Publication Date : 12-04-2015


The Singapore equity market should stay resilient in the face of a rising interest rate environment. A stabilising earnings revision trend, single-digit earnings growth, reasonable market valuation and the “predictable” Fed are the reasons DBS Group Research thinks so.

Fed chairman Janet Yellen said recently that while the initial rate hike is likely to occur later this year, the pace of increase will be gradual.

The Fed’s predictability has so far been a calming influence on the financial markets, which have been attempting to decipher the time frame and speed of the rate hikes.

Meanwhile, currency markets have priced in a Fed rate hike in the second half of this year and policy easing by the Monetary Authority of Singapore (MAS).

As a result, the United States dollar is higher by 3.4 per cent against the Singapore dollar year-to-date. A weakening Singdollar can lead to fund outflows. The MAS semi-annual monetary policy meeting this month is an event to watch.

While interest rate hike uncertainties and the weak Singdollar can lead to periods of weakness through the course of the year, the Singapore equity market should be underpinned by its reasonable market valuation and stabilising earnings revision trend.

The Singapore market is inexpensive taking into account a stabilising earnings revision trend and the expected growth in earnings of STI companies.

The benchmark Straits Times Index (STI) ended the first quarter up 2.4 per cent. While we expect the ascent going forward to be interrupted by bouts of profit-taking, the STI should finish the year higher than where it is now. DBS has a year-end objective of 3,620.

Stock picks

Singapore banks are enjoying the positive vibes from a rising interest rate environment but funding costs may rise as well, which will offset some of the positive impact.

Meanwhile, we see little risk-to-asset quality, given that unemployment remains low. OCBC is our preferred pick over UOB. Key catalysts would be the successful integration of Wing Hang Bank’s operations, which will further enhance OCBC’s earnings profile and give rise to a more diversified geographical profit distribution.

Ceteris paribus, crude palm oil stocks IndoFood Agri, Golden Agri and First Resources are beneficiaries of a stronger US dollar as it means lower costs for them in US-dollar terms.

Bumitama Agri is the exception as its benefits are more than offset by higher interest expenses and forex losses from US-dollar debts. Meanwhile, ST Engineering will also benefit from the strengthening greenback as its revenue is US dollar-based.

Bond yields have edged higher this year on expectations of a rising interest rate environment. The increase in the MAS 10-year yield to 2.3 per cent year-to-date and 30- to 50-basis point rise in the three-month/three-year Swap offer rates (SOR) are negative for Singapore real estate investment trusts (S-Reits).

Although most S-Reits have hedged the bulk (estimated at 75 per cent) of their debts at fixed rates, these will begin to expire starting this year. Going forward, the debt will be more expensive to roll over.

We estimate that a 1 per cent hike in the refinancing rate on debt renewals this year and next year will lower distributions by an average of 2 per cent (ranging from 0 per cent to 5.6 per cent). With current yield spreads at 3.7 per cent, close to historical trading levels, we see limited upside for S-Reits.

Amid a tame economic growth and rising rate environment, the hunt for yield continues as we look for companies that are able to generate stable cash flows, in net cash positions and offer attractive dividend yields. In this respect, we like China Merchants Holdings (Pacific) and Amtek Engineering.

We expect toll revenue and earnings of China Merchants Holdings (Pacific) to continue growing steadily as traffic volume increases along with China’s economic growth.

For Amtek, earnings recovery is driven by the US, which is a key market for automotive products that should see steady growth in demand from lower fuel cost. Last July’s acquisition of Interplex Industries, a miniature precision engineering player, is positive as it allows cross-selling opportunities and benefits from cost-cutting.

Yeo Kee Yan is a retail market strategist with DBS Group Research. – See more at: