Phillip Singapore Strategy – Too hungry for yield July 12, 2019

Review: STI was up 3.4% in 2Q19. It was a volatile quarter, with two positive months sandwiched between May’s major sell-down. The largest gainers were REITs and specific stocks such as Singtel (recovery in regional associates) and Wilmar (IPO plans in China) – Figure 1. Markets rallied on a reversal of the Fed’s interest-rate stance and hopes of a trade resolution. Trump doused all such optimism by raising tariffs on Chinese imports. This against a backdrop of already weak global growth. REITs rallied in the quarter on market expectations that interest rates have peaked, globally. The Fed will be cutting interest rates while the ECB has signalled the restarting of quantitative easing. Central banks’ back-stop has returned.

Outlook: We expect a range-bound market in 3Q19. The global economy is still drifting lower (Figure 4). The market is rallying on monetary stimulus in the U.S. plus fiscal stimulus from China. Our worry is, expectations of lower interest rates have been too aggressive Market is pricing in around three interest rate cuts this year by the Fed (Figure 9). There is room for disappointment. On the trade dispute between the U.S. and China, we expect it to tapper down. As the U.S. President heads into the 2020 presidential election, he needs a strong economy and stock market. This should shackle him from more belligerent trade tariffs. Corporate America is also pushing back. China can permanently switch to its own domestically produced technology – semiconductor and operating software. Moreover, US companies are exposed to Chinese retaliation with their estimated US$400bn worth of sales in China.

STI Target: We maintain our STI target of 3600, in-line with historical 14x PE. A 4Q19 rally is possible when there is a revival in global growth, improved trade relations and easier monetary policies.

 

Recommendation:  The Phillip Absolute 10 model portfolio was up 6.6% in 2Q19 (1H19: +14.2%). Our yield and dividend growth recommendations were the outperformers. Growth and finance stocks disappointed again. Nevertheless, we maintain both UOB and SGX in our portfolio. SGX should report healthy earnings on the back of its robust derivatives business. Keppel DC REIT has breached our target price. We replace it with DBS Group Holdings.  We raised our weighting on financials this quarter. Banks offer decent dividend yields of almost 5%, and we expect the dividends to grow. Interest margins can creep up because of the delayed repricing of loans.  Worth noting that SIBOR has in fact risen 6bps in 2Q19. Trading income will get a boost from the global rally in bonds. Loans growth is the weak spot, but that is already well-known. We removed China Sunsine and replaced it with APAC Realty. We cut back on our exposure to REITs. We believe interest rate expectations have overshot with the expected three rate hikes this year in the U.S. Rental reversions or organic growth in Singapore is muted. Inorganic growth is available but at much steeper valuations.

 

2Q19 Performance Review – Phillip Absolute 10

The Phillip Absolute 10 model portfolio was up 6.6% in 2Q19 (1H19: +14.2%). Our yield and dividend growth recommendations were the outperformers. Growth and finance stocks disappointed again. China Sunsine’s growth is capped by a weaker product selling price. Finance stocks are under pressure from lacklustre momentum in loans, plus expectations that interest rates will trend lower. Ironically, SIBOR has decoupled from the drop in US interest rates. Over the past SIBOR interest rates had in fact risen by 6 bps. We maintain both UOB and SGX in our portfolio. SGX should report healthy earnings on the back of its robust derivatives business. Keppel DC REIT has breached our target price. We replace it with DBS Group.  We raised our weighting on financials this quarter. Banks offer decent dividend yields of almost 5%, and we expect the dividends to grow. Interest margins can creep up because of the delayed repricing of loans.  Trading income will get a boost from the global rally in bonds. Loans growth is the weak spot but that is already well-known. 

We removed China Sunsine and replaced it with APAC Realty. We cut back on our exposure to REITs. We believe that interest rate expectations have overshot. Three rate hikes this year in the U.S. have been priced in. Rental reversions or organic growth in Singapore is muted. Inorganic growth is available but at much steeper valuations.

 

We will be replacing China Sunsine and Keppel DC REIT with:

(i)           DBS Group – We expect earnings upside from healthy margins as SIBOR interest rates have been resilient. Trading income will benefit from global rally in bonds.

(ii)          APAC Realty – An oligopoly that enjoys high returns on capital and is expanding overseas. It pays an attractive dividend yield of 9% with a net cash balance sheet.

 

 

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About the author

Profile photo of Paul Chew

Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has almost 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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