GDP: Growth to slow, labour market to loosen
UBS economists expect real GDP growth to remain weak at 1.5% in 2016 and 2017, following 1.7% growth in 2015E. Employment growth has already slowed to 2% YoY in H115 and will likely decelerate further. We expect the US Federal Reserve to lift the Fed Funds rate to 1.25-1.50% by end-2016. We assume a further reduction of the MAS Singapore Dollar nominal effective exchange rate policy band slope in April 2016.
Market valuations not aggressive, but negative EPS trends weigh on sentiment
The Singapore market's implied long-term growth has revisited negative territory since October 2015. The banking, capital goods and property development sectors are currently trading below their long-term averages. However, this can be explained by weaker ROEs and EPS growth prospects. Consensus expects 8% net profit growth for MSCI Singapore stocks. We think this is too optimistic and expect market earnings estimates to continue to be revised downwards in the first half of 2016, particularly for banking, offshore and consumer stocks—we see this as an impediment to sentiment.
Defensive earnings, strong balance sheets, M&A potential to outperform
We set a 2016 target of 3,100 for the FSSTI, translating to a 6% upside. We think H116 will be weaker than H216. In early 2016, incoming data could continue to disappoint the market. In H116, we expect stocks with resilient revenue streams, improving margins and high free cash flow to outperform the market, even if forecasted earnings growth is not high. Given tepid prospects for organic growth, we believe companies with a strong track record in M&A, or which can unlock value through asset divestments for example, will continue to fare well. Of the sectors trading below their long-term average values, we are most optimistic on property developers. Meanwhile, in the REITs sector, yield is no longer a differentiator. With rents slackening in all sub-sectors and limited domestic opportunities, we think the performance differentiator would hinge on those best-positioned to make accretive overseas acquisitions and recycle capital.
Our stock preferences
We prefer the transport sector and would invest in ComfortDelGro, SATS and SMRT for their resilient earnings, improving margins and free cash flow
. Our preferred developer stocks are City Developments
(as bearish outcomes look priced in) and CapitaLand
. The telco, banking and capital goods sectors face headwinds, but we think the stocks better placed to overcome these are SingTel, OCBC and Keppel Corp
, respectively. (Read Report)
Source : UBS Global Research
Labels: Equity Strategy