Singapore Market Strategy - RHB Invest 2020-12-14: Key Themes In 2021 & Stock Picks


Singapore Market Strategy - Key Themes In 2021 & Stock Picks

  • We recommend investors employ a balanced investment strategy that combines tactical positions in value stocks with long-term positions in secular high yielding growth stocks.
  • We see opportunities for underperformers of 2020 playing catch up in 2021 as businesses revert back to some sort of normalcy towards 2H21. Amidst expectations of sustained improvement in private consumption, we favour initiating positions in cyclical growth stories with greater exposure to domestic demand recovery, while remaining cautious on stocks that have direct exposure to the travel and tourism sectors.
  • We believe opportunities to buy into the global cyclicals that are vaccine-dependent could arise in late 2H21. We continue to favour manufacturing and technology sectors where we believe the growth witnessed in 2020 could be sustained in 2021.
  • Nevertheless, we believe economic recovery in 2021 will be uneven and gradual. There will remain elevated amount of risks from the re-emergence of COVID-19 on the external front and risk related to tapering off domestic government support while economic recovery takes hold. To cover for such risks, we recommend investors to stay invested in high-yielding stocks that offer some visibility on growth.

Playing the economic recovery story: selective rotation into value

Recovery in domestic consumption should be visible first

  • Our economics team believes that private consumption is set to accelerate in 2021 as restrictions are eased. Mobility data, a proxy for private consumption, has so far indicated rising foot traffic in the retail sector following the relaxation of CB measures since 1 Jun 2020. This tallies with the gradual rise in the Retail Sales Index, an indication of consumer demand. Singapore is set to be in Phase 3 of the reopening of the economy whereby the majority of economic activities are to resume. This would set a precedence for the mobility and retail sales indices to continue on an upward trend for 1H21 and accelerating in 2H21, as Singapore further eases its restrictions.
  • In addition, ongoing government support – in the form of social protection programmes, especially towards the early part of next year – should see a gradual return of normalised business activities, as countries manage to better contain the pandemic. This is coupled with low interest rates, which should support sustained improvement in private consumption. While consumption during 1H21 will likely remain below potential, a broad-based COVID-19 vaccine could lift sentiment and normalise consumption patterns in the latter part of the year.
  • We recommend that investors gradually build positions in domestic consumption recovery stories, where private consumption is expected to sustain its path of improvement into 2021. Our domestic consumption recovery picks are

Recovery in global cyclicals that are vaccine-dependent to take time

  • We believe a recovery in global cyclicals could take a prolonged period of a year or more – as either all countries in the world have to get the virus under control, or an effective treatment/vaccine is developed and widely deployed. A timeline for the creation of a safe, effective vaccine – one that provides immunity for a significant time and can be rolled out quickly – is full of uncertainty.
  • While our house view is that a COVID-19 vaccine will be available by late 2H21, large-scale immunisation is expected to take few years. Moreover, a lot can still go wrong, and fears of another economic collapse cannot be ruled out.
  • In our base case, global cyclicals or sectors that are directly vaccine-dependent, like aviation and related stocks, real estate, tourism-related (eg hospitality), entertainment, and healthcare – as well as industrials and commodity-related industries, will only start seeing earnings recovery towards the end of 2021. We see the following stocks as the long-term cyclical recovery plays.

Uneven and uncertain recovery necessitates selecting defensive stocks

  • We note that the global COVID-19 situation remains fluid, with a resurgence of cases in Europe and the US. Some European countries are already in lockdown and hospitalisation rates are rising in the US. An inability to control COVID-19 infections in countries that are Singapore’s key trade partners, or countries that account for the highest number of tourist inflows, could derail expectations of an economic recovery that is currently in place. In addition, there are external risks from the continued deterioration of US-China ties.

Government support to domestic industries is expected to gradually taper off

  • In 2020, the Singapore Government announced c.S$100bn 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 S$4,600 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-August 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, and we agree, 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 a prolonged period. The tapering of Government support in such a scenario could materially derail the expected earnings recovery for 2021.
  • To cover for such risks, we recommend that investors stay invested in REITs and high-yielding stocks that still offer earnings and dividend visibility. Our key defensive growth and/or high-yield picks are

Sector Recommendations

  • Overweight Sectors:
    • Consumer
    • Industrials
    • Land Transport
    • Manufacturing & Technology
    • Real Estate
    • REITs
    • Rubber Gloves
  • Neutral Sectors:
    • Commodities
    • Financials
    • Gaming
    • Telecom
  • Not Rated:
    • Healthcare
    • Offshore & Marine.

Preferred SG Stocks Across Sectors

Key Risks To Our View

Further escalation of trade tensions between the US and China

  • China and the US have locked horns over issues from trade and China's human rights record to its expansionist ambitions in the South China Sea. The relations have soured since President Donald Trump began setting tariffs and other trade barriers on China in 2018. While China is hopeful of improved predictability in relations with the US now that President Elect Joe Biden has won the US Presidential elections, we believe there remains a risk that trade tensions could escalate further given that there still is a bipartisan consensus in the US on containing China.
  • Escalation in trade tensions could derail the current economic recovery both in Singapore and globally. This would have a negative impact on Singapore stock valuations.

Slower-than-expected deployment of vaccines

  • Regarding the COVID-19 vaccine, in our base line assumptions, we have pencilled in late 2021 for the wide spread dissemination in Asia. Based on our recent discussions with some participants in the pharmaceutical industry, capacity enlargement, logistics to distribute the vaccine to a broad population, and domestic government policy to implement the vaccinations are still a work in progress. Hence, we take a relatively more cautious stance on a widespread dissemination compared to market expectations of perhaps 2H21 broad distribution.
  • However, there remains a risk of slower-than-expected vaccine deployment amidst logistical issues, which could further delay Singapore’s economic recovery, which we believe should take hold in 2H21.

Changes in regulations/policies

  • Further changes in immigration policy impacting the availability of labour, looser/tighter-than-expected fiscal/monetary policy could have a better/worse impact on Singapore’s GDP growth outlook. We note that STI’s EPS growth as a strong positive correlation to the country’s expected GDP growth.
  • Changes to sector specific regulations could also have meaningful impact on the earnings outlook for stocks (eg further tightening measures in the real estate sector).

Resurgence of COVID-19 infection

  • The strong control on the COVID-19 pandemic in Singapore has been one of the key factors behind our expectation of a gradual reopening of the economy during 1H21 and economic recovery gathering pace during 2H21. A sharp resurgence in the number of number of COVID-19 cases could stall economic recovery and potentially push the country back into another round of CB measures.
  • A second round of CB measures, although cannot be completely ruled out, we believe that the availability and deployment of vaccine by then should limit the downside risk of another round of restrictive measures.

Continuing corporate restructuring in Singapore

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-12-14
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