Phillip 2020 Singapore Strategy – A domestic recovery December 16, 2019 1519

  • Expect Singapore economy to surprise on the upside – recovery in global economy and domestic macro better than expected.
  • Three other themes for 2020 are trade ceasefire, risk from binary political events and less momentum for interest sensitive stocks.
  • STI target of 3700 driven by growth surprise and potential re-rating catalyst.

Review: YTD19, the STI is up 4%. We fell short against the benchmark MSCI Asia Ex-Japan (MAXJ)’s rise of 11% (SGD terms). The STI has underperformed MAXJ in four out of the past five years. We lack the earnings growth and re-rating theme. This has resulted in STI valuations being stuck in a tight range. A new source of fund-flow could be a re-rating trigger. When reviewing sector performance, REITs stood out as the best performer in 2019. We entered 2019 with expectations of two rate hikes. Instead, we faced the “Powell pivot” and experienced three rate cuts in 2019.

 

Outlook:  In 2020, we think the Singapore economy could surprise on the upside. Firstly, the economic backdrop globally is expected to recuperate after two years of deceleration led by the manufacturing sector. Secondly, several key sectors of our economy are starting to recover. Property transaction volumes have rebounded after the malaise post-July 2018 cooling measures. Sales from new launches are up 13% in 2019. The improvement in the property sector supports retail spend and mortgage loans. The construction sector is on the mend with contracts awarded at four-year highs. Thirdly, the macro setting is turning positive. Foreign direct investments in Singapore are at record levels of US$108bn. Employment growth is the fastest in almost five years. There will be several political events to eyeball in 2020. Of course, we have our own Singapore elections. Past elections have not seen any meaningful impact on the stock market. Another notable event will be the Democratic Primaries. If Elizabeth Warren secures the presidential nomination, we can expect a knee jerk sell down in U.S. equities. On the dreaded trade war, our base case is a truce via the Phase 1 deal.  We believe the deal has a better chance in this period because i) Trump is heading into Presidential election, of which he will not wish to risk further deceleration in the US economy; ii) Headlining Phase 1 deal to provide both sides with the legroom to claim victory that more concessions and assertion should be attained in Phase 2, and iii) A desire to avoid 15 December punitive tariffs on the U.S. consumer.

 

STI Target: We are raising our STI target from 3400 to 3700. The improvement in growth and re-rating potential could surprise on the upside. This pegs the market at 15x PE FY20e.

 

Recommendation:  Our model portfolio – Phillip Absolute 10 – outperformed the STI in 2019. Our best performers include SGX, Capitaland, Sheng Siong and Ascott REIT. We are removing SGX due to the share price performance and expectations of reduced (Trump driven) market volatility.  We replaced SGX with StarHub. StarHub is on a path to recovery. The problematic pay-TV business should improve with more variable content contracts and a steadier subscriber base. As for mobile, we believe it is past the peak of the competitive intensity. We are replacing DBS with Frasers Centrepoint. 1H20 will be challenging for banks as net interest margins roll-over and loans growth stay tepid. Sheng Siong will deliver consistent earnings growth from new stores and a recuperating retail sector will be helpful. CapitaLand’s journey to building more recurrent earnings continues. Venture is our exposure to a rebound in the electronics sector driven by 5G and supply chain de-risking from China to Southeast Asia. We like PropNex’s huge market share, attractive yield and recovery in property transaction volumes.

 

2019 REVIEW

YTD19, the STI is up 4%. We fell short against the benchmark MSCI Asia Ex-Japan (MAXJ)’s rise of 11% (SGD terms). The STI has underperformed MAXJ in four out of the past five years. We lack the earnings growth and re-rating theme. This has resulted in STI valuations being stuck in a tight range. When reviewing sector performance, REITs stood out as the best performer in 2019. We entered 2019 with expectations of two rate hikes. Instead, we faced the “Powell pivot” and experienced three rate cuts in 2019. As the year progressed, the slowdown in the global economy, led by manufacturing-stoked fears of a looming recession swayed by the inverted yield curve and escalation of tariffs between the U.S. and China. Stocks that performed the best were driven more by bottoms-up company-specific drivers rather than a broad macro driver.

 

OUTLOOK

In 2020, we think the domestic Singapore economy could surprise on the upside. Firstly, the economic backdrop globally is expected to recuperate after two years of deceleration led by the manufacturing sector. Secondly, several key sectors of our economy are starting to recover. Property transaction volumes have rebounded after the malaise post-July 2018 cooling measures. Property sales from new launches are up 13% in 2019 and accelerating. The improvement in the property sector supports retail spend and mortgage loans. The construction sector is on the mend with contracts awarded at four-year highs (Figure 8). Even the moribund retail sector is registering some stability (Figure 9). Thirdly, the macro setting is turning positive. Foreign direct investments in Singapore are at record levels of US$108bn (Figure 10). After two consecutive years of decade-low population growth, Singapore manage to eke out an improvement in our population growth (Figure 11).

There will be several political events to eyeball in 2020. Of course, we have our own Singapore elections. Past elections have not seen any meaningful impact on the stock market. Another notable event will be the Democratic Primaries. If Elizabeth Warren secures the presidential nomination, we can expect a knee jerk sell down in U.S. equity markets. Then there are the November Presidential elections. Maybe, only Michael Bloomberg can save the following four years. On the dreaded trade war, our base case is a truce via the Phase 1 deal. We believe the deal has a better chance in this period because i) Trump is heading into Presidential election which he will not wish to risk further deceleration in the US economy; ii) The headline Phase 1, can provide both sides with the legroom to claim victory that more concessions and assertion could be attained in Phase 2; and iii) A desire to avoid 15 December punitive tariffs on the U.S. consumer.

