■ We expect earnings growth to be 4-5%, well below consensus
■ So identifying pockets of demand will be vital
■ We highlight six themes: yield, shifts in demand, China 2.0, market share gains, balance sheet optimizers and Asia buys Asia
• Singapore’s low beta, high yield market stands to benefit from a cheap valuations and low fund holdings
• REITs trade at attractive valuations; banks have the best risk profile among ASEAN peers
2016 investment themes
Singapore stands out in ASEAN in that it is a developed, low beta market. In addition, it offers one of the highest yields in the region. As Singapore investor sentiment appears to be more geared towards developed than emerging markets, we believe Singapore equities should benefit, especially in light of cheap valuations and low fund holdings.
However, concern remains over the prevailing macroeconomic environment in the country. Our economists think Singapore is trapped between a cyclical slowdown and large-scale structural changes as firms adjust to reduced inflows of foreign labour and higher domestic wages. Higher interest rates are already a factor as currency depreciation expectations rise. Our economists see increasing risks of monetary easing following the deterioration in domestic and external conditions, which could benefit equities. For 2016e, they expect GDP growth to come in at 2.1%, slightly better than the 1.7% expected in 2015e.
Meanwhile, at 12m forward PE of 12.1x, the equity market trades at over a 9% discount to its five-year average. In addition, consensus expectations for 6.9% y-o-y earnings growth backed by 6.2% sales growth and 5.9% EBITDA growth for 2016e looks reasonable to us and might surprise on the upside.
Some of the sectors to look out for in 2016 are:
Singapore has one the highest probabilities of policy easing, which should benefit the real estate market. Our sector analyst, Pratik Ray, particularly likes Singapore’s REIT sector, where valuations look attractive for the first time in years. REITs should also look attractive in a world of falling core bond yields. Sector themes include overseas acquisitions as managers attempt to support DPU/DPU growth, issuance of perpetual securities supporting acquisitions, and privatization and public-private arbitrage opportunities within the sector.
Banks have the best risk profile among ASEAN banks. Domestic asset quality risks are contained, while banks have strong buffers from provisioning reserves and capital positions. In addition, after the recent sell-off, stocks are more attractive notwithstanding a softer earnings outlook. Our analyst Kar Weng Loo believes that the sector could re-rate again once the market becomes more comfortable with the asset quality outlook. Another potential catalyst is if NIM starts improving again and this could be contingent on a US Fed rate hike. (Read Report)