■ Lift off in interest rates, currency volatility, oil prices, changes in domestic policies and restructuring initiatives will be key drivers for 2016
■ Overweight Transport, a beneficiary of low oil prices and Property developers, which are trading at distressed valuations with upside catalyst from potential policy relaxation
■ We pick smart nation proxies, beneficiaries of domestic policy changes and companies in value unlocking mode, generating upside in dividend payout
■ Stock picks: Capitaland, City Devt, Ezion, Frasers Centrepoint Ltd, Japfa, Mapletree Greater China, ST Engineering, Sheng Siong, Thai Bev and Venture Corp
5 key drivers in 2016
The pace of rate hikes vs economic recovery will drive volatility. Beyond the initial knee jerk reaction, history has shown that the first 1-3 months could be negative for equities once the Fed starts its rate hike cycle, but would improve as the economic recovery gathers momentum. Currency took a hit in 2015, and will be less of a worry as 2016 progresses if Asian growth recovers. The oil price, at a seven year low, is close to the bottom, and offers rebound opportunities although recovery is still some way off. Potential changes in domestic policies offer upside catalysts in Land Transport, Property while a fourth player in the Telecoms sector, if successful, will impact incumbents. Restructuring and M&A opportunities will gather momentum; the market is trading at only 1.2x Price-to-Book.
Inexpensive valuation, pricing in nascent growth
The shadow of higher interest rates, more earnings disappointments during the upcoming 4QFY15 results season and uncertain growth outlook next year could be a near-term drag for equities. The consolation is that after the dismal YTD decline of more than 17%, STI’s valuation is inexpensive. At 2800, STI trades at 11.46x (-1.5SD) FY16F PE vs EPS growth of 5.9%. We expect a trading range of 2650-3100 over the next 6 months.
Look for opportunity to buy in 1Q16 on further weakness
We see weakness in 1QCY16, throwing up opportunities to accumulate for a tradable rally because:
1) market valuation is inexpensive,
2) history shows the inflexion point for the negative stock market reaction after the initial US rate hike is within a 3- month period, and
3) the period from mid-March till end-April is traditionally positive for equities as investors position ahead of stocks going ex-dividend.
Smart nation proxies and companies in value unlocking mode:
Despite low oil prices, Ezion is a valuation trade to ride on any oil price rebound, which we believe is near its bottom. Prefer Property developers (Capitaland, Frasers Centerpoint Ltd, City Devt) to REITS (selective on companies with resilient earnings and growth – Mapletree Greater China (MAGIC)). We pick smart nation proxies (ST Engineering) and companies in value unlocking mode generating upside in dividend payout. Venture is backed by an attractive dividend yield and strengthening US$; Thai Bev and Sheng Siong offer steadily growing cash flows. Japfa’s valuation is bombed out while earnings are poised for recovery. (Read Report)
Source : DBS Group Research