SINGAPORE (Mar 13): Local stocks were off to a rough start in 2020. Even as the US-China trade war drags on, tensions threaten to flare in the Middle East. Then, the Covid-19 outbreak put China’s economy to a grinding halt. The subsequent spread outside China has merely added to the woes.
“We’re not out of the woods yet, and the current sell-off has finally dented investors’ ‘buy the dip’ mentality which had worked well over the past few years,” says KGI Securities analyst Joel Ng in an interview with The Edge Singapore.
“There’s definitely a higher level of risk now, and the likelihood of a global recession is at the highest level since the global financial crisis in 2008. All sectors are seeing a slowdown, and macroeconomic growth could be lower than expected,” adds Ng, citing recent growth outlook downgrades by the World Bank, International Monetary Fund (IMF) and World Trade Organisation.
Despite the turbulent market, Ng says that the sell-off has presented a buying opportunity for investors, one which was last seen during the Asian Financial Crisis in 2009.
“The sell-off opportunity is creating bargains across all sectors of the market, including banks, REITs and property stocks,” says Ng.
“The next three to six months will present a real buying opportunity for investors,” he adds.
Go tech for yield and growth
Over the years, technology has become a key trend. KGI analyst Kenny Tan says that although the general market is seeing a slowdown, tech is one of the areas that are unlikely to be affected. On a local front, semiconductor stocks such as Frencken Group, AEM Holdings and UMS Holdings are likely to remain cushioned.
“We are still bullish on the semiconductor industry. They dipped and then rebounded like nothing happened, and they’re at the all-time highs and still climbing,” says Tan in reference to Apple’s warning that it would be unlikely to meet its March quarter sales guidance figures.
According to Tan, investors have little choice but to invest in semiconductor stocks. As investors scurry for yields and growth, the tech sector is the only one that offers both.
“You have low or negative yielding bonds on a global scale. The only sector that’s really growing is the tech sector, and it has been growing for the past 10 years,” reasons Tan.
He shares that the four companies with market capitalisation figures over US$1 trillion include Apple and Microsoft — both of which generate anywhere between US$30 billion and US$60 billion in profits and cash flows.
“All the beneficiaries from these tech names are the semiconductor stocks and hence all the benefits trickle down into the industry as well through the supply chain,” says Tan. “You need semiconductors for everything — phones and computers,” he adds.
In particular, Tan cites Keppel DC REIT as a brokerage favourite for its exposure to the data centre market. The share price of the counter, according to Tan, is “just going up day after day”.
But the constant rise in share price may not be an entirely good thing. The brokerage had recently downgraded Keppel DC REIT to a “neutral” as it believes the counter is “quite fully valued” and investors could find better opportunities in the market.
“While the data centre industry remains an attractive investment thematic, we think the sub-4% dividend yield of Keppel DC REIT signals a fair valuation for its current share price,” says Tan in a March 10 note.
But FY2020 could well be the time for a rebound after a year of slow growth for the industry in 2019, he adds.
“Despite recent concerns about supply chain disruptions and stock market weakness from Covid-19 fears, we remain confident of data centre trends, where data management will continue to consolidate towards hyperscalers and their private/public cloud infrastructures,” he says.
Given the broader sell-off in equity markets, technology stocks are not immune to fund outflows even if they have solid fundamentals,” says Ng. “However, we believe these technology-related stocks will be the first to recover after the global economic slowdown this year.” “The key point is that technology companies are riding on long-term structural trends which are underpinning a significant portion of overall earnings growth going forward,” he adds.
Recession fears
Amid a worsening Covid-19 outbreak outside China, Asian economies are bracing themselves for the worst. Fears of a recession have been ignited. The ray of hope that followed the Phase One US-China trade deal is but a distant memory now.
According to KGI analyst Chen Guangzhi, Asian markets could well enter a recession earlier than developed countries as investors shy away from emerging markets. “The preferences are clearly shifting away from the emerging market space, and this is quite similar to what happened during the 1997 Asian Financial Crisis,” says Chen. “Global investors are suspecting if Asia will have an early recession compared to the US.”
