Positioning for the recovery

While the initial months of the pandemic were marked by a sharp divergence between the tech sectors and the other industries, this coming recovery is seen to be more evenly-spread. “Manufacturing will likely remain in the driving seat for many, but services recovery should gain speed, especially in economies that are able to roll out vaccines relatively quickly,” says Oxford Economics’ Priyanka Kishore. “Advanced Asia Pacific economies have an edge here, but the situation for the rest of the region isn’t dire. We expect India, Indonesia, and Malaysia to begin vaccinations from Q1,” she adds.

From the perspective of Pictet Wealth Management’s César Pérez Ruiz, another clear sign of a better equity market ahead is the resurgence of mergers and acquisitions activities in recent weeks.

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On Dec 1, Salesforce offered to buy Slack for US$27 billion ($35.99 billion). The following day, IHS Markit is to acquire S&P Global for US$59 billion — the biggest M&A deal this year. On Dec 12, UK drugmaker AstraZeneca offered US$39 billion to buy Alexion, a US biotech firm. “With a brightening economic outlook and extremely low cost of funding, more deals can confidently be expected. Historically, deal count has been positively correlated with return on equity, which should rise as the recovery takes hold,” says Ruiz, the firm’s head of investments. “In parallel with deals of a more offensive nature, we are also seeing traditional industries such as banking being pushed into defensive M&A,” he adds.

While some analysts expect ties to improve between the US and China under a new administration, no one is saying things will be back to a rosy norm. “Frankly speaking, the first words we’ve heard from Biden aren’t very appealing,” says Alicia Garcia-Herrero, Natixis’s chief economist for Asia Pacific.

Ironically, the persistent tensions between the US and China will give an advantage to other emerging markets other than China. “We are still positive on China, but this persistent friction is one reason why we are broadening our focus beyond China to Asia at large and specific countries in other emerging market regions,” says Pictet’s Ruiz.

A blip year?

In hindsight, 2020 is likely to be seen as investors to be a “blip year”, notes CGS-CIMB. The “surprise rally” of November aside, brokers and investors are sounding almost positive again. “Markets are no longer overly concerned with intermittent waves or postponed travel bubbles; the challenges of a pandemic slowdown are deemed less catastrophic,” writes CGS-CIMB’s research team in their Dec 9 note.

As such, investors — both institutional and retail — flushed with liquidity, are seen to have cast fear aside and are starting to pile back into the market. Year to date, the Singapore market has seen a net inflow of $7 billion.

What might lend further credence to a better 2021 is that the STI is trading at below mean valuations. It is also relatively cheaper than regional peers.

As such, CGS-CIMB sees a possible upside of 10%-20% for the STI, with the end-2021 target of 3,068 points pegged to a conservative estimate of 14.2 times earnings. DBS, meanwhile, sees Singapore posting a strong earnings growth of 40% y-o-y for 2021, and to yield 4.1% — the highest in the region.

Following the news that vaccines have been discovered in November onwards, share prices of transport and gaming companies have run. However, CGS-CIMB warns that this relief rally of these counters is ahead of their fundamentals, as real recovery is only likely in 2022 and 2023.

However, there are other sectors that will do better. For example, commodities players are seen to grow their earnings by 25% and the technology and manufacturing names will see 18% earnings growth on the back of secular demand growth.

DBS has flagged a few “old economy” stocks that will have “that youthful feeling again”. OCBC, for example, is inexpensive, as it is trading at near one standard deviation below its average 15-year forward P/B value. “While OCBC faces ongoing net interest margin repricing, its non-interest income should continue to contribute positively. Some negatives, including lower net interest income and overhang from asset quality, have been priced in,” notes the DBS analysts.

ComfortDelgro has been hard hit during the pandemic, with ridership for its trains, buses and taxis down, especially during the near three-month-long “circuit breaker” period that began in April. However, there’s sequential recovery seen for 4Q as more people are back commuting, and this momentum is likely to continue into 2021. Its operations in China have also recovered, while that of the UK and Ireland will remain “challenging”, says DBS. However, the stock is trading at just 1.35 times its book value, which is cheap by historical standards, as is its return on equity.

Developer UOL, on the other hand, is well poised to unlock the value of its commercial and hospitality assets. It now trades at barely two thirds of its price to net asset value. Other “old economy” stocks that belong to this “youthful again” theme include Keppel Corp, which is trading below its book value, and also in active strategic review of its offshore and marine operations which is meant to help restore confidence in the stock, according to DBS.

Yangzijiang Shipbuilding, which is enjoying a steady stream of contract wins for building ships, is still trading at below its net cash value of $1.13 per share, and also at an “unjustifiably low” P/B value of 0.55 times. In addition, it is able to generate “superior financials” of 8% return on equity and its dividend of four cents a share is seen as sustainable, says DBS.

In the following few pages, investment professionals tell The Edge Singapore what other themes they see playing out which are the sectors and stocks they like, and don’t.