The investment case for Singapore is challenged by declining domestic property prices (-3% in 9MFY15, we expect a further 8% in FY16E) and a tight labor market slowing growth. A transition to a productivity driven growth model is ongoing, but not smooth. The economy skirted recession in 3Q (0.1%) and growth drivers remain subdued. Singapore's monetary policy stance leaves it exposed to rising US rates, while data suggests it does not benefit from a lift in DM growth. However, a 4% plus dividend yield provides significant downside support.
Will EPS downgrades end in 2016?
We expect 4.5% market EPS growth vs consensus' 5.7% in 2016. This is attributed to our less sanguine outlook on banks, real estate and telcos. While we see Singaporean Banks as beneficiary to Fed rate hike, declining trade with China and deteriorating asset quality in emerging ASEAN will hinder earnings delivery. In real estate, we expect residential prices to decline by 8% next year, coupled with increasing vacancy rate in hospitality and office. In telcos, we forecast competition to heighten as new players potentially enter the market.
Drivers, trends, and data points we are tracking
We track Singapore banks cross-border lending trends. Singapore has a high trade linkage with China and is exposed via trade finance links. Domestic property market trends as well as domestic prices to judge the risk of deflation. The Biannual MAS policy statements will also be critical in understanding the gradient of monetary policy and the SGD outlook.
Rationale behind our stock picks
Our top picks in Singapore are chosen with the following criteria in mind – Stabilization of oil prices (EZION) and an improving global growth outlook (SIA). Steady revenues and dividend plays (SGX). We also see palm oil prices trend higher as El Nino impacts yields and recommend First Resources. Hopes of an unwind of policy restrictions on property makes us prefer CIT among the developers.
Stocks To Avoid
Our Avoids list is based on a weak outlook for the offshore marine sector (SMM), the threat of new competition in the telecom space (Starhub) and risks to growth and asset quality in the Banks (UOB). (Read Report)
Source : JP Morgan Asia Pacific Equity Research