Head, OCBC Investment Research
Member of OCBC Wealth Panel
It has been a choppy year for Asian equities as Fed policy, oil prices, Brexit, slower growth from China, the U.S. Presidential election and several other key events dictated stock price movements.
As the region is seeing slower growth, these challenges have meant tougher operating conditions, which in turn have reined in corporate earnings growth. The recent shift in the market’s focus to the U.S. Presidential election has also directed attention to global trade, which is one of the key topics covered during this election.
Despite the challenging macro backdrop we continue to see selective opportunities on the local bourse.
Reasons for lacklustre trading
While global markets were able to recover some ground following the unexpected Brexit announcement, the Singapore market was not able to shake off the trading inertia as the Straits Times Index (STI) traded within a narrow band from 2700 to 2960 from March to October this year. The lack of key corporate developments and the drag from the faltering oil and gas sector were some of the key reasons for the lacklustre trading activity.
Inexpensive valuations and healthy yield
Against a challenging macro environment, corporate earnings projections for Singapore listed companies have been cut successively. Based on the current estimate from Bloomberg, STI companies are projected to show no earnings growth this year. As share prices have also generally corrected to reflect this uninspiring earnings outlook, valuations are inexpensive for the STI. With the current price-earnings ratio of 13 times and price-book of 1 time, valuations are one of the lowest in the region. The additional sweetener is the healthy 4 per cent dividend yield.
Global uncertainty has actually benefited certain sectors
We believe headwinds remain in the market, especially with the impending U.S. Presidential election and market concerns about higher interest rate ahead. In Singapore, apart from the recent spate of privatisations, it appears fairly quiet on the corporate front.
There is a flight to safety and investors continue to opt for higher yield and defensive earnings companies. This is aptly captured by the good gains for Real Estate Investment Trusts (REIT) and telecommunications stocks.
The FTSE REIT Index is up about 9.5 per cent for this year and Singapore listed REITs are offering an average dividend yield of about 6 per cent.
The FTSE Telecommunications Index is up about 3.7 per cent for the year. Singapore Telecommunications -- the bellwether stock in the sector -- provides a dividend yield of 4.7 per cent and is up 5.5 per cent for the year, despite concerns of a fourth telecommunications player coming into the market.
Earnings woes seem to be largely priced in
Earnings woes will remain as the local and regional economies struggle with the challenges of slowdown in some core sectors such as oil & gas, commodity, property, banking, etc.
However, the bulk of the negative news has already been priced into the stock market. Based on historical trends, the STI is currently trading at 1 time price-to-book – this compares with the 10-year high of 2 times, low of 0.95 times and average of 1.41 times.
Property stocks offer good value for longer term investors
We do not expect a year-end rally for the STI given the current economic slowdown and investors staying on the side-lines while awaiting the outcome of the U.S. Presidential election. However, opportunities still exist.
For example, the real estate sector has staged a strong recovery from this year’s low. Based on the FSTE Real Estate Index, it is up some 19 per cent from this year’s low in February. General sentiment is still sombre and buying interest is still confined to selective new residential projects. Property stocks are now offering good value as they are currently trading at a huge discount to book value. Based on the index, it is currently trading at 0.6 times book value.
Privatisation and acquisition theme to continue
We expect the privatisation and acquisition theme to continue, reflecting the undervaluation of Singapore listed stocks. Cash-rich companies or companies with strong owners are likely to scout for undervalued companies to provide operational synergy or organic growth.
Our top picks
With the mixed outlook ahead, we prefer a stock picking strategy. Some of our favourites include Ascendas REIT, CapitaLand, DBS, Fraser Centrepoint Trust, Keppel DC REIT, OUE Limited, SingTel and SPH REIT.
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