As an unusual 2020 US Presidential campaign draws to a close, local investors are hoping that Democratic candidate Joe Biden wins the upcoming elections. According to DBS analysts Yeo Kee Yan and Chung Wei Le, a Biden victory would see a more constructive relationship with China, benefitting Chinese equities.
“[Biden] will likely adopt a more “open and negotiable” approach with China. Tariffs may be reduced, which is positive for China’s recovery that should lift sentiment for China-related stocks,” they write in a broker’s report on Nov 3. They see firms with production facilities in China and sales exposure to the US benefiting from stabilised US-China relations. A Trump win, on the other hand, will likely spell greater uncertainty for stocks exposed to China due to his unilateralist foreign policy and hostility towards China, Yeo and Chung argue.
Stocks likely to benefit most from a Biden victory include China Aviation Oil and HPH Trust, which have significant operations in China. Firms with production facilities in China and sales exposure to the US could also benefit, with the analysts favouring Valuetronics and Hi-P. The former in particular has a strong balance sheet and attractive valuations, with its FY21 forward price-to-earnings (P/E) ratio at 10.4 vis-a-vis its peer’s 20.6.
See also: Volatility in equities expected in short term on Biden win, split Congress
But if Trump wins, oil and gas players with US exposure would gain from Trump’s support and deregulation of US oil and gas, with production growing 44.9% to a record 12.9 million barrels daily in November 2019 from 8.8 million from his January 2017 inauguration. Keppel Corp could benefit from a resulting rise in demand for oil rigs and vessels - driving contract wins closer to $4-5 billion per annum - while US oil service providers like CSE Global, which is now trading at attractive valuations of 8.2 times FY21 forward P/E ratio.
Still, the boost to Asian equities from a Biden win will be a godsend for local investors, who have experienced a difficult October as the STI grew only 1.9% due to Covid-19 resurgence fears. Financials also performed strongly due to iFast’s roaring 3Q20 results and future digital bank wholesale license. But consumer staples lagged as Wilmar completed its China listing of its subsidiary YKA.
See also: US under Trump: Diminished or unambiguously worse
Banks outperformed as the US 2/10 spread widened from 0.56% to 0.62%. Yeo and Chung UOB particularly favoured on the back of further improvement in loans under moratorium figures and the pricing-in of negatives associated with the counter.
While investor sentiment has been weakened by a Covid-19 resurgence in Europe and the US, travel stocks are likely to benefit from the Singapore government’s commitment to restore air connectivity, with SATS, ST Engineering, CDL Hospitality Trust and Far East Hospitality Trust seen to benefit. Positive results in year-end Phase 3 vaccine trials should revive the fortunes of currently beleaguered travel-related stocks.
S-REITs have also underperformed as US 10-year yields rose from September’s 0.69% to 0.78% in October in anticipation of a second round of fiscal stimulus. This could rise further to 1.3% in 2021 on the back of positive vaccine development news and US economic recovery. The analysts are therefore taking a more cautious approach towards S-REITs going forward.
“This may lead to near-term profit taking in view of the fragile economic growth. That said, forward yields of 6.5% (5.2% spread vs 10-year bond) should lend some support,” write Yeo and Chung. Negative developments allowing smaller firms to end lease obligations without penalty could hurt selected retail, office and industrial REITs, they warn.
Nevertheless, the analysts are looking to top-slice S-REITs with forward yields of approximately 4% or lower like Keppel DC REIT and Mapletree Industrial Trust. They like AREIT due to its stable operating metrics and robust FY20/21 yields of 5.1% and 5.6% respectively. Frasers Centrepoint Trust is seen to ride on Singapore’s impending Phase 3 of circuit breaker reopening expected for the end of the year.
“Potential beneficiaries [of Phase 3 reopening] include MICE (Suntec REIT), retail REITs with properties in the central region (Mapletree Commercial Trust, Capitaland Mall Trust), public transportation (ComfortDelgro) and F&B (Koufu),” remark Yeo and Chung.
In light of these potential upsides, the DBS duo see the present sell-off in the Singapore market finishing above March lows. With the STI’s technical support currently at 2380, the index should hold up above 2300, they argue. There is more optimism in the markets currently as China leads the Asian recovery and the world gets closer to a vaccine, though the US Presidential election and Covid-19 resurgence in Europe and North America remain the main unknowns.
The Economist predicts that Joe Biden is very likely to win the electoral college with a 96% chance of beating Donald Trump. He is seen to win 350 electoral college votes to Trump’s 188. FiveThirtyEight’s aggregate polls show Biden 8.4 points ahead at 51.8% to Trump’s 43.4%.
As of 2.30pm, the STI is currently trading at 2489.04.
