Singapore Strategy - Bouquets and brickbats

• Poor 1Q15 results, industry-specific issues and rising bond yields are driving the widespread share-price corrections

• We continue to see Singapore as a stock-picker’s market, and prefer the property developers over yield plays

Top picks: City Developments, Raffles Medical Group, Frasers Centerpoint Trust, HongKong Land and Accordia Golf Trust

Summary
The poor run for the Singapore-listed stocks has continued into 2Q15, driven by a combination of: 

1) weak results, 

2) industry-specific factors, and 

3) rising bond yields. 

As such, stock selection remains a primary source of alpha generation in the Singapore market, in our view.

Key topics
Market is in correction mode. A big proportion (22 out of 30) of FSSTI Index constituents saw their share prices decline quarter-to-date (QTD), with only a handful eking out any gains. This appears to be influenced by 3 factors.

First, the March earnings season was a forgettable one, with around 60% of the stocks in our coverage universe missing earnings forecasts. In fact, over the past 3-month period, 73% of the constituents of the FSSTI Index have seen flat forecasts or downward revisions to consensus earnings.

Second, industry issues – the threat of new entrants and concerns of a wider fallout from the Petrobras corruption scandal – have led some investors to be wary of the long-term prospects for the telecoms and offshore marine sectors.

Third, rising bond yields are proving to be a headwind for high-yield sectors, as the relative appeal of their dividends lessens. The 10-year domestic bond yield has risen by 0.4pp QTD, and perhaps as a consequence, the 1-year forward dividend yields for the REITs and telecom sectors have risen by 0.3pp and 0.4pp over the same period, respectively.

Valuations still not attractive. The MSCI Singapore Index is trading near its past-10 year average on a PER basis and 1SD below its past-10-year average on a PBR basis.

While we do not think the Singapore market is expensive currently on a historical basis, it nonetheless does not look compelling given that earnings could stagnate in 2015.

Daiwa’s economics team believes the Fed will tighten interest rates from 2H15, and expects oil prices to remain weak over the coming months. As such, we still recommend an Underweight rating on Singapore (in terms of MSCI country index weighting) versus the other regional markets.

How to position a portfolio? 
With industry and macro headwinds still dominating the investment landscape, effective stock selection remains the key source of alpha, in our view.

Within the Singapore market, we are positive on the 2015 outlook for the property developers, but negative on the offshore marine sector. While we expect the poor industry conditions to continue to weigh on the offshore sector, there are signs from the monthly Singapore Real Estate Exchange (SRX) index that residential prices for both the private and public segments stabilised in May 2015, having been in a prolonged downtrend since 3Q13.

We are expanding our top picks by including HongKong Land and Accordia Golf Trust in our existing list of City Developments (CDL), Raffles Medical Group and Frasers Centerpoint Trust. Meanwhile, we retain Sembcorp Marine and Super Group in our key underperforms list, but replace StarHub with Cosco Group, owing to the correction in the former’s share price.

In addition, we find these relative ideas appealing: 
1) developers over yield plays (S-REITs), 

2) Keppel Corp over Sembcorp Marine due to its diversified business exposure, 

3) Singapore Telecom (SingTel) and M1 over StarHub in the telecoms sector, and 

4) Sheng Siong over Super Group in the consumer sector. (Read Report)

Source : Daiwa Capital Markets

Labels: , , , , ,