SINGAPORE (Apr 16): As the Covid-19 situation drags on, market watchers are looking at 2Q2020 to be one of the worst quarters in history as the global economy enters into a synchronised recession.
Although China has since bounced back with a V-shaped recovery after managing to control the outbreak in 1Q2020, KGI Securities analysts note that major export destinations such as the US and EU are collapsing under the weight of shutdowns.
“The markets hate uncertainty, and until a medication or vaccine is developed to fight the coronavirus outbreak, Covid-19 will be an overhang on the economy,” says the KGI team in a Monday report.
While the near term remains uncertain, the brokerage is banking on a broad-based economic recovery for many “beaten down” sectors once the US passes the peak number of infections in about three to four weeks.
“We are of the view that equity markets will react in a positive manner when the number of cases begin to peak,” they say.
To be sure, KGI is confident of a slow recovery for Singapore from 3Q2020 onwards, as the maximum amount of disruption caused by the government imposed lockdowns tapers off in 2Q2020.
With a turnaround on the horizon, the analysts have some advice for local investors on which stocks could be worth cashing in on. But the message is clear: Buy in April, and don’t look back.
“From an investment perspective, the largest market gains usually occur months before the economy begins to recover. As such, it pays to look at other factors when determining an entry point in the current environment,” says the team.
In particular, the brokerage believes that Singapore equities have since bottomed out despite the city-state being likely to enter its worst recession on the record. This, in turn, presents favourable risk-reward opportunities for investors.
For a start, analysts note that fund outflows from Singapore equities have significantly slowed down since the second week of April as generous fiscal and monetary policies begin to have a positive impact on sentiments and risk assets.
According to KGI, this indicates that the worst of the sell-off is likely over for local stocks.
“A small sample survey of bullish or bearish sentiment from our sales team also showed an even split in terms of the short term outlook of the stock market,” say analysts.
“[This means] that rationality has returned to markets but generally lacks a strong market sentiment to push markets in either direction,” they add.
While global equities might beckon to investors due to attractive prices, KGI argues that Singapore valuations are cheap, and boast attractive dividend yields.
“Straits Times Index (STI) trades with one of the highest dividend yields (>5%), and compares favourably against regional and global peers,” say analysts. “STI and S-REIT Index valuations and dividend yields are at the most attractive level since the global financial crisis in 2009.”
Looking ahead, the brokerage anticipates that the Singapore dollar should be stronger, and remains relatively stable compared to other Asian currencies.
“Investors looking at Asian equities may prefer investing into Singapore equities, especially as the dividend yield differential for income-producing stocks such as the banks and the REITs becomes too wide to ignore,” say analysts.
“Furthermore, we expect a reversal of SGD weakness as the freeze of the economy begins to thaw and as global trade starts to recover,” they add.
The brokerage has identified its top picks for the quarter ahead. In summary, KGI believes that tech stocks such as cloud services are the “biggest winners” in the current macroeconomic environment.
These include supporting themes such as semiconductor, data storage and 5G.
Apart from tech counters, KGI highlights how Singapore-focused retail REITs are now trading at decade-low prices, after being punished by government measures.
“Beaten down hospitality REITs are offering good risk-reward opportunities,” say KGI analysts.
While the brokerage looks to steer clear of airline stocks, it remains bullish on aviation service providers.
Commodities-wise, KGI is also looking for gold and oil to deliver respectable returns as well.
“Investors should look beyond this crisis and position themselves for the eventual recovery,” say KGI analysts.
“In a nutshell, we are taking a firm view to buy in April and not look back,” they add.
