Singapore 2013 - Step out of the comfort zone

We downgrade Singapore to Neutral from Overweight as its 2012 outperformance, lack of earnings growth and restructuring-induced cost pressures act as headwinds for further performance. Our 3,316 (bottom-up) end-CY13 FSSTI target is unchanged. It implies 13.2x P/E.

Within the Singapore market, our main recommendation is to drift out of yields and hunt for safe growth at a reasonable price. Although global growth is slow, fears of a China hard landing is receding. Any breakup in Europe seems less imminent and the US should look beyond its fiscal cliff after 1Q13. Ahead, investors could price out doomsday scenarios and stretch for growth. Singapore could lag as it is not associated with growth.

Polarisation of valuations
Defensive stocks have gotten expensive vs. cyclicals. The FSSTI is 10% below its 4Q10 high but REITs are at their 4Q10 P/BV highs. Some consumer stocks have hit even higher valuations while big laggards have been commodity and transport stocks. 

Banks are in-between their 2009-10 P/BV levels. Property stocks vary: CAPL looks cheap, CityDev is still expensive. Capital Goods was looking rich till its recent selldown; we now spot value. We advocate a shift out of REITs into visible growth.

Four themes for 2013
The four themes we focus on are: 

1) how to benefit from sustained asset inflation and an improving China; 

2) stocks with visible earnings that are not yet richly priced; 

3) smaller bets on unloved cyclicals that could provide some beta; and 

4) why safe REITs are looking expensive and yield stocks need to be stapled with stock-specific catalysts to attract.

Stocks that we love
DBS and CapitaLand will benefit from asset inflation and a recovering China, we believe. UOL is the third NAV play that trades at attractive discounts to RNAV. 

Dairy Farm, Ezion and Tat Hong are our picks with earnings visibility and reasonable valuations. We reach for growth by going for Wilmar, CWT and Keppel Corp; they belong to the unloved cyclical category that can surprise positively. 

Lastly, we steer out of large-cap REITs (CMT, CCT) and choose AREIT, ST Engineering and StarHub as yield picks with catalysts. (Read Report)

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Source : CIMB Research