SINGAPORE: With a host of risk factors, including fresh trade-related jitters, threatening to cause more pain for local equities, analysts say it’s time for investors to seek shelter in defensive plays.
“We advocate investors to reposition into defensive stocks, using the rebound in July to pare exposure to cyclical names,” said DBS Group Research analysts Yeo Kee Yan and Janice Chua.
These will be stocks that are not closely linked to the economic cycle, while having a healthy level of cash, decent growth of about 5 per cent ahead and a consistent and satisfactory level of dividend payouts.
Supermarket chain Sheng Siong, ground-services provider SATS, taxi giant ComfortDelgro, SIA Engineering and ST Engineering are those that fit the bill, according to Mr Yeo and Ms Chua.
Echoing the need for a cautious stance, a morning note from KGI Securities on Tuesday (Aug 7) wrote: “Over the next 12 months, our strategy is to sell into strength and build up a defensive portfolio.”
Its analyst Joel Ng explained this as a “prudent” move given heightened market risks.
Among his top picks include telco SingTel, ST Engineering, ComfortDelGro and Sheng Siong. He also likes real estate investment trusts (REITS), such as Frasers Centrepoint Trust and Keppel DC REIT.
To be sure, defensive plays, such as consumer staples and utilities that are typically resilient during periods of economic downturns, have started gaining traction among investors amid recent market gyrations.
SingTel rose 5 per cent to end July at S$3.21, while spirits maker Thai Beverage rallied 8 per cent to cap off last month at S$0.76.
Sheng Siong - a clear favourite among market watchers - gained about 1 per cent to S$1.07 at the end of July.
“The outperformance in some of these stocks shows investors looking for some shelter,” said Phillip Securities' research head Paul Chew.
Elsewhere in the market, local lenders remain favourable, with DBS analysts noting that it’s time to accumulate positions following the release of quarterly report cards.
Over the past week, OCBC and UOB announced second-quarter net profit results that beat market estimates, while DBS posted a weaker-than-expected net profit gain for the same period as the impact of business volume growth was moderated by lower trading income.
Even as all three banks flagged concerns about a slower home loan market following the recent property cooling measures, analysts remained positive.
“We still like the banks as they give (investors) a decent dividend yield of about 4 per cent and they will benefit from this rising interest rate environment,” Mr Chew told Channel NewsAsia over the phone.
“No doubt, the cooling measures will temper some loan growth expectations but that’s likely for next year. Like what the banks mentioned, (the impact) won’t be immediate as most of the loans have been secured and as they get disbursed, they will provide some growth for now,” he added.
Similarly, OCBC’s research head Carmen Lee said while the property curbs will rein in mortgage growth especially in FY2019, this is likely to be mitigated by growth in other areas, including cards, investment and higher trading income.
Ms Lee has a “tactical overweight” on the banking sector with “buy” calls for DBS and UOB at current prices.
“With lower allowances, improving margins, as well as healthy dividend payout ratios and yields, we remain fairly optimistic on the outlook for the banks for the coming 1 to 2 years,” she wrote in a note.
CHIEF OF CONCERNS: TRADE WOES
Analysts said market movements will continue to be hinged on how trade tensions develop, though risks such as a stronger greenback, rising interest rates and local housing curbs could add to the downbeat sentiments.
All eyes will likely be on more duties that may be imposed on US$16 billion worth of Chinese goods this month. 25 per cent tariffs imposed on the first tranche of Chinese products valued at US$34 billion took effect on Jul 6, with Beijing responding in kind on the same value of US goods.
The Trump administration has also said that it may jack up the tariff rate on the next US$200 billion of Chinese imports – a proposal that China has said it would hit back with new tariffs on US$60 billion worth of American goods.
“Odds are low that the US-China trade war will subside anytime soon,” said DBS analysts in an Aug 6 note.
Also likely to weigh down the local equity market’s performance is a unique seasonal effect, they added.
Dubbing the trend as “The ghost of August”, Mr Yeo and Ms Chua wrote that the Singapore market has recorded losses for the month of August “without fail over the past 10 years”.
DBS data showed the benchmark Straits Times Index (STI) suffered a median decline of 2.1 per cent and an average decline of 4.2 per cent in August over the past decade.
Given the host of uncertainties, these analysts expect the trend of a “negative August” to continue this year.
But there may be a chance for the local bourse to grind higher with banking heavyweights leading the way, reckoned Mr Chew from Phillip Securities. The three local banks make up about 40 per cent of the index.
Trade war fears are also no longer a new risk, he added.
“For one, tariffs are already imposed on almost all exports between US and China. That’s about as far as you can go for now… Under such circumstances, it’s hard to be extremely bullish or bearish because these trade skirmishes could escalate or disappear overnight given how it all depends on one person,” said Mr Chew, referring to the unpredictability of US President Donald Trump.
Nonetheless, taking into account the uncertainties ahead, Phillip Securities has revised down its year-end target for the STI to 2,700, from 2,900.
Noting that the STI has seen its peak in May when it hit 3,614, DBS analysts expect a choppy third quarter, with the benchmark index testing the 3,220 level in the “down month” of August.
As to how local stocks will round off 2018, much will depend on the outcome of the US-China trade war.
“Base view is that while trade war developments could worsen during next two months, it should subside in the fourth quarter heading to the US mid-term elections, with STI ending the year at 3,550,” said Mr Yeo and Ms Chua.
On the other hand, a bear case scenario – defined as an all-out trade war with a 10 to 25 per cent tariff imposed on all products traded between China and the US – will see the STI plummeting to 2,915.