08/31/2015
Singapore / Equities
The Singapore market remains fragile and susceptible to macro events unfolding over the next two months. As such, we advise investors to be tactical.
While the current uncertainties in Asia are not seen as a global financial crisis (GFC) in the making, many investors are worried that it is reminiscent of the1997 Asian Financial Crisis (AFC) with the weakening Southeast Asian currencies. However, we think the probability of a full-blown AFC in a similar magnitude is low because Asia is less reliant on external debt and has higher foreign currency reserves. The current account balances for most Asian economies have also improved. That said, our team has cut back growth assumptions and imputed higher risk, as well as lower valuation for our base case target prices on Straits Times Index (STI) components. We now expect earnings to decline by 1% this year.
Our base case is for the STI to trade within the 2,750 to 3,050 range. Attractive valuation underpins the STI at 2,750, which is slightly below the 11.46 times (minus 1.5 standard deviation) 12-month forward price earnings (PE). This support coincides with the Eurozone crisis level, but upside could be capped at 3,050 in the near term, which is 5% below our revised bottom-up 12-month STI target of 3,200.
However, the volatile macro environment could lead to negative surprises and trigger a crisis. This will push Singapore into a recession, thereby infusing systemic risks into equities. While black swans are typically random and chances of these events occurring are remote, we have stress tested the STI using target prices of the component stocks based on 2008 GFC valuation. Our bottom-up bear case scenario for the STI is 2,250, which coincides with the price to book value ratio levels during the troughs of the AFC in 1998 and the GFC in 2009.
As such, the market remains fragile and susceptible to macro events unfolding over the next two months. We prefer to maintain a trading stance and be tactical in our buy and sell calls. Our buys are companies which are bombed out in the oil and gas sector (such as SembCorp Industries), oil price beneficiaries (for example SIA), or companies with high earnings visibility (like iFAST). Venture Corporation is a beneficiary of the weak Malaysian ringgit and strong US dollar.
We continue to avoid highly geared companies, as it is a question of time before higher interest rates hit corporates. We would top slice stocks which are trading close to our base case target prices and have potential downside to our bear case target prices – Jardine C&C and Petra Food remain vulnerable to the declining Indonesian rupiah and slower growth in Indonesia, and SPH faces downside risk from advertisement expenditure if the economy slips into a recession. Provision levels for UOB could rise if economic condition and the property market deteriorate.
