Debt Levels Raise Vulnerabilities
Wobbles from rebalancing phase — Singapore’s STI has lost 1% ytd, making its performance the worst in Asean. Reasons include fear of Fed tapering its QE program later in the year as well as slower growth and higher costs while the growth model is rebalanced to be more inclusive. The STI is now just 6% above 14.2x PE (-0.5SD historical mean or 3000 points), which we believe is a good support level assuming no regional financial contagion breaks out.
Unwinding debt, a tricky balance — Normalization of SGS 10Y yield and expectations of higher interest rates may lead to uneven recovery. Asset prices have risen, buoyed by low interest/negative real saving rates, and may come under pressure. Singapore households’ debts have spiked up, led by mortgages. Credit card rollover balances and charge-off rates have also been rising. MAS Total Debt Servicing Ratio Framework (TDSR) of 28 June shows that authorities are keen to moderate debt increases. Our property analyst, Adrian Chua, expects private residential prices to fall 5% over the next 12M. Lower asset prices have historically constrained STI returns.
Normalizing our risk stance — Our Singapore economist Wei Kit sees a cyclical recovery kicking in in 2H13 and GDP rising to 4.4% in 14E from 2.3% in 13E. Lower valuations and the prospect of Singapore’s electronics exports bottoming led us to normalize our cautious risk stance in March. While electronics exports have not been strong YTD, a drop of ~30% YoY in Feb is similar to the weakest point during the Euro crisis. Singapore’s electronics exports growth saw its worst level, at -40% YoY, in 2001’s tech bust and the GFC. A bottom in electronics exports has historically led GDP and stock-market recoveries. A silver lining is that expectations are benign: aggregate EPS for our coverage universe is flat for 13E and +10% for 14E.
Stay in stock-picking mode — Volatility and debt unwinding risks keep us in stockpicking mode. Our Gordon Growth derived STI target is 3100. Top picks: Keppel Corp (rig cycle intact despite oil price volatility), UOB (has retraced) and HK Land (35% NAV discount vs. 30% historical mean). Despite concerns about China, two China-exposed firms, Wilmar (key conduit for Asia’s food needs) and CMA (robust B/S for expansion, earnings anchored by recurring income in Singapore) are also top picks. In a stronger US$ environment, investors could focus on industrial dollar earners: ST Eng and Venture. Stocks we dislike: SMRT, SPH, SIA, Starhub, SGX and Cosco Corp.
Publish date: 09/07/13