Singapore Strategy - Winds of change


■ 3Q15 report card was not a pretty sight

■ Central banks hold the key

■ Prefer companies with earnings visibility and beneficiaries of a stronger US$

■ M & A activities could gather momentum

No lasting impact from Paris attacks
We believe that the equity markets’ negative knee jerk reaction to the terrorists’ attacks in Paris will be brief. The economic impact of the latest incident should be negligible and the impact on Singapore corporate earnings is nil. Instead, weak corporate earnings and economic outlook are a bigger drag to equities.

3Q15 earnings – kitchen-sink quarter
3Q15 report card unveiled a 10% y-o-y drop and 21% q-o-q fall in earnings. It was the usual culprits that were the key drags - oil and gas, plantation and shipping sectors. Overcapacity, margin pressure, currency volatility and kitchen-sinking are key reasons depressing earnings. The momentum of earnings cut accelerated, as we take stock of rising risks which emerged over the past quarter. Earnings cuts of 4.6% and 6.4% for FY15F and FY16F respectively resulted in a 2% decline in earnings for 2015 and 6.4% growth for 2016 (based on STI index stocks).

Central banks take centre stage
Monetary policy decisions by central banks will continue to be a major influence on equities in the months ahead as corporate earnings fail to inspire and regional economies slow. Rather than relief, we think further delays to the first US rate hike may instead trigger frustrations and uncertainty about the global economy. A rate hike in December, followed by a dovish stance from FED, providing assurance that the interest rate normalisation process will take place at a very gradual pace may be the best antidote for equity markets. On the domestic front, despite narrowly avoiding a technical recession, Singapore’s economic outlook over the next 6 months is expected to stay challenging amid the slowdown in China and weak recovery in US/Europe.

Go for earnings visibility, US$ beneficiaries and value unlocking
Although STI’s valuation now hovers at an undemanding -1SD PE level of 12.2x (FY16), the lacklustre GDP and earnings growth outlook, Fed rate hike uncertainties, possibility of another kitchen-sink quarter in 4Q will keep investors at bay. Amid the challenging environment, we prefer companies with earnings visibility and yield support – Sheng Siong, Mapletree Greater China Commercial Trust (MAGIC), Venture, Riverstone, US$ beneficiaries (Venture and Riverstone) and companies with potential to unlock value (Capitaland, Frasers Centrepoint Ltd and Capitaland Retail China Trust).

M&A deals on a roll
M&A and restructuring opportunities could gather momentum following the sharp correction in equity markets in 3Q. This is evident by recent deals - Keppel Corp privatising Keppel Land, SIA privatising Tiger Air and private equity funds buying out Saizen REIT. Challenging operating conditions could trigger consolidation in shipyards and companies in the aircraft maintenance sector while bargain hunters and private equity investors have been seeking opportunities in bombed out names in oil and gas sector. (Read Report)

Source : DBS Group Research

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