Feature Articles: Investment - OCBC Wealth Management

Singapore Stocks To Head Higher

18 August 2010

Ms. Brigette Goh, fund manager for the LionGlobal Singapore Trust (the Fund), shares her outlook for the Singapore economy and stock market.

Are you positive about Singapore’s economic prospects, and do you see it as a catalyst for the local bourse to head even higher?

Singapore's economic prospects have been revised upwards as the global economy remains on a recovery path. This was on the back of strong manufacturing sector growth as well as growth in the construction and services sectors. In addition, the openings of the two Integrated Resorts (IRs) and higher visitor arrival numbers, contributed to growth in the tourism-related sectors. However, the pace of growth is expected to taper off in the second-half of this year on concerns over slowing global economies, heightened by volatility in the markets, caused by sovereign debt concerns and the European crisis.

In the medium term, we believe the cyclical recovery story will remain intact, buoyed by a low interest rate environment, as well as fair valuations.

How do you see concerns about the Euro-zone debt crisis and the risk of a sharp economic slowdown in the U.S. and China affecting the local economy and stock market?

Concerns over the Euro-zone debt crisis as well as the slowing U.S. and China economies will likely affect the local economy and stock market in terms of financial and trade flows.

From our observation, analysts have yet to factor into their assumptions, the weakness from troubles in Europe because the global trade momentum remains strong. This could be a downside risk to earnings going forward, should the contagion from the crisis begin to impact other regions in the world. The fallout and contagion from Europe's crisis could destabilise global and regional financial markets, while the derailing of global economic recovery will affect exports and the manufacturing sectors.

How would you rate the Singapore market relative to other Asian bourses? Do you see the local bourse outperforming its regional peers over the next 12 months?

The Singapore market looks attractive when compared to other markets in the region, given its strong earnings growth and reasonable valuations. Earnings Per Share (EPS) forecast revisions are marginally positive after a slew of strong upgrades over the past few quarters, and the market is currently trading at a Price/Earnings ratio of 13 times for FY2010 ? slightly below the historical average. Given this backdrop, we are positive on the outlook for the Singapore market over the next 12 months.

Tell us more about the Fund. How many stocks does it own, and what are its top holdings? How are stocks selected for the Fund?

As at end-June 2010, the portfolio has around 33 stocks. The table below shows the top ten holdