Across Asia, equity markets have been volatile over the past few months. The regional benchmark MSCI Asia-Pacific Index plunged 27 per cent from its April high to its September low, and most other Asian indices followed suit. In Singapore, the Straits Times Index (STI) fell 23 per cent during the same period.
This widespread correction across the region was brought on by several factors: the softness in commodities, especially oil, the weakness in Asian currencies and the economic slowdown in China.
With the Chinese slowdown expected to continue — the economy should expand 6.8 per cent this year, 6.5 per cent in 2016 and 6.3 per cent in 2017, based on consensus estimates — the rest of Asia will feel the effects.
Singapore-listed companies will not be spared, as many are homegrown enterprises with a regional presence, with China as a key market.
Already, the slower growth in China — along with the muted outlook for commodities — has led to cuts in corporate earnings forecasts in Singapore and the region.
Valuation is key
In Singapore, the corporate earnings growth for 2015 is estimated to be flat to a low single-digit number currently versus about 8 per cent at the start of the year. The range of estimates for Singapore’s economic growth has also narrowed.
Last month’s pick-up in equity trading may point to a return in risk appetite but Ms Carmen Lee, head of OCBC Investment Research, OCBC Bank, believes that the fourth quarter will remain quiet.
“We believe that downside risks have increased as the recent emerging markets slowdown could affect developed markets,” she explains. “The corporate earnings outlook and guidance from companies is also decidedly more cautious.”
However, investors who want to dip their toes into the market would be happy to know that there are gems in the market despite the general subdued mood.
Ms Lee says that the biggest draw is valuations.
Using the price-book ratio, the Singapore market is trading at 1.2 times now, the same as in 2011 during the European crisis and just marginally higher than 1.0 in 2008 during the global financial crisis.
The STI is trading at 13.3 times 2015 earnings and 12.5 times 2016 earnings with price-to-book of 1.2 times and dividend yield of 3.8 per cent.
In other words, valuations are “not expensive” and current economic fundamentals are stronger than in the crisis years.
Now might be a good opportunity to buy quality stocks, she says.
“We prefer a stock picking strategy to identify well-run companies with clear business strategies and earnings models, strong management track records and preferably with good and consistent dividends and clear dividend payout policies,” she adds.
Here are OCBC Investment Research’s picks:
DBS Group Holdings
(BUY, Fair Value (FV): $21.35)
The impending interest rate hike is expected to have a positive impact on DBS in 2016. Its regional strategy is also bearing fruit, giving it a diversified earnings base from several key business units and a good geographical spread. Its dividend yield is decent at 3.6 per cent.
Frasers Centrepoint Trust
(BUY, FV: $2.25)
Frasers Centrepoint Trust (FCT) has delivered positive growth in its distribution per unit (DPU) every year since its initial public offering (IPO) in July 2006. This represents a compounded annual growth rate of 8 per cent. It has a defensive and resilient portfolio of suburban malls, which are less likely to be impacted by macroeconomic weakness due to the non-discretionary nature of its portfolio. It has a healthy gearing ratio of 28.7 per cent as at June 30 this year. Based on our projections, FCT offers an attractive distribution yield of 5.9 per cent for FY15F and 6.1 per cent for FY16F.
Keppel DC REIT
(BUY, FV: $1.24)
Keppel DC REIT offers a unique pure-play exposure to the data centre industry. This industry is expected to experience robust growth given huge potential of cloud computing and “big data”. It has a healthy balance sheet to support acquisitions and drive inorganic growth. Based on our estimates, the distribution yield is 6.5 per cent for FY15F and 6.9 per cent for FY16F.
Singapore Telecommunications Ltd
(BUY, FV: $4.38)
The telecommunications sector offers defensive stable earnings and attractive dividend yield. Singapore Telecommunications (Singtel) is still guiding for growth in 2015, and core revenue and EBITDA are projected to grow by mid and low single-digit level, respectively. It is also moving into digital media and digital service. At current price, dividend yield is a decent 4.5 per cent and it is committed to paying out no less than 60 per cent of earnings.
Wing Tai Holdings
(BUY, FV: $2.58)
Wing Tai Holdings’ current valuation of 0.44 time price-to-revalued net asset value (P/RNAV) is compelling. In addition, its current price-to-book (P/B) of 0.43 time is about 1 standard deviation below average and near previous crisis troughs. The group is well positioned to ride out the current residential down cycle with its strong balance sheet (10 per cent net gearing with $880 million cash) and an experienced management team.
(BUY, FV: $2.27)
Wheelock Properties is currently trading at compelling valuation of 0.48 time price-to-revalued net asset value (P/RNAV) and 0.59 times price-to-book (P/B). It is 76 per cent owned by Hong Kong parent Wheelock and Co. The company has a strong balance sheet (13 per cent net gearing with $263 million cash), which will buttress it in the current downcycle. Its participation in Hotel Properties Limited (HPL) offers an accretive move that could precipitate further upside if the HPL consortium moves to unlock value in the large West Orchard site.
At OCBC, thoroughly researched information and recommended calls are condensed into monthly and weekly reports, with views on market outlook and top investment ideas that are based on close monitoring of the financial markets and economic conditions. The result is well-researched information that is easy to understand and apply, which OCBC Premier customers benefit from.
In my view
What are your favorite sources of stock information?
“I have come to rely heavily on the Internet for my daily dose of economic, business and corporate news.
For financial news, my favourites are Bloomberg and Reuters (for global news and financial information), Singapore Exchange website (for corporate news and developments), iOCBC (for share prices and index movements and technical charts) and online news from BBC, CNBC and The Economist.
My TV is permanently tuned to CNBC whenever I am home on weekdays. It has become so easy to access information at any time of the day, however, this also means that we are inundated with too much information.
To get around this, I tend to stick to my favourite websites or news apps for quick, short and concise synopsis and then research more if the sound bite proves to be interesting to me.”
Ms Carmen Lee
Head, OCBC Investment Research, OCBC Bank