Singapore Market Strategy - Positioning for further USD strength


With the PBoC devaluing the CNY by 1.9% seen as a pre-emptive move ahead of potential Fed rate hike and further dollar strength, concerns have been raised once again on the impact of the strong USD to the broader Singapore market.

The CS Economics team believes the largest risk to MAS's exchange rate policy comes from the labour market stability. While the unemployment rate could grow to 2.3% by year-end, a policy shift could take place only if it is closer to 2.5%, in our view.

Although commodities and cap goods stocks have significant USD revenue exposure, we do not see currency as a major share price driver, given larger macro overhang. Venture could see its revenues boosted by a strong USD and is a safe yield play, in our view.

We maintain our UNDERWEIGHT stance on S-REITs, and our analysis of yield spreads suggests that ART and SUN may not have priced in a rate increase. Our preference would be on retail REITs (CMT and FCT), KDC REIT and KIT. SIA could also see its earnings impacted with higher USD costs than revenue.

CS-USDExposure
Tech, Industrials and Commodities have significant USD revenue 

Cap goods: Keppel and Sembcorp Marine should be largely hedged on their order books, which limit near-term gains. The larger depreciation of currencies at other competing countries means export competitiveness may not improve much. Yangzijiang could benefit from stronger USDRMB as only about 40-50% of costs are in RMB.

Palm Oil: Palm oil companies are beneficiaries of a stronger USD, though the impact will be more limited for Wilmar, Golden Agri and First Resources, which report in USD.

Tech: A stronger USD is a tailwind for top line growth in the near term. Venture's revenue grew 10% YoY in 2Q15 despite a weak demand environment as it is increasing market share and partly helped by currency.

SIA: 55% of SQ's costs are denominated in USD, while revenues generated in some of its key markets, including Europe, Japan, Australia, Indonesia, and Malaysia, have depreciated against the SGD.

Banks: DBS has c.44% USDHKD-linked loans and can see near-term translation gains.

Employment figures could swing exchange rate policy 
The CS economics team believes the biggest risk to the central bank's exchange rate policy comes from the stability of the labour market. While the recent 2Q employment numbers did improve, this follows extremely weak 1Q employment change numbers. Assuming employment grows at the same run rate over the next two years, we see employment growing by just 1.5% YoY in 2015, and the unemployment rate rising gradually to 2.2%-2.3% (sa) by year-end. A rise in the unemployment rate closer to 2.5% will probably be needed to result in bigger shifts in exchange rate policy. As such, we see risk that should weakness in the labour market persist, an outright exchange rate policy easing could come after the General Elections. (Read Report)

Source : Credit Suisse Asia Pacific Equity Research

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