■ Three reasons why 2016 could be a year of positive returns. With MSCI Asia ex-Japan up just 1% in 2014 and down 10% in 2015, we highlight three reasons why 2016 could be a year of positive returns.
One, Figure 1 highlights that while MSCI Asia ex-Japan has historically corrected in the run-up to the first Fed tightening in 1994 and 2004 and during the 2013 Fed taper, MXASJ has historically rallied in the six months after.
Two, Figure 2 highlights that MXASJ P/B has dropped to 1.37x. This is the lowest P/B start since 2008-09.
Three, MXASJ ROE appears to be bottoming at 11%.
■ Key risks to our call. With the Fed tightening against a weaker macro backdrop globally and particularly so in China and 2004 (the episode with the 37% return for MXASJ) associated with NJA ROE rising from 10% to 15%, the key question is whether these differences are big enough to negate history. The other risk is whether global policy divergences (Fed tightening versus ECB and BOJ easing) mean the DXY does not fall as it did in prior episodes. We believe a modest 10% return though is still likely.
■ Overweight Cheapest 4. While past performance is not necessarily a good guide to the future, the Cheapest 4 outperformed the Expensive 4 by 7% YTD in 2015. We continue to Overweight the Cheapest 4, which are Korea, MSCI China, Taiwan and Singapore.
Singapore Strategy 2016 (Pg 67)
Domestic policy in focus
We expect Singapore GDP growth to remain lacklustre in 2016, reflecting a weaker growth outlook for China and ASEAN, as well as a slower population increase. Given an uncertain external environment, we expect the focus to be on domestic restructuring, with government measures in the telco, property, land transport sectors closely watched. We believe there could be downside risks to market EPS growth expectations of 5% in 2016, vs a 2% decline in 2015. While MSCI Singapore P/B of 1.16x is close to its FY08/09 low of 1.06x, we do not see scope for a broad rerating as ROE is likely to remain depressed at close to 9.5% (2008-09 low of 10%). We are OVERWEIGHT the real estate and transportation sectors, and UNDERWEIGHT in the telco sector. Our top picks are DBS, Singtel and Citydev.
Expect more earnings cuts
Consensus 2015 and 2016 EPS were cut by 7.6% and 11.4% since January 2015, respectively. As a result, the market now expects MSCI Singapore to see EPS growth of 5.2% in 2016, following a decline of 2.3% in 2015. The largest cuts were in consumer discretionary, consumer staples and industrials sectors. Consumer discretionary stocks have been impacted by weak retail sales and falling gaming revenues. Consumer staples have been hit by a decline in commodity price, while industrial stocks have been impacted by lower newbuild rig orders. Real estate, financials and telcos have seen relatively resilient earnings.
Attractive valuation but ROE may remain depressed
MSCI Singapore P/B of 1.16x is close to its FY08-09 low of 1.06x. The market is already trading at a discount to P/B of 1.23x in 2001 (global recession) and 1.21x in 2003 (SARS episode). Only during the Asian Financial Crisis of 1997-98 did P/B see much lower levels of 0.77x. However, we do not see scope for a broad rerating as ROE is likely to remain depressed at close to 9.5% (FY08/09 low of 10%).
What could surprise in 2016?
We expect government measures in telco, property and land transport sectors to be closely watched.
■ Potential for a new entrant in the cellular market: We see a high probability of a fourth cellular operator emerging from the spectrum auction in 1H16. In 2H16, we expect cellular pricing in Singapore to come under pressure as incumbent operators pre-empt the potential launch of services by the new player in 2017.
■ Pre-emptive recalibration of property measures: In our view, the time is ripe for an easing of some of the measures, given that specific policy intent of these measures has been achieved: (1) speculative activities have fallen, (2) foreign demand has been curbed, and (3) income growth has now outpaced home prices.
■ Bus and rail restructuring in focus: With the bus government contracting model on track to start in 3Q16, we expect continued emphasis in improving rail reliability, with a potential transition to a similar asset light model for rail. This will be like the rail financing framework for the Downtown Line operated by ComfortDelgro, where the operating assets are owned directly by LTA. (Read Report)
Source : Credit Suisse Asia Pacific Equity Research