UOBKayHian (UOBKH) is continuing to look at equities with a focus on high-quality companies that have a strong earnings outlook, re-opening plays, exposure to the Chinese market as well as selected cyclicals.
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“With subdued near-term inflation and aggressive monetary policies globally, interest rates will likely remain very low for an extended period and thus with cash returns at close to zero, this may drive market multiples higher despite weaker-than-expected earnings in this upcoming reporting season,” explains analyst Adrian Loh.
Touching on his liking for counters with an exposure to the Chinese market, he says this is due to the country’s “impressive” recovery post Covid-19. “This is underscored by its latest indicators showing sequential improvement”.
For instance, China’s Purchasing Manager’s Index – a key barometer registering activity levels in manufacturing and non-manufacturing sectors – have staged a recovery in their 3Q2020 numbers.
Against this backdrop Loh is keeping his eye on key events such as Phase 3 of the re-opening of Singapore’s economy, Brexit talks and the US Presidential Election happening in November.
“While Brexit talks and the US elections will inject some measure of volatility into stock markets, the global economy remains on an uneven and divergent “K-shaped” recovery path between economies, industries/sectors, and individuals,” observes Loh in an Oct 13 note.
This volatility has pushed him to look at counters that geared towards local spending.
“While we take some measure of comfort in having advocated for a defensive stance heading into 2020, it is nevertheless painful to note that the Straits Times Index (STI) was the worst performing index in Asia in the first three quarters of the year,” notes Loh.
See also: STI dips 0.3% despite September NODx gains
So far, 11 out of UOBKH’s 20 best performing stocks were from the small/mid cap space. Of these, the top three were – unsurprisingly – from sectors that benefitted directly from the Covid-19 pandemic.
These include Malaysia-based glove manufacturer Riverstone Holdings which saw stocks surge 282%, consumer staple provider Sheng Siong (+35%) as well as healthcare provider Parkway Life REIT (+27%).
Tech stock also featured prominently in the top 20 list, with six stocks securing a place as “investors gravitated to stocks that are better able to deliver earnings despite [an] uncertain economy,” says Loh.
Looking ahead, he believes several counters will benefit from the government’s re-opening of the economy as the number of community infection rates remains low.
“This should benefit consumer stocks like Koufu and Kimly as well as retail REITs such as Frasers Centrepoint Trust and Suntec REIT,” says Loh.
Aside from this, he suggests a diversification into cyclical sectors such as hospitality REITs that have been more directly hit by the pandemic. In terms of specific counters, Loh points out CDL Hospitality Trust, Far East Hospitality Trust and Ascott Trust, as counters to keep a watch on.
As for the STI, Loh has lowered his year-end 2020 target for the STI to 2,680 points – from 2,760 points previously. This implies a 5% upside from current market levels.
In the longer term, he is looking at the STI edging up to 2,930 points by the end of 2021. This represents a 9% upside from the 2020-year end target and is based on 10% discount to the STI’s long-term price-to-earnings and price-to-book rations,
In terms of earnings per share (EPS) numbers, Loh expects the Singapore market to register a 40% year-on-year decline this year before registering a 48% year-on-year recovery in 2021.
He names property developers, shipyards, land transport and gaming operators as key sectors expected to register high year-on-year EPS growth in 2021. Among these counters, Loh has eyes on Sembcorp Industries, Yangzijiang Shipbuilding as well as ComfortDelgro.
