Singapore Market Focus
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Singapore Market Focus Singapore Strategy Refer to important disclosures at the end of this report DBS Group Research . Equity 6 Aug 2018 Trade war worries resurface in STI : 3,265.73 seasonally weak August Analyst Kee Yan YEO, CMT +65 6682 3706 • Trade war worries resurface; to subside in 4Q [email protected] • STI to test 3220 in seasonally weak August, base case remains for Janice Chua +65 6682 3692 recovery to 3550 by year-end as trade war subsides [email protected] • Banks back in focus – UOB upgraded to BUY. Stay with late Key Indices expansion/early contraction plays - Sheng Siong, SIA EC, SingTel, ST Current % Chng Engrg, Comfort Deglro, SATS, Thai Beverage. FS STI Index 3,265.73 0.1% FS Small Cap Index 367.85 0.3% • Investors are generally cautious, based on feedback from recent SGD Curncy 1.35 -1.5% marketing trips. Although cash levels are relatively high after the sell- Daily Volume (m) 1,729 down in May and June, there lacks a strong catalyst to add positions. Daily Turnover (S$m) 1,066 Daily Turnover (US$m) 791 Trade war worries surfacing again. Even as the US and China seek to Source: Bloomberg Finance L.P. restart talks to defuse trade tensions, news of the Trump administration considering a higher 25% tariff on US$200bn of Chinese imports have Market Key Data reignited trade war fears among Asian equities. The 25% tariffs on (%) EPS Gth Div Yield US$16bn Chinese imports could come into effect this month and the 2017 7.8 4.3 public hearing on the proposed 10% tariffs on US$200bn Chinese imports 2018F 13.0 4.1 is likely on 20 August, followed by enactment as early as September. 2019F 7.8 4.2 (x) PER EV/EBITDA The Ghost of August. The Singapore market has always ended August 2017 16.0 15.3 lower over the past 10 years with a median decline of 2.1% and average 2018F 14.2 14.9 drop of 4.2%. Short of a clear resolution to the US-China trade war, the 2019F 13.2 13.8 trend for a ‘negative August’ month is expected to continue this year, given trade war uncertainties, weak domestic driver post property measures, and a lack of positive catalysts. For the STI, we expect July’s rebound to be capped at 3340-3355 with downside risk to test 3220 this month. Our base view is that while trade war tensions could get worse during the August/September period, it should subside in 4Q heading STOCKS closer to the US mid-term elections with STI ending the year at 3550. 12-mth Price Mkt Cap Target Performance (%) S$ US$m S$ 3 mth 12 mth Rating Cash levels up but investors still cautious. In our recent marketing trips to HK, SG, Bangkok, and KL, investors are generally cautious. Although cash ComfortDelGro 2.27 3,600 2.59 3.2 (2.6) BUY levels are higher post-May/June sell down, investors are awaiting clearer Sheng Siong 1.09 1,201 1.26 7.9 16.6 BUY indications on the earnings’ growth outlook and for trade war’s tensions SIAGroup Engineering Ltd 3.05 2,501 3.92 (6.2) (14.3) BUY Singtel 3.18 38,041 3.70 (9.1) (17.2) BUY to clear up before taking a more aggressive stance. ST Engineering 3.35 7,655 4.10 (4.0) (12.3) BUY SATS Ltd 5.15 4,214 5.65 (5.7) 4.7 BUY Stay with defensive picks, prefer banks to property. We continue to Thai Beverage 0.78 14,349 0.94 (6.0) (17.5) BUY advocate a defensive stance, our picks are stocks that are less cyclical in UOBPublic Company 26.59 32,510 31.70 (8.5) 9.3 BUY nature with consistent dividend payouts in net cash with decent growth of near 5%. Banks are back in focus, after pulling a decent set of 2Q results, Source: DBS Bank, Bloomberg Finance L.P. backed by strong loan growth and lower credit costs, although trading Closing price as of 3 Aug 2018 income disappointed. We upgraded UOB To Buy on account of its sustained profit growth momentum, higher interim dividend and potential for higher full year dividend backed by strong capital levels. ed: TH / sa:JC, CW, CS Market Focus Singapore Strategy Market Outlook Oversold July bounce within expectation FTSE ST Indices July performance ▪ STI ended the month 52pts (+1.6%) higher on oversold bounce as focus turned to corporate earnings while trade war worries temporarily subside ▪ The July rebound is in line with our expectations (refer to Singapore Strategy Report titled “Buckle up for a rough ride”) ▪ Sector leaders – Telecom lifted by Singtel’s shares ahead of ex-div date for its FY dividend – Consumer goods