Singapore Market Strategy

Credit Suisse, July 29

INCREASING bond yields started the correction in Asean markets. While yields have stabilised, macro worries have been brought to the fore, which, combined with EPS cuts, hurt performance. In such an environment, the Singapore market, with few macro worries, an AAA rating and modest stock valuations, looks relatively good.

Unfortunately, there are few top-down "themes" in Singapore stocks. Mid-caps have been one (MSCI SG mid-cap has outperformed large caps 99 per cent since January 2003), but they have underperformed large caps by 8 per cent recently. This may not turn as long as the risk aversion lasts.

Constructing a large cap portfolio in Singapore stocks then ends up being very bottom-up. We update ours. While we have recently suggested that banks may do well in periods of increasing rates, we worry that the strong Q1 numbers provide a large base, while increasing interest costs are a risk. We prefer UOB relative to the others.

We stay overweight cap goods through Keppel Corporation, and prefer property stocks with limited Singapore-exposure (CapitaMalls Asia, Capitaland) and add Reits (CapitaMall Trust, Mapletree Commercial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust).

We are overweight telcos through M1, for which the hope of higher data monetisation is more relevant.

Increasing interest rates (opportunity costs) are negative for both fixed income and equity assets, before confidence in improved growth pushes equities higher.

The Federal Reserve seems to be on course for tapering to begin next month. Credit Suisse forecasts have US 10-year at 2.75 per cent by year's end (2.56 per cent now).

Global liquidity conditions should remain loose though, on the back of Japanese monetary action, and potential for further expansion in Europe. This should help keep rates in check.

Global economic momentum is troughing, largely led by a better US/Europe (developed markets) outlook. To the extent this is driven by improvements in "local" manufacturing, benefits of the turnaround may not reach emerging markets/ Asean, which may have to rely more on "domestic" drivers.

This is reflected in Credit Suisse's GDP forecasts, which have higher growth in US/Europe/Japan in 2014 (y-o-y), but are largely flat for most of Asean. Equit111y multiples in Asean/emerging markets should not de-rate more if rates do not increase further.

Without an improvement in growth though, there should be little top-down reason for valuations to re-rate. As Singapore GDP (and trade, listed equities) relies heavily on emerging markets/Asean, this outlook should apply to Singapore equities as well.