STI to decline due to historical seasonal weakness in August, DBS notes 5 stocks to watch

ST Engineering, UMS Holdings, CapitaLand Ascendas REIT, Frasers Centrepoint Trust and Sasseur REIT are DBS’s stock picks for Aug.

DBS Group Research analysts are expecting an August pullback for the Straits Times Index (STI), caused by profit taking of index heavy weights going ex-dividend. This is a trend they say is consistent with historical seasonal weakness seen in this month and third quarter overall.

Analysts Yeo Kee Yan and Foo Fang Boon say that STI’s near term resistance is at 3,408 with near term support of around 3,275 and 3,225. August is also typically a volatile month for the US equities, often referred to as the “dog days of summer”, coinciding with a period of lower liquidity as more investors go on holiday.

Yeo and Foo say that three observations from their analysis of the past 13 years show that August has been a consistently weak month — eight stocks with a combined index weight of 61% suffered an average m-o-m decline of more than 3% in August, with a negative reliability of more than 77%.

These stocks are Seatrium, Keppel Corporation, Singapore Telecommunications (Singtel), Oversea-Chinese Banking Corporation (OCBC), and United Overseas Bank (UOB).

On the other hand, the REITs were more stable with just a marginal 0.3% average monthly decline. While only Venture Corporation “bucked the trend”, consistently delivering gains in August, say the analysts.

“This year, the odds of an August rebound are tempered by uncertainty over potential index removal,” they add.

However, beyond August, Yeo and Foo are “sanguine” about the 2H outlook. They note that Singapore narrowly avoided a technical recession in 2Q2023, with the manufacturing sector seeing a smaller 1.3% q-o-q contraction.

“The wholesale trade cluster recovered +3.4% q-o-q in 2Q2023,” they say. “June electronics exports contracted at a lesser rate of -15.9% y-o-y, a trend we expect to continue improving. In the US, the Fed sees a significant growth slowdown rather than a recession this year and the Fed rate hike cycle has likely entered an extended pause period.”

Finally, Yeo and Foo highlight five stocks to “take shelter in”, based on their 2QFY2023 earnings preview and review, 2HFY2023 earnings outlook, price action year-to-date and its upside/downside to target price.

The first is ST Engineering in the aviation sector, as they note a robust 16% core earnings CAGR over the next two years.

The second is UMS Holdings, set to benefit from an uptick in global semiconductor sales and artificial intelligence (AI) demand.

Next, the analysts identified CapitaLand Ascendas REIT (CLAR) as their preferred industrial REIT, for its relative distribution per unit resilience and capacity for upside surprises as interest rates stay higher for longer.

They have also identified Sasseur REIT in their five picks, saying that it should benefit from Chinese policymaker’s focus on driving domestic consumption, aiding the recovery in shopper traffic and tenant sales.

Finally, the analysts are keen on Frasers Centrepoint Trust as its 3QFY2023 operational update continues to exhibit signs of robust recovery with improved shopper traffic and tenant sales, while refinancing of loans should be completed this year.

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