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Singapore 4Q20 Stock Strategy - UOB Kay Hian 2020-10-13: Focus On Stability & Selected Cyclicals

Singapore 4Q20 Stock Strategy - UOB Kay Hian Research | SGinvestors.io KOUFU GROUP LIMITED (SGX:VL6) KIMLY LIMITED (SGX:1D0) FRASERS CENTREPOINT TRUST (SGX:J69U) SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Singapore 4Q20 Stock Strategy - Focus On Stability & Selected Cyclicals

  • With the STI’s poor performance in the first three quarters of 2020 behind us, we continue to advocate exposure to equities with a focus on high-quality companies with strong earnings outlook, reopening plays, China-focused companies and selected cyclicals.
  • The STI’s 2021F PE of 12.6x (15% discount to its long-term average) appears inexpensive while its 2021F P/B of 0.85x - a 32% discount to its long-term mean - and forecast ROE of 8.3% is undemanding in our view.



2020 year-to-date recap.

  • While we take some measure of comfort in having advocated for a defensive stance heading into 2020, it is nevertheless painful to note that the Straits Times Index (STI) was the worst performing index in Asia in the first 3 quarters of the year.
  • Despite a large stumble initially, Singapore has done an admirable job in containing COVID-19; however being a small but open economy has meant that - without adequate containment of the virus by its neighbours - large segments of the economy will continue to pull itself out of a U-shaped recovery.


Over half of 20 best performing stocks were small caps.

  • Within our stock coverage universe, 11 out of 20 of the top performing stocks in the first 3 quarters of the year were in the small/mid-cap space, underlining how a diversified investment strategy can generate significant alpha for investors.
  • The top 3 performing stocks were COVID-19-related:
  • Tech outperformed REITs with six tech stocks in the top 20 vs four REITs as investors gravitated to stocks that are better able to deliver earnings despite uncertain economies.


What we are keeping an eye on.

  • Heading into year end, key events to watch include Singapore’s gradual entry into Phase 3 reopening of the economy, Brexit talks and the US Presidential Election.
  • While Brexit talks and the US elections will inject some measure of volatility into stock markets, the global economy remains on an uneven and divergent “K-shaped” recovery path between economies, industries/sectors, and individuals.
  • Domestically, we would stick to names which are geared towards local spending.


Sectors we like.



STI 2020 year-end target lowered to 2,680

  • We have lowered our year-end 2020 target for the STI to 2,680 (previously 2,760) which implies c.5% upside from current levels. Based on consensus P/B numbers, the STI is currently trading at 0.88x 2020F and 0.85x 2021F, both of which are close to its -2SD level, or a hefty 32% discount to its 10-year average of 1.29x.
  • The STI’s 2021 PE of 12.6x is a 15% discount to its long-term average of 14.9x.


STI 2021 year-end target is 2,930

  • For 2021, our year-end target for the STI is 2,930 (9% upside from our 2020 year-end target) and is based on a 10% discount to the STI’s long-term PE and P/B. However there may be a multiple re-rating, and thus upside risk to our target to 3,260 should a COVID-19 vaccine be found and successfully distributed.


EPS growth estimates for 2020 and 2021.



Brent crude oil and natural gas have been left out

  • Brent crude oil and natural gas have been left out of the commodities rally with iron ore, gold and copper increasing by 29.6%, 24.2% and 7.4% respectively in the first three quarters of the year. Meanwhile, Brent and natural gas (using the Australia-Japan LNG price as a proxy) have declined by 38.0% and 35.5% respectively.
  • Using the forward oil price curve as at 12 Oct 20, Brent will average US$44.76/bbl next year, only 5% higher than the current spot price. UOB Global Economics & Markets Research expects the Brent oil price to continue its struggle around US$40/bbl on renewed signs of OPEC production non-compliance even though its production cuts successfully steadied the market in 1H20.
  • Any meaningful increase in the oil price will depend on US demand during the winter months, and sentiment will no doubt be supported by falling virus infection rates and the potential discovery of a COVID-19 vaccine. The key oil price play in our coverage universe is Rex International (SGX:5WH).


Leveraging off China’s recovery.



Other stocks with China revenue exposure.


We continue to advocate for equities given that we are 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 and thus with cash returns at close to zero, this may drive market multiples higher despite weaker-than-expected earnings in this upcoming reporting season. We continue to believe that equities will benefit relative to cash or bonds.
  • Risks to our base-case scenario include reinfection of the population post reopening of the economy, uneven and patchy economic recovery of Singapore’s key regional and global trading partners, and timeliness in the development and distribution of a vaccine.





Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-10-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.780 SAME 0.780
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