SINGAPORE (June 28): UOB KayHian sees value in Singtel, City Developments, CapitaLand Commercial Trust, OCBC, Keppel Corp and Wing Tai within its universe of stocks which have corrected more than 15% from the 52-week high.
Since its high of 3,615 in early May, the benchmark Straits Times Index has retraced close to 10%. Amplifying the volatility, has been external noise over the US-China trade spat as well as rising interest rates. Market risk premium (MRP) from May 2 till June 27 implies a 81bp rise in MRP to 5.17% during this period, above the long-term mean of 5.0% since 2005..
In UOB’s view, the rise was due to a shift in interest rate hike expectations since the Federal Open Market Committee (FOMC) meeting on 13 June and external concerns over the US/China trade spat, which would have implications on global growth.
While there is justification for a hike in MRP due to signals from members of the FOMC that there could be four rate hikes in 2018 rather than 3, we think the rise in MRP would also partially price in the trade spats between the US and China.
In a Thursday report, analyst Andrew Chow says UOB has extended its analysis of the MRP to stocks to find stocks that could have been oversold. Based on its estimates, stocks that look oversold included OCBC, DBS, Keppel Corp and Wing Tai.
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These stocks saw a rise in risk premium to 0.97-1.79% compared to the broader market’s risk premium increase of 0.81% which Chow thinks is overdone.
In his view, fundamentals for banks are largely intact, notwithstanding the rising risk that global growth could be dampened by weaker global trade.
Meanwhile, Keppel Corp is his preferred proxy for the gradual recovery in oil prices given its strong balance sheet. At the current price, Keppel’s O&M segment is valued a zero.
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Chow also remains constructive on prospects for developers and we see Wing Tai’s 15% ytd decline and 5% decline since May 2 as unjustified.
Despite the recent decline in the VIX to 16.9 from the recent peak of 37.3 in early February, Chow sees the potential for VIX to trade above mean in the event of further escalation in rhetoric over the trade spat or other geo-political concerns.
“These issues are likely to be protracted and could provide tactical trading opportunities for patient investors,” says the analyst.
OCBC, DBS, Keppel and Wing Tai closed at $11.61, $26.50, $7.11 and $1.97 on Thursday respectively.
