We expect the Singapore market to post a modest rebound in 2H16 after a dismal 2015. We think the credit cycle will be kick-started following the US Fed interest rate lift-off, setting the conditions ripe for the DM market to outperform its regional EM peers. In particular, we expect the large-cap stocks to stage a progressive recovery following a rout since Jul 2015. Our bottom-up STI target of 3,200pts represents an implied 13.3x FY16 P/E.
■ Worst-performing market to regain some lustre
Singapore seems to have lost its shine over the past year on regional P/E and ROE bases, no thanks to self-imposed domestic restructuring as well as the economic slowdown in China. Compared to the regional markets (see Figure 13), the country’s stock market was one of the worst-performing ones last year. However, things may be about to change next year as we expect Singapore to make a modest comeback in 2H16.
■ DuPont Analysis
For this year’s strategy, we conducted a DuPont analysis of the Straits Times Index (STI). We think there is room for its ROE to improve beyond 8.9% currently. Using DuPont’s 3-factor ROE analysis, we expect asset turnover to remain stable but anticipate the credit cycle to be more active following the normalisation of rates. The next longer-term catalyst would be profit margins bottoming out. On the cost side, oil and commodity prices have fallen substantially – but this has not percolated down completely to corporate bottomlines due to “price stickiness” and existing lock-in hedges. We expect this to progressively play out over the coming quarters.
■ Cherry-picking recommended
The market’s valuation – at 12.5x earnings, 1.1x book with a dividend yield of 4.1% – looks modest from historical and regional perspectives. A normalisation of the monetary policy next year would support our bottom-up view that the FSSTI could hit 3,200pts by end-2016, based on an implied 13.3x FY16 P/E or 1.2x P/BV, while offering a 12% upside. We would recommend that investors stay selective – with banks, transport, technology, plantations and utilities as our preferred sectors. As for the property sector, the physical market is likely to remain subdued – which could lead to another fall in residential prices by 6-8%, in our view. We expect some cooling measures to be lifted in 2H16, after property prices corrected 12-15% from the peak, which should see interest returning to this sector.
For 2016, our stock picks comprise well-positioned quality stocks with good track records. The list includes Comfort DelGro, Dairy Farm, DBS, First Resources, Frasers Centrepoint Trust, Ho Bee, SilverLake Axis and Wing Tai. In the more adventurous small/mid-cap space, we like China Everbright Water Ltd, Ezion, Global Invacom, IPS Securex, Oxley Holdings, SIIC and Singapore Shipping. Top SELLS are CDLHT, Keppel REIT, Eu Yan Sang, SembCorp Marine and Super Group. (Read Report)
Source : RHB Research