Top Investment Ideas

October 2016

Michael Tan
Senior Investment Counsellor, Wealth Management Singapore - OCBC Bank
Member of OCBC Wealth Panel

Hunt for yield reigns as politics come to the fore

Politics will force itself into spotlight soon as we head on to the final stretch of the year. We have learnt from Brexit not to ignore political risks. Hilary Clinton’s first debate with Donald Trump heralds the start of the run-in to the election in November. Italy, meanwhile, has firmed up the date for its constitutional referendum as December 4.

Markets may enter into a phase of higher uncertainty. Risks remain elevated as one of the concerns about market levels has been that much of the gains have been fuelled by liquidity, not underlying growth. There is a realization that monetary policy is coming to the end of its usefulness as a stimulant for growth, and that something more is needed.

The environment of still low bond yields and range bound equities argues for income from both equity and fixed income markets for the rest of 2016.

We continue to prefer credit over equity. We are negative in our outlook on equity evenly in the developed market - US, Europe, and Japan - while keeping our neutral call on Asia.

Asset allocation should be the key consideration in managing and building your core portfolio.


Equity funds

You may capture the strong growth potential of Asia through dividend yielding equities. The Schroder Asia Equity Yield Fund provides capital growth and income through investment in equity and equity related securities of Asian companies which offer attractive yields and sustainable dividend payments. You may reap attractive potential payouts of between 3 – 4 per cent p.a., paid monthly.

Equity-Linked Convertible Investments or stock ideas

Looking ahead, while we continue to see long term value for the equity market, near term catalysts are limited. Hence we maintain our preference for quality dividend yield stocks.

With the yield spread versus the Singapore 10-year bond yield remaining supportive, we believe that yield strategies remain relevant in the current sluggish macro environment where interest rates are expected to remain accommodative.

While Singapore REITS (SREITs) have outperformed the STI index, the sector still offers attractive yields and is among the highest yielding REIT markets globally. Within the SREITs sector, our preference is for retail and industrial sub-sectors over office and hospitality.

Stock picks with more stable earnings visibility include Keppel DC REIT (KDCREIT SP) , SPH REIT (SPHREIT SP) and Frasers Centrepoint Trust (FCT SP).

We remain neutral on the property sector, which saw some lift in sentiment following regulatory announcements made to fine-tune refinancing rules for borrowers of owner-occupied residential properties. Overall sector fundamentals remain muted with home prices expected to decline over FY16-17.

Our preferred sector picks are diversified blue chips with healthy balance sheets, such as City Developments (CIT SP) and CapitaLand (CAPL SP).

In the U.S., cyclical sectors, led by Technology and Financials, continued to outperform in September. Given our cautious view on global equities, we continue to look for global sectors with a combination of consumer exposure as well as relatively attractive valuations. These would be Consumer Discretionary, Healthcare, Technology and Telecoms. At the same time, we are raising Financials from negative to Neutral and downgrading Energy from neutral to negative.

The latest move by the BOJ to introduce yield curve management rather than expansion of negative interest suggests that central banks are recognizing the ineffectiveness. This augurs well for the banks which were de-rated further since the introduction of negative interest rates. However, we see further risks from rising operational uncertainties post the UK referendum, with the regulatory environment and dilution risk capping the upside. Our preferred pick here is Bank of New York Mellon (BK US).

Energy stocks continued to underperform in-line with the weakness in crude oil prices. Crude oil price is forecast at US$48-50/bbl over the next 6-12 months, with limited upside catalysts for the sector, especially after the recent outperformance.

The U.S. economic recovery remains on track. Steady improvements in labour markets remain supportive for U.S. consumption growth. Also, the Consumer Discretionary sector continues to trade at a discount to its global peers. We pick Lowe’s (LOW US) and Starbucks (SBUX US).

We continue to be overweight the Technology sector, especially names with consumer exposure. Valuations are relatively less demanding and preferred names include Visa (V US) and (CRM US).

Healthcare underperformed in August in-line with other defensive sectors as risk appetite improved. Our positive stance remains intact here. Besides healthy fundamentals from expected strong pricing power for drug and biotech companies, the sector is likely to be less impacted should global growth decelerate.

Valuations remain undemanding versus global peers while M&A activities provide potential catalysts. We prefer Allergan (AGN US) and Sanofi (SAN FP).


GuocoLand Limited 3.95%, 1 April 2019

GuocoLand Ltd (GLL) is a subsidiary of Guoco Group, which is listed on the Hong Kong stock exchange and is in turn, a member of the Hong Leong Group, one of the largest conglomerates in Southeast Asia.

GLL develops and invests in properties. The company also provides investment trading, underwriting managers, and fund management & advisory services. In addition, GLL offers internet commerce services.

GLL is increasing its focus on commercial development to diversify its portfolio. Launched in February 2015, the Tanjong Pagar Centre’s (an integrated mixed-use development in the Singapore central business district) is expected to be completed this year and will be a near term catalyst.

GLL paid S$595.1 m during a government land sale in June for a plot in River Valley. In all, there were 13 bidders, indicating healthy interest and potentially signalling a trough to the Singapore private residential market. While GLL’s credit profile has improved since its Dongzhimen divestment, the redemption of its perpetual securities and its recent land acquisition in River Valley would result in an uptick in its gearing.

As at 30 June, GLL’s total debt to total capital was 52.67 per cent (from 51.18 per cent in 31 March 2016) while its EBITDA to interest expense was 6.20 times (from 3.25 times in 31 March 2016). GLL has demonstrated ability to access credit in the Singapore corporate bond market as well as divesting its integrated developments for capital recycling.

Bond Funds

Interested investors may consider the LionGlobal Short Duration Bond Fund. It allows investors to invest in investment grade bonds. Investors can receive potential payout 2.5 per cent p.a quarterly. This may be less risky when or if interest rates rise.

You can also consider the Fullerton USD Income Fund. This fund invests in a diversified portfolio of USD-denominated bonds, focused on quality companies with robust fundamentals. At least 70 per cent will be invested in investment-grade bonds to provide a combination of capital gains and stable dividend payouts.

In a low growth environment, Asian credits remain well-supported by monetary policy and the continued hunt for yield. This fund may provide an attractive income with lower volatility versus other asset classes. Its concentration risk is managed by careful credit selection and diversification and the interest rate risk is managed by ensuring that portfolio duration does not exceed five years.

Mixed-Asset Funds

Three funds have shown resilience in the face of the volatility caused by the UK’s referendum to exit the EU and possibly other events going forward. A portfolio of these 3 funds gives you a fair diversification of your investment.

The BlackRock Global Multi-Asset Income Fund’s dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.

Investors may also consider the Schroder Asia Income Fund which offers an attractive potential monthly pay out of about 5.25 per cent per annum paid monthly. The fund aims to capture the growth potential of Asia through both equities and bonds. Investors may gain from an active asset allocation strategy which aims to maximize yield and total return in different market environments.

We also recommend the JPMorgan Global Macro Opportunities Fund. This fund leverages on global macro themes to generate performance. It aims to deliver absolute performance in various market environments. The fund also has low correlation with many asset classes and provides good diversification for your portfolio. The fund manager can employ traditional and/or sophisticated investment instruments.

Currencies: Fed inaction leaves U.S. Dollar vulnerable for now. But we do not expect the U.S. Dollar setback to last given Fed’s readiness to hike in December.