Singapore Stock Strategy - OCBC Investment 2020-12-17: Will Skeptics Renew Their Affection For Beaten Up Singapore Stocks?

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Singapore Stock Strategy - Will Skeptics Renew Their Affection For Beaten Up Singapore Stocks?

  • Recovery is uneven and may be delayed.
  • Near term volatility, but long-term market outlook is constructive.
  • Singapore stocks are good additions to provide for a more diversified and broader equity portfolio.



Accelerated mode of “this too shall pass…”

  • Having been a market watcher for several decades from Black Monday to Asian Financial Crisis (AFC) and then to the crippling Global Financial Crisis (GFC), the chain of events this year is unusual on so many fronts. When the pandemic started, we went out with a report sharing that “This too shall pass…” as global markets have always been resilient based on historical trends, past major economic crises and major sharp market sell-downs. Equities have in general, always managed to recover from sharp losses in the past and have been one of the better performing long-term asset classes.
  • As the pandemic deteriorated, the temporal sell-down, and the subsequent sharp pace of recovery took us by surprise. This short and sharp recovery led us to quickly move into technology stocks in 2Q20 to capitalise on the working from home (WFH) theme.
  • However, by the end of 3Q, and with the sharp price appreciation for most of the high-growth technology stocks, we advocated adding some Singapore defensive stocks to ensure a broader and more diversified portfolio. This proved to be a satisfactory strategy as rotation into value stocks commenced, fuelled by hopes of vaccines, re-opening of global economies, and then uncertainties over the US Presidential election and high valuations for technology stocks.


Recovery is uneven and may be delayed…

  • While our quarter by quarter market strategy reports in 2020 were able to effectively match market actions, it was also with an acute awareness that the recovery is going to be largely uneven across different regions and markets. With the resurgence of cases in Europe, US and Japan, there is also the heightened risk that the recovery may be delayed despite optimism over the impending deployment of vaccines.
  • That clarity meant that sectors which were not positioned for the digital economy will have to suffer longer and will also need a longer period to heal, recover and grow and along the way, some companies will no longer be viable due to a lack of funding or cash flow issues. Companies which were able to play into the digitalisation of economies will continue to benefit and look set to continue to grow in the coming years.


Near term volatility, but long-term market outlook is constructive

  • The recent surge in the spread of the coronavirus, especially in Europe, US and even in Japan, could derail economy recovery, despite recent optimism on vaccines. We expect this to result in near term market volatility as some economies re-impose restrictions to control the spread of the virus. This cautiousness was also seen in weak US and Europe Consumer Confidence indices.
  • Beyond the current situation, investors are likely to look at the gradual economic growth recovery as vaccines deployment takes place in 2021, starting with the developed economies. With rates widely expected to stay low for a longer period of time, this will support risk assets and equities.
  • China, which is the first major economy to emerge from the pandemic, has continued to deliver encouraging economic data, and this could help to support and lift the rest of the region. During the recent 5-year plan, China also unveiled its ambition to become a technological powerhouse and to develop its self-reliance in technology. Its “dual circulation” strategy aims to achieve sustainable growth and develop a robust domestic economy. This is especially critical in view of the ongoing US-China tensions.


US-China tensions to remain in focus

  • Recently, President Trump issued an executive order banning US persons from investing in selected Chinese companies deemed to have ties with the Chinese military, as well as the release of draft anti-trust guidelines against monopolistic practices in the Chinese internet industry. Together with closer scrutiny and regulations on big-tech companies in both US and China, the operating environment for these high growth firms will become increasingly tougher.


Get the party started!

  • First, the positive news. Favourable vaccine news has lifted optimism in the market and together with a low interest rate environment, equities are likely to remain in focus. However, with the strong turnaround in share price performances, from losses to gains for the year in most markets, valuations are no longer cheap.


Will skeptics renew their affection for beaten up Singapore stocks?

  • Will the underperformers enjoy a comeback the way growth stocks did so quickly in 2020? Optimism over vaccine deployment is likely to drive cyclical stocks higher in the months ahead. Singapore’s benchmark Straits Times Index (STI) is cyclical-heavy and could see a re-rating to narrow the gap against the more growth-heavy indices in the region.
  • In mid-December, the Singapore government announced phase 3 opening on 28 Dec 2020. This will see the relaxation of current restrictions, allowing for social gathering in groups of up to eight people. This is an increase from the previous limit of 5 people. Together with this news, Prime Minister Lee also announced that the government has set aside more than S$1b for COVID-19 vaccines. Vaccinations will be made free for all Singaporeans and long-term residents.
  • While the number of COVID-19 cases remain high in Europe and the US, and most of Singapore’s existing restrictions remain, the latest announcements contained in the phase 3 opening are positive and point to a gradual return to normalcy for the Singapore economy. This augurs well for several segments of the Singapore economy, in particular, sectors which were severely hit by a lack of tourists.


REITs remain an OVERWEIGHT


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Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2020-12-17
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