Daiwa: Stay long Singapore’s cyclicals despite US-China trade war fears

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While it may be tempting to shift to Singapore’s defensive plays while awaiting the resolution of U.S.-China trade tensions, their fundamentals remain weak and corporate earnings look set to rebound, Daiwa said in a Singapore strategy note.

“While there appears to be temporary slowdown in the export cycle, we think this is a pause, rather than a turn in the corporate earnings cycle as the consensus has finally caught up with positive macro surprises seen over the past year,” it said in the Wednesday note. “Our bottom-up earnings forecasts continue to suggest a sustained rebound in market earnings over 2018-19.”

It forecast adjusted market earnings growth of 10.5 percent on-year this year, down from the previous forecast of 10.7 percent, but it raised its 2019 earnings growth forecast to 9.2 percent on-year, up from 8.7 percent. It added that it expected banks would lead the growth.

Daiwa raised its end-2018 target for the Straits Times Index to 3840 from 3780, based on an unchanged one-year forward price-to-earnings ratio of 13.7 times.

‘Poor’ fundamentals for defensives?

While Daiwa had a positive view of cyclicals, it was less than enthusiastic about defensive plays.

“In our opinion, the fundamentals of traditional ‘defensive’ sectors like telecoms and the REITs remain poor; the telecom sector is bracing for entry of a new player (TPG Telecom) towards end-2018, while the distribution per unit growth outlook for the S-REITs remains lacklustre (2018: weighted average growth of 2.4 percent),” it said.

Daiwa also noted that expectations for interest rates to rise would be negative for “bond-proxies,” such as REITs and telecoms, where the dividend yield spread is already narrow.

On the long side, Daiwa said its preferred trades were banks on their above-market earnings potential, property developers on an expected price recovery and corporate restructuring plays with robust fundamentals, such as ST Engineering and Wilmar. It also tipped Keppel Corp. as a diversified property and oil and gas play.

Its top index pick list includes DBS, UOB, City Developments, Keppel Corp., CapitaLand, ST Engineering, SATS and Wilmar. Its out-of-index picks are Raffles Medical, SIA Engineering and Health Management International.

This article was originally published at 5:58 A.M. SGT on Friday, April 27, 2018.