 

RECOMMENDATION

There is no single underlying theme in our portfolio. Our selection is purely a bottom-up balanced portfolio of stock picks which we hope to generate alpha. We look for balance returns in our model portfolio. For our 2019 absolute return portfolio, our top 10 picks – The Phillip Absolute 10 by categories are:

 

a)       Dividend Yield: Ascott REIT and Netlink Trust are the yield anchors to our portfolio. Around 40% of Ascott revenues are income protected (master lease and income guarantees) and the balance is diversified across nine geographies. Netlink is your residential fibre provider monopoly enjoying regulated returns. Incremental to earnings growth will be connections for 5G deployment and penetration in commercial fibre business.

b)       Dividend Growth: We expect UOB to grow their dividends in view of their 7% earnings growth in FY19e. Frasers Centrepoint is a new addition. Growth will come from the rise in captive HDB population for their malls and likely inorganic growth from a pipeline six suburban mall assets in PGIM fund held by its sponsor. 

c)       Growth:   The recovery in HDB transactions and a large number of new property launches will be supportive of PropNex earnings growth in FY20. We expect another year of growth for Sheng Siong as they grow the stores, market share and margins. Venture will ride on the shift in global electronics supply chain into Southeast Asia and an improvement in electronics demand from improving Sino-US trade relationship.

d)       Re-rating:  CapitaLand is scaling up its lodging and asset management fee income. We view this as a higher quality income and will re-rate the valuation of the company. We are expecting Starhub pay-TV operations to improve as customers are locked in two years and the content cost is gradually restructured. We think mobile competition has peaked and intensity will subside. We expect Singtel’s associate Airtel to improve group earnings, after a brutal price war,  the wireless market in India is currently going through a series of price hikes.

 

STI target. We are raising our STI target from 3400 to 3700. The improvement in growth and re-rating potential could surprise on the upside. This pegs the market at 15x PE FY20e.

 

 

2019 Performance Review – Phillip Absolute 10

Our Phillip Absolute 10 outperformed the STI in 2019. Below were some of the changes we made during the quarters.

 

1Q19 Add: SGX, Keppel DC REIT, China Sunsine; Remove: Chip Eng Seng, Micro-Mechanics, Banyan Tree

2Q19 Add: NetLink Trust, Ascott REIT, Singtel; Remove: Ascendas REIT, CCT, Geo Energy

3Q19 Add: DBS, APAC Realty; Remove: China Sunsine, Keppel DC REIT

4Q19 Add: Venture Corp, PropNex; Remove: ComfortDelGro, APAC Realty

 

The portfolio was dragged down in 1H19 by some of our growth stocks such as China Sunsine and Geo Energy. Earnings severely disappointed with both stocks. Keppel DC REIT was a hindsight miss, as we took profits too early as we felt valuations were stretched. We switched our income-generating stocks in 2Q19 with NetLink and Ascott REIT. In the 3Q19, we included our first mid-cap stock – real estate agency APAC Realty. We exited ComfortDelGro as taxi industry continues to lose market share to private hire vehicles and rail business was hit by several charges. In 4Q19, we added Venture as a beneficiary of recovery in electronics industry plus swapped APAC Realty with PropNex due to the latter’s better execution.

 

Sector Narratives

1.   Consumer: Consistent with our domestic recovery theme, we expect consumer spending to improve in 2020.  Wage and job growth will support spending and even an improvement in property sales.

2.   Finance: We still view banks as dividend growth stocks due to their single-digit earnings growth profile and well-capitalised balance sheets. Nevertheless, we expect 1H20 to be weak for the banks namely from lower interest margins and tepid loans growth. 2H20 should see better performance as the recovery in macro conditions becomes less ominous.

3.   Healthcare: The hospital admission data has surprisingly turned positive and even medical tourism has been better. However, high valuations and higher risk profile (as the sector ventures overseas) will cap any upside in share prices.

4.   Property: We have been surprised by the share price performance of property stock especially with the huge uncompleted supply yet to be launched. With 40 to 50 launches a year, take-up rates have understandably been low at 20%. We prefer the real estate agents over developers. Agencies have concentrated market shares, will benefit from improvement in volumes and not underwrite the potential losses from unsold inventory (or the punitive stamp duties).

5.    REITs: It was a windfall year for REITs. We moved from expecting two rate hikes to receiving three rate cuts in 2019. This five cut swing in expectations will not occur in 2020. My expectations are flat price performance and to just collect your dividends as returns.

6.   Technology: Pretty bullish on this sector – 3 reasons: (a) recovery in overall global manufacturing; (b) roll-out of new structural technologies like 5G and continued penetration of electronics into mainstream automobiles (infotainment, LEDs, seating, etc) and hybrid vehicles (due to emission standards especially in Europe); and (c) supply chain migration to Southeast Asia – including Malaysia.

7.   Telecommunications: Not too worried about the fourth mobile operator. If there was a profit opportunity, the service would have already been rolled out and not just an unlimited free trial at present. MVNOs have closed any profit pools left for TPG.

8.   Transportation: It has been challenging for the taxi industry in Singapore. The number of private hire vehicles is growing at a rate that is equivalent to the current fleet of taxis every 18 months.

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