Excerpts from analysts' report
 RHB Research analysts: Ong Kian Lin & The Singapore Research Team The STI has fallen by 17% over the past three months (14.6% YTD) post fears of a China slowdown, the surprise CNY devaluation and with the US Fed rate hike still on the table. It is trading below -1SD from the mean P/E (12.2x) and P/BV (1.1x). It is probable that equities may still continue to decline (by 6-8%) in the weeks ahead, before investors source for trough valuations. We peg re-entry points at 2,700pts (11.5x P/E), ie the depth of the Euro debt crisis. We also recommend selecting counters this period, in bracing for the bumpy ride ahead. |
» 1H15 results misses and the earnings downgrade trend continues. A recurring theme was also the weakness of regional currencies against the SGD, which eroded corporate earnings – especially for companies with offshore exposure. With Singapore’s growth prospects looking uncertain, we believe further downgrades could spill over into 2H15. The Singapore market may continue to be driven by external events, spanning from the contagious effects of growth slowing down in China to the CNY devaluation, which will affect low-cost manufacturers in ASEAN (who will find it harder to compete), as well as companies in Singapore which provide components to Chinese manufacturers (export decline).
» Oil and gas, and commodities are the most affected QTD. Concerns over a slowing Chinese economy drove oil and commodities prices to a six and 13-year low respectively. The stocks of companies in these two sectors were the hardest hit. Representatives from each segment include Noble (QTD: -41%) (NOBL SP, NR), Golden Agri Resources (QTD: -28%) (GGR SP, BUY, TP: SGD.0.48), Sembcorp Marine (QTD: -19%) (SMM SP, NEUTRAL; TP: SGD2.66).
 We prefer under-valued large-cap companies with strong balance sheets to withstand the ensuing interest rate hikes and market turmoil. We also like companies that generate stable and growing recurrent earnings, supported by net cash positions. |
The REITs were also not spared and tumbled -15%, QTD, fuelled by fears of rate hikes and margin call concerns over private banking carry-trades.
» Stock selection remains crucial. We revise our FY15 STI target to 2,950 pts in view of the present macro uncertainties that could stretch over the next 3-6 months. In this climate, high earnings visibility and attractive valuations remain our key considerations.
Flight to safety themes such as high dividend yields in times when macro uncertainties linger may not be the best option this period, since the US Federal Reserve (US Fed) rate hike is still on the table and yield spreads continue to widen. We prefer under-valued large-cap companies with strong balance sheets to withstand the ensuing interest rate hikes and market turmoil. We also like companies that generate stable and growing recurrent earnings, supported by net cash positions. Our recovery plays Top Picks are listed in the table below (more details in Figure 15).
Full report here.
