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Singapore Strategy - Buckle up for a rough ride

Shared By Stock Fanatic on Thursday, July 5, 2018 | 5.7.18

■ Selldown presents opportunity to trade on rebound in near term, stay with liquid blue chips or stocks with specific catalysts

■ 3Q outlook clouded by triple worries – trade war leading to potential currency war, rate hikes

■ All eyes on trade war, cutting back STI YE target to 3650 in base case, and 2915 in a bear-case scenario

■ Prefer domestic plays, recession-resistant stocks, stocks with high yield and beneficiaries of strengthening USD

Trade the rebound. Market is grappling with rising uncertainties from interest rate hikes, global trade war threatening to slow economic growth and strengthening USD. Potential downside to earnings in almost all sectors (except properties and REITS) could scale back earnings growth from 15.7% to 13% in the upcoming reporting season. That said, the recent correction has priced in earnings cut and pushed valuations to attractive levels, STI trading at -1SD or 12x forward PE. Our picks to trade on near-term rebound – UOB, Keppel Corp, City Devt, SATS, YZJ, CDL HT and APAC Realty are liquid names with catalysts for upside.

Base case: Trade war threats to subside by year-end, STI YE target cut to 3650. Beyond the rebound, volatility will increase, as trade war worries and tightening liquidity will cap bounces. We set a base-case scenario assuming that the current trade war cries are mainly political rhetoric ahead of the November mid-term election, and should subside towards year-end. That said, newsflow on trade war is likely to get worse before it gets better. We cut our base-case STI target to 3650, taking into account possible earnings cut and lower risk premium.

Bear case – STI could head for 2915 if ‘all-out’ trade war escalates. While we think a full-blown trade war is unlikely, we consider the downside impact, and conclude that STI could head for 2915, pegged to 10.5x PE(-2SD) which is in line with the two previous stock market bottoms over the past 10 years post GFC – during Eurozone crisis (2011) and oil price crash (2016).

As trade war rumblings unfold in 3Q, we prefer to stay defensive on companies with net cash, decent dividend yield and domestic consumption plays – Dairy Farm, Sheng Siong, SIA Engineering, ST Engineering, Singtel and Netlink Trust. We upgraded ComfortDelgro to BUY on potential growth of its taxi fleet, instead of contraction, backed by its attractive dividend yield of 4.6%.

Source : DBS Group Research
(Read Report)

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Posted on Thursday, July 5, 2018 | 5.7.18
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