Singapore Strategy: Are sunny days here again?
The Singapore market has outperformed some regional indices so far this year, and despite recent gains, we believe that valuations remain undemanding and below that of key regional markets, and with the added bonus of a decent dividend yield of 3.3%. Liquidity in the market remains healthy. Key risks include a slowdown in China and a prolonged decline in the local property market. Recent excitement in the local M&A scene indicates that valuations are not expensive, and firms with huge cash reserves are in a good position to buy assets or companies to realize synergies, extract values or grow organically. Other under-valued or not liquid stocks are also likely candidates for M&A. We believe key policy makers will remain generally pro-growth and that central banks will continue to adopt an accommodative stance. For the Singapore market, we deem a stock pick strategy is still preferred. We continue to be OVERWEIGHT the Oil & Gas and Healthcare sectors and selective quality blue chips and high yielding stocks.
STI’s outperformance in 2014
After a flat performance in 2013, the STI has finally stirred back to life and is now back above the 3200 level, after dipping below 3000 in Feb 2014. Singapore’s economic growth is likely to come in at the higher end of the government’s official range of 2-4%. Liquidity in the market remains healthy as seen from the gains in yield stocks. The S-REIT index has rebounded almost 10% from this year’s low despite general global trend of higher interest rates ahead.
Valuations are not excessive
Despite recent gains in 2014, valuation remains undemanding. The STI is currently trading at forward PERs of 14.4 FY14 earnings and 13.0 FY15 earnings, below key regional markets, and with dividend yield estimated at a very decent 3.3%.
China remains a key concern for Asian and Singapore firms
Key developments in China will continue to affect market sentiment in Asia, but we believe that China’s longer term growth is still intact after medium-term structural reforms. Optimism about the improvement in developed economies remains, as shown by the recovery in consumer confidence, and this will help to partially absorb the slack from any potential slowdown in demand from China. In Singapore, one key areas of concern is the expected slowdown in property sales and prices.
Singapore’s recent M&As – signaling valuations are not expensive
Recently, the market came alive with a series of acquisition and privatization announcements and potential deals (involving Hotel Properties Ltd, Olam, CapitaMalls Asia, etc.). There is a growing trend to acquire undervalued companies, signaling that current valuations are inexpensive, and firms with huge cash reserves are in a good position to buy assets or companies to realize synergies, extract values or grow organically. The current interest on property-related companies could be due to the present depressed market conditions for the property sector and most stocks are trading at discounts to RNAVs. Other under-valued or not liquid stocks are also likely candidates for M&A.
Overall, we expect key policy makers to remain generally pro-growth and that central banks will continue to adopt an accommodative stance. While developed economies are still in favour, for the Singapore market, we deem a stock pick strategy is still preferred. We continue to be OVERWEIGHT the Oil & Gas and Healthcare sectors and selective quality blue chips and high yielding stocks.
Publish date: 08/05/14