Cautious outlook

ANALYSTS are turning cautious on the outlook for next year. In a Nov 19 report, JPMorgan says it believes there is downside to market forecasts for both the Singapore economy as well as the overall market revenue and earnings outlook. "Sales and earnings forecasts have flatlined since May 2012, while EPS [earnings per share] forecasts are now back to pre-GFC [global financial crisis] levels," the report points out. "Risk now exists, in our view, as we believe the Street is behind the curve in downgrading the macro outlook for Singapore. This should feed downward revisions of sales and earnings estimates for the market as a whole."

On the economic front, JPMorgan points out that 30% of Singapore's GDP is driven by trade flows, where weakness is expected, in view of anaemic global growth. Still, Singapore's domestic fundamentals are resilient — they include a tight labour market, some inflation, a high savings rate and low household leverage.

Nomura Research also believes that domestic factors will be key drivers for the Singapore market in 2013. "We think the market will, at best, produce a single-digit return in 2013 with the possibility of a negative return if the economy turns out worse than expected," says Lim Jit Soon, its head of Southeast Asia equity research, in a Nov 23 report.

Three factors could affect the Straits Times Index next year, according to the report, with ongoing economic restructuring undermining corporate earnings growth. The market could be disappointed as consensus earnings growth of 11% for FY2013 is optimistic, Lim reckons. In addition, there could be more cooling measures for the residential property sector. These could, in turn, result in a sharp pullback in residential property prices next year, which would negatively impact sentiment. The government will also be releasing its white paper on the future population in Singapore and its long-term manpower needs. "While we expect the [white] paper to argue for a larger population in the longer term, current tight immigration policies are likely to be maintained," Lim says.

On a positive note, Singapore's market valuation is not expensive. The market is trading at a forecast price-to-earnings ratio of 12.5 times for next year, on EPS growth of 11%. The estimated price-to-book ratio of 1.4 times for 2013 is below the historical average of 1.7 times, although return on equity has been trending lower over the past couple of years.

"Low global interest rates will likely be supportive of asset markets, we expect, while Singapore has significant policy flexibility to cushion any significant weakness in the economy," adds Lim.

The focus on yields will continue next year, he reckons. However the S-REITs are unlikely to experience the double-digit gains they achieved this year. "For 2013, we would position in sectors and companies that are less dependent on the Singapore economy, given our less positive view on the economy. For this reason, we remain bullish on conglomerates, which traditionally derive much of their earnings from overseas. We are also positive on the upstream plantation names," Lim says.

Nomura is "negative" on gaming, which could affect Genting Singapore. "We are 'neutral' on banks as valuations are still attractive even though earnings growth could be affected by higher provisions, slower loan growth and contraction in net interest margins," Lim says in his report. Although he is "neutral" on real estate investment trusts and telcos, the yields are attractive, he concedes.

Stock picks

Nomura's stock picks for 2013 are heavily skewed towards names with the potential to provide stability of yields and EPS growth. Hence Keppel Corp, Sembcorp Industries and ST Engineering are outright "buys". They derive a large part of their earnings from overseas and are less affected by the economic restructuring at home, the report argues. Jardine Matheson also gets a "buy" rating, because its earnings come from outside of Singapore.

As for high-yielding stocks with a Singapore exposure, Nomura is recommending SATS and ComfortDelGro. Among the banks, DBS Group Holdings is the top pick, and among the property stocks, Keppel Land is favoured.

The upstream plantation names that Nomura is recommending are First Resources and Bumitama Resources. Ascendas Hospitality Trust is the top pick among the REITs and trusts and the wild card is Biosensors International, which underperformed. "We think 2013 could see outperformance as it embarks on M&A [mergers and acquisitions] to drive further growth," the Nomura report states.

JPMorgan is adopting a bottom-up approach by focusing on stocks that continue to have either resilient growth profiles or are undergoing structural inflection points under its base case scenario. It likes DBS and Keppel Corp. Among the property companies, though, JPMorgan prefers CapitaLand because it has all the building blocks in place for harvesting in 2013, according to the report. It is expecting stronger earnings growth and faster asset "churn" of its assets. CapitaLand has a capital recycling model where stable assets are divested into its REITs.

Of the trusts, JPMorgan likes Hutchison Port Holdings Trust because its port assets are at "a structural advantage versus peers" and throughput volumes could rebound next year. In the telco space, it prefers StarHub, which has the highest yield among Asian telcos and could offer dividend upside next year.

What to look out for

The US market is being buffeted around by the agreement/disagreement on resolving the fiscal cliff. There could be a resolution in the week starting Dec 3, but the consensus believes an agreement will take longer to materialise. Meanwhile, the US's 3Q GDP numbers will be out on Nov 29. Locally, October loan growth figures will be out. These could confirm slowing loan growth.

This story first appeared in The Edge Singapore weekly edition of Dec 3-9, 2012.


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