The brokerage is no longer bullish on emerging markets (EMs), a reversal from their optimistic views at the beginning of the year. “A lot of people have been expecting EMs to recover, especially with the positive global macroeconomic backdrop at the start of the year,” says Chen. “But there are still tailwind risks to these markets,” he adds.
Chen stresses that investors should remain invested in safe haven assets such as gold and silver. KGI is expecting gold prices to continue on an uptrend beyond US$1,700 ($2,405) per ounce, from its March 11 level of US$1,646.14.
“I think we would recommend our clients to invest more in the safe haven assets, and lower their positions exposed to equities especially in China,” he adds
Now, as supply chains move out of China, Chen believes that Southeast Asian economies such as Singapore, Indonesia, Thailand and Vietnam could benefit as companies turn to them instead.
Quality over low prices
With the Singapore Exchange relaxing its hold on listed stocks with the easing of quarterly reporting (QR) moves and the potential removal of the minimum trading price (MTP) watch list, KGI is quick to caution that attractive prices should not overshadow the importance of good governance.
KGI analyst Amirah Yusoff says that the easing of QR, although less cumbersome for companies, could translate into the need for better care and precaution on the parts of the investors.
“If I were an investor, I’d be a bit more cautious because I don’t know what the company is doing. And I only get updates twice a year, so what if something happens quarterly? You never know,” says Amirah.
For instance, Amirah hones in on REITs, noting that assets are what separate the wheat from the chaff. “Their management styles and how active they are in managing their portfolios are also factors for investors to consider,” she says.
Amirah cites ARA Hospitality Trust’s management as an example. The REIT’s 4QFY2019 results were far from spectacular, with its distribution per unit (DPU) of 1.08 US cents falling 12.9% short of its own forecasts.
“Stronger-than-expected supply headwinds, particularly in the teeming upscale select-service segment, have impacted RevPAR [revenue per room] growth in 4Q2019, and is expected to spill-over into 2020 as new hotels continue to offer introductory rates,” Amirah says in a Feb 20 report.
In line with a dimmer macroeconomic outlook, she sees downward revaluation of the REIT’s properties of about 2.1%, especially for hotels in the West/Midwest. But this is expected to taper off towards 2HFY2020.
Amirah has also trimmed her FY2020F estimates for ARA to account for a more conservative environment in light of year-end US elections, as well as a slower recovery amid supply headwinds.
Yet, Amirah remains optimistic in terms of the REIT’s recent acquisitions which are set to boost earnings. “We believe that the contributions from its three new Marriott acquisitions will help soften the impact of supply headwinds, the transitional period for ARA hotels’ new management, as well as any subdued demand due to the year-end elections,” she says.
“We also note that the current Covid-19 situation has not impacted ARA’s hotels, given that they are predominantly domestic customer-oriented and not located in gateway cities,” she adds.
In light of the slowing economy, ARA is also choosing to focus on economically favourable states, mostly in Southern regions with growth potential, namely Texas, Florida and North Carolina.
“We do note though that while Texas is attractive to businesses due to the lack of state income taxes, a potential decrease in oil production in the near future could affect the state’s growth,” she says.
In addition, Amirah notes that ARA’s handson management is set to help the REIT get back on track. “Jin Lee knows what’s happening in every single one of their hotels if you ask him even though he’s not the general manager there,” says Amirah. “That’s comforting to me, because it shows that he’s neither over-confident, nor completely reliant on the hotel manager that they hired,” she adds.
Another area that the brokerage remains keen on is ESG initiatives, which have recently become a vital point to note for investors.
“We think ESG is a key theme that’s going to come up over the years,” says Amirah. “As investors get younger, they want to know these things about a company. They want to know that the business is not going to die off in 20 years,” she adds.
The way she sees it, investors want to know that companies are consciously putting in the effort to manage their operations and provide the best value for their shareholders.
