement of aggressive methane pollution limits for O&G operations and banning of new O&G leasing on public lands and waters.
  • A Trump win may be positive for oil prices and in turn O&G players given his stance of deregulating the O&G sector. Indeed, Trump’s efforts has led to US’ crude oil production growing to a record 13.1m bpd before COVID-19 struck. While crude oil production grew during Obama’s term, this was mostly attributed to the proliferation of hydraulic fracturing rather than policy changes.
  • By pulling out of the deal with Iran, Trump has prevented c.2 million barrels per day (bpd) of Iranian oil entering the global supply. A Biden win could mean Iranian oil returning earlier compared to Trump, which would put pressure on oil prices.

Keppel Corporation (SGX:BN4)

CSE Global (SGX:544)

Manufacturing migration in motion

  • Trump intends to entice companies to move their manufacturing bases out of China and back to the US. In his second term agenda, Trump has announced a plan for “Made in America” tax credits and expensing deductions for essential industries relocating manufacturing to the US. In addition, Trump has threatened to disallow the award of federal contracts to companies that outsource to China.
  • The impact of these moves remains uncertain. While companies may benefit in the short-term from the incentives, without a productivity improvement, companies may face higher costs from manufacturing in the US. As such, some companies could opt to shift production to Southeast Asia, which could benefit manufacturing and real estate stocks in countries such as Thailand and Vietnam.
  • On the other hand, Biden’s plans for China remain uncertain. The presidential candidate has grown hawkish against China in recent months and will likely remain tough on China. Whether he will amend the US- China policies (Phase 1 trade deal, tariffs, technology ban) he inherits from Trump remains to be seen. Still, Biden has stated that he will invest heavily in US R&D capabilities to compete against China.

Theme 3: 2020 winners - Which to keep and which to reduce?

  • As we head towards the end of the year, we think it is an opportune time for investors to reassess their positions. We looked at the sectors that have done well YTD and assess what’s the next course of action:
  • We think investors should reduce into strength their exposure to supermarkets and personal protective equipment (PPE) makers. Supermarket stocks have likely recorded their best quarter in 2Q20. PPE stocks could see wide price fluctuations as a strong FY20/FY21F earnings performance has been well anticipated and possible mass vaccination against COVID-19 could spell uncertainty for the sector.
  • On the other hand, we think investors should maintain their exposure to technology on increased spending on IT infrastructure, 5G, and data centres. We like yield plays too on the prolonged low interest rate environment and yield compression play; and logistics on rising e-commerce trend.

Supermarket (Reduce)

  • We think supermarket sales peaked in 2Q20. Lockdowns were implemented across many countries in 2Q20 to curb the spread of the COVID-19 pandemic, which led to a surge in supermarket sales at the expense of outdoor dining. The situation has reversed as movement restrictions eased. We think another period of drastic movement restriction is less likely going forward.
  • In Singapore for example, sequential supermarket sales growth began to normalise from May even during the country’s ‘Circuit Breaker’ period as ‘panic buying’ of groceries faded and diners turned towards online food delivery. F&B sales jumped 36.9% m-o-m in June post Circuit Breaker while supermarket sales continued to register sequential declines.

Sheng Siong (SGX:OV8)

Dairy Farm (SGX:D01)

Personal Protective Equipment (Reduce)

  • The share prices of medical equipment makers have risen substantially this year as demand for personal protective equipment (PPE) such as gloves, far outstrips supply. These firms have seen their earnings increasing multi-fold on the back of higher ASPs and volume. The virus continues to be present and has not slowed its spread in certain countries (Indonesia, India); it has even begun its resurgence in others (such as UK, France, Spain).
  • We note that the strong EPS growth enjoyed by glovemakers this year will taper off drastically in 2021. As we approach the development and deployment of the vaccine, earnings risk for these glovemakers will increase. While near-term share prices may still be supported by earnings, we recommend that investors sell into rallies as a vaccine deployment for the masses could start as soon as 4Q20. There is little dividend support for the share price once earnings come off.

Riverstone (SGX:AP4)

Top Glove (SGX:BVA)

Technology/Internet (Maintain)

  • We continue to like the technology sector given structural tailwinds in the sector and undemanding valuations in certain counters.
  • Some telecommuting will be here to stay, driving IT infrastructure spending. The COVID-19 pandemic has made companies rethink the viability of working from home. Telecommuting has driven demand for data center chips and unified communications and collaboration (UC&C) solution providers (Zoom, WebEx, Microsoft Teams, and Skype) are playing catch up in upgrading their IT infrastructure to cope with the surge in usage. We believe that some conversion to telecommuting is a structural change as companies are able to save on costs (travelling and accommodation expenses).
  • 5G deployment, significant enabling of IoT by 5g, advancements in AI, and rising demand for cloud computing are expected to fuel the growth of semiconductors and technology. 5G phones, autonomous driving, more accurate tracking of logistics, AI in manufacturing, and more advanced medical equipment are some examples of applications and products driving the technology trend.

AEM Holdings (SGX:AWX)

Venture Corp (SGX:V03)

Yield Picks (Maintain)

  • Lower-for-longer rates positive for yield stocks. The FED announced a major policy shift in August to “average inflation targeting” before considering raising rates, away from its standard 2% target. Powell also reassured that he intends to keep interest rates at near zero through 2023.
  • With interest rates remaining low, we continue to like REITs with room for yield compression. In addition, the low interest rate environment reduces the cost of debt and funding, potentially leading to accretive acquisitions.

Top picks for office REITs are Keppel REIT (SGX:K71U) and Mapletree Commercial Trust (SGX:N2IU).

  • We think office sector in Singapore is likely to have bottomed out. We see potential demand from Chinese technology giants (Tencent, Alibaba, and ByteDance) as they expand into Singapore. In addition, there is minimal supply due to delays in construction and redevelopment. We like these two REITs for the quality of their portfolio and pure play by asset class (Keppel REIT (SGX:K71U)) and geography (Mapletree Commercial Trust (SGX:N2IU)). The office S-REIT sector is trading at an attractive 0.8x P/NAV.

Top picks for retail REITs are CapitaLand Mall Trust (SGX:C38U) and Lendlease REIT (SGX:JYEU).

  • As safe distancing and movement restrictions gradually ease, we continue to favour retail malls that would benefit from further easing. We like CapitaLand Mall Trust (SGX:C38U) for the potential boost to its central malls as office crowds return. We also like Lendlease REIT (SGX:JYEU) for its strong and popular property, 313@Somerset, and its attractive valuation of 0.8x P/B.

Logistics Plays (Maintain)

  • The proliferation of online shopping for convenience, price competitiveness and variety has led to a secular shift towards e-commerce. The COVID-19 lockdowns imposed by governments have further catalysed this trend as consumers turned to e-commerce to make their retail purchases.
  • In Singapore for example, the percentage of retail sales sold online increased from 4.4% in January 2018 to 5.9% in January 2020. During the circuit breaker period, this figure jumped to as high as 24.8% of retail sales in May 2020.

Frasers Logistics & Commercial Trust (SGX:BUOU)

Ascendas REIT (SGX:A17U)

See PDF report attached below for complete analysis on regional markets.

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | Dennis LAM DBS Research | https://www.dbsvickers.com/ 2020-10-06
SGX Stock Analyst Report BUY MAINTAIN BUY 1.100 SAME 1.100