lifted by a rebound in Thai Bev’s shares – S-REITs AREIT, CMT, and CCT ▪ Sector laggards Source: DBS Bank – Residential property stocks fell on the worry that the surprise government measures will put the recovery to an abrupt halt – O&G dragged down by SembCorp Marine following disappointing results Trade war worries surfacing again What’s happening this month ▪ FED’s rate hike likely in September, not August Date Event Comment ▪ July was a peaceful month for global trade as US and EU struck Consensus expects the FED to hold a truce; both sides agreed not to impose new tariffs while rates steady this month at 2% with working together towards zero tariffs on non-auto industrial the next hike in September. We FOMC goods 02-Aug continue to expect two more hikes Meeting ▪ But US-China trade war worries likely to resurface this month by year-end that lifts the FED funds – Proposed 25% tariffs on US$16bn Chinese imports could come rate to 2.5% followed by another into effect this month four hikes next year to 3.5% – Public hearing on proposed 10% tariffs on US$200bn Chinese Timeline of US trade tariffs imports likely on 20 August – Proposed 10% tariffs on US$200bn Chinese imports could 24-25 Public hearing on proposed 25% tariffs on come into effect in September July US$16bn Chinese imports Proposed 25% tariffs on US$16bn Chinese *Aug imports could come into effect Public hearing on proposed 10% tariffs on *20-Aug US$200bn Chinese imports Proposed 10% tariffs on US$200bn Chinese *Sept imports could come into effect *tentative Source: DBS Bank Page 2 Market Focus Singapore Strategy The Ghost of August Strong tendency to end lower in August ▪ Did you know that the Singapore market has ended the month STI of August down m-o-m without fail over the past 10 years? Year m-o-m ▪ STI suffered a median decline of 2.1% and average decline of End-July End-August change (%) 4.2% in August over the past decade 2017 3329 3277 -1.6% ▪ Odds are low that the US-China trade war will subside anytime soon 2016 2868 2820 -1.7% – Latest news: Even as US and China seek to restart talks to 2015 3202 2921 -9.6% defuse a trade war, the Trump administration is considering a 2014 3374 3327 -1.4% higher 25% (from 10%) tariff on US$200bn of Chinese imports 2013 3222 3029 -6.4% – Trump’s US$12bn aid package to US farmers and the EU’s pledge to increase purchase of US soybeans and LNG suggests 2012 3036 3025 -0.4% that Trump is prepared to escalate his trade war with China 2011 3189 2885 -10.5% ▪ Trend for a ‘negative August’ month is expected to continue 2010 2987 2950 -1.3% this year, given trade war uncertainties, weak domestic driver 2009 2659 2592 -2.6% post property measures, and a lack of positive catalysts ▪ We think the 10-year downtrend can only be broken if 2008 2929 2740 -6.9% headline news read, ‘War is Finally Over!’ Median -2.1% Average -4.2% Source: DBS Bank Choppy 3Q with August a down month Straits Times Index (Daily) ▪ Current rebound likely capped at 3340-3355, slightly below 12.76x (-0.5SD) 12-mth fwd PE ▪ Choppy 3Q with August a down month, STI to test 3220 ▪ Outcome of US-China trade war a key factor on how the stock market will end the year – Base view is that while trade war developments could worsen during next two months, it should subside in 4Q heading to the US mid-term elections with STI ending the year at 3550 – Bear case is an all-out trade war whereby a 10-25% tariff is imposed on all products that are traded between China and the US with STI heading down to 2915 Source: DBS Bank ‘Caution in the air’: feedback from marketing trip Stocks in focus during discussions ▪ In our recent marketing trips in HK, SG, KL, and Bangkok, Property : City Devt, UOL, investors remained cautious. Although cash levels are relatively Banks: UOB, OCBC, high after the sell-down in May and June, there lacks a strong REITS : CDL HT, AREIT, catalyst to add positions. Mapletree Logistics, ▪ Of the 4 risks highlighted, i.e. strengthening US$ to S$1.40 by CCT, MINT year end, escalating trade war tensions, rising interest rates, Consumer Services : SIA, Genting SG, and domestic property cooling measures, trade war and strong Comfort Delgro, SATS US$ were the key concerns. Industrial : Hi-P, Venture, ST Engineering ▪ Most agree with our base case scenario on trade war tensions and looking to bargain hunt during the 2Q reporting season, Sectors which have been disappointing thus far.