Singapore Strategy

CIMB Research, June 4

GLOBAL equity and bond markets appeared to have abruptly entered the twilight zone in the past two weeks. From a balmy scenario of low interest rates and mild growth, the investment climate has suddenly turned into a stormy one, with the risks of rising interest rates and bubbly bond valuations.

Should interest rates rise, winners in Singapore would be banks and companies with cash piles. Losers would be companies with high net gearing and Reits. The fact that Reits have already reacted to rising bond yields does not mean that they will automatically recover to pre-selldown highs. We maintain our 3,460 Straits Times Index (STI) target (bottom-up) and "underweight" rating, given STI's lack of EPS growth.

We have been "underweight" on Reits and telcos since end-2012, but upgraded them to "neutral" last month when Japan started quantitative easing. Our recent strategy aims to find value in banks (DBS), NAV plays (UOL, CapitaLand, GLP), consumer companies (Thai Beverage, SATS) and stable business models (ST Engineering, Ezion, Vard) with yields, rather than pure Reits.

The common question posed is whether investors should get back into some of the Reits. We reiterate our preference for banks, consumer names and high-yielding, net cash operating companies over Reits and highly geared companies. The latter sees a higher concentration among commodity, shipping and second-tier offshore and marine companies. Our top stock picks are unchanged.

UNDERWEIGHT