SINGAPORE (Jan 8): Credit Suisse is recommending Singapore investors stick with a portfolio of quality, high-yield stocks and stocks with low embedded expectations to ride out any volatility in 2019 while positioning for a market recovery.
And while the market’s upward momentum this year may be dulled by dimmer economic and corporate earnings growth outlook, the Swiss investment bank says the below-historical average market P/E of 11.4x and a compelling dividend yield of 4.4% make for an attractive risk-reward proposition for longer-term investors.
In a Tuesday research report, Kum Soek Ching (below), Head of Southeast Asia Research, Private Banking Research, Credit Suisse, says 2018 is likely to have marked the peak in growth momentum for Singapore banks.
After a broad-based slowdown in loan growth in 3Q, indeed UOB and OCBC have guided for mid-to-high single-digit growth and DBS for mid-single-digit growth in 2019 as demand for mortgages and trade finance softens.
As two rate hikes are expected in 2019 and loan repricing continues with a lag, Kum says there is still room for margins to expand as US rates rise although an increase in funding cost as liquidity tightens or a pause in US Federal Reserve rate hikes will be key risks to margins.
With corporate earnings under pressure from a slower economy and weaker business sentiment, Kum believes SREITs’ earnings predictability and more defensive yields position the sector well for an outperformance. All REIT sub-sectors are also expected to post marginally positive distribution per unit (DPU) growth in. Credit Suisse favours selected retail, office and data centre REITs.
“We see a bottoming in retail rents as supply growth fades after 2019, with REIT-managed shopping malls faring better than island-wide retail space,” says Kum. While the office rental recovery is more mature than other sub-sectors and spot rent increase could moderate with slowing of the economy, office REITs should finally see the office upcycle filtering down to positive rent reversion in 2019.
In a year of slowing GDP growth, Credit Suisse expects softer new sales and flat housing prices in 2019. As price upside is likely to be capped by policy risks and the perceived government tolerance threshold, Kum does not see a meltdown in the property market in the absence of a major disequilibrium in supply-demand.
Based on data from the Urban Redevelopment Authority, supply and completion of private residential units should average 10,580 units a year in the next four years, versus a 10-year historical average net demand of 11,400 units.
“Major property developers are trading at price-to-book of 0.50x to 0.70x, or almost at their previous lows in 2015.” says Kum, “This is consistent with the deepest valuation discount during the corrective phase in 2013–2016. We see limited downside risk to the stocks.”
The Singapore telcos sector underperformed the market in 2018 on concerns over competitive risk from the impending entry of TPG and Kum expects “competition to rise in the months ahead as players move to lock in new and current customers.”
Meanwhile, the maturing mobile market and structural decline in traditional revenue streams have driven the telcos to shift their focus toward developing more offerings in the enterprise space, such as cybersecurity, and rationalising costs.
Given that the telcos have some of the best datasets on their customers, there should be room for them to better monetise the data through new solutions, in areas such as digital marketing. However, since many of these new growth opportunities are outside of the telcos’ traditional business, Credit Suisse says they need to close their technological gaps by pursuing more mergers and acquisitions (M&A).
“We believe SingTel will be an exception due to its robust balance sheet. Its earnings should also be more resilient to rising competition, as it has the lowest exposure to Singapore. Its 2019E dividend yield of 6% remains sustainable, in our opinion,” says Kum.
As for O&M conglomerates in Singapore which have underperformed the market in 2018 due to lower-than-expected new order achievements. The renewed weakness in the oil price in the last quarter of 2018 has also dimmed the recovery potential in the rigs sector. Still, an improving rigs utilisation rate, a nascent improvement in demand for new-builds and a peak in new rigs supply in 2019 bode well for a bottoming in the rigs market, adds Kum. Meanwhile, most exploration and production companies have adjusted their capex plan to a lower long-term oil price assumption of between US$50 and US$60.
