SINGAPORE (June 25): The Singapore stock market has been spooked by a few events recently, including US-China trade wars and Opec’s tussle with expanding oil production.
Alongside these events are continued tightening by the Federal Reserve and a $37 billion injection into the financial by the PBoC to calm markets after US tariffs.
KGI says high yield spreads in Asia have been widening for the past three months, alongside a weakening of the CNH (offshore renminbi) and a yield curve that is close to inversion. Spreads between the 2 and 10-year treasuries are only trading around 35 bps now, a five-year low.
If the trend continues, there could be waves of default led by Chinese high yield, which can cause a domino effect on Asian high yield debt. “We recommend a defensive position in this kind of market environment,” says KGI Research Team in a report last Friday.
Similarly, KGI can see fund outflows in Asian equity markets causing decline among regional benchmarks, representing a good timing to shift into defensive positioning with fundamentally healthy companies that have been sold down together with the broader market decline.
KGI then used the following screening criteria to select stocks among the STI constituents: Two-year positive forward earnings growth; Upside potential based on street estimates; Relative underperformance vs STI year-to-date.
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It expects companies that have underperformed the STI year-to-date but continue to have positive earnings momentum to recover as second quarter earnings season begins next month.
Stocks selected were Yangzijiang (+49% potential upside), ThaiBev (+28%), Venture Corp (+51%), Sembcorp Industries (+31%), Keppel Corp (+31%) and Singtel (+25%).
As at 3.28pm, shares in Yangzijiang, ThaiBev, Venture, Sembcorp, Keppel and Singtel are trading at 92 cents, 76 cents, $17.54, $2.79, $7.15 and $3.12 respectively.
