Singapore Strategy - Re-jigging top picks

Usual caution towards September unwarranted? Since late August, there has been a growing perception that equities have become overbought. Various strategists have sounded caution. Warning shots like the sell-down of the Chinese stock market last week plus noises about a new interest rate tightening cycle have emerged as new negatives by early September. This, coupled with September’s infamous track record for stock-market disappointments, added to the caution. All the above concerns are valid, though they have to be balanced by the sense that there seems to be still a tremendous amount of un-invested money on the sidelines. Trading into the second week of September, high-yield stocks like SPH, M1 and the REITs have outperformed, indicating a chase for yields and still-high levels of liquidity. Market price actions make us reconsider our defensive posture: one might miss the next rally if one stays defensive for too long.

Maintain Overweight on Singapore; CY09 index target remains 2,700. We leave our 2,700 year-end FSSTI target unchanged for now though it is useful to start thinking about final index target peaks. From our study, the FSSTI peaked at 2.3- 2.4x P/BV in the last two recovery cycles. Simplistically extrapolating such P/BV peaks would imply FSSTI targets of 3,900-4,000 at the end of this bull cycle. This might be a tad too bullish as prospects for bank, property and O&M earnings were much stronger two years ago. The FSSTI peaked above 2.0x P/BV only in periods of extreme exuberance (2000 tech boom and 2007 property boom). Assuming it does not reach 2.3-2.4x P/BV and eventually peaks at 2.0x P/BV, we see a target of 3,350 for next year, when we would turn bearish. Using a mean 16x P/E would also suggest a FSSTI target of 3,400.

Sector thoughts and top picks. From our list of top picks in August, we would take profit on CDL-HT and Ho Bee, replacing them with PLife REIT and Keppel Land. Other picks such as CityDev, Indofood Agri, Noble, SembCorp Industries, SPH, Suntec REIT and UOB remain. Additionally, CSE Global and Ezra have been added to our preferred list. Among the sectors, we suggest going long on property and short on banks. We prefer interest-rate-sensitive sectors to banks. Conglomerates stand out as a non-consensus Overweight, though the brighter prospects in the sector belong to second-tier names for now, we believe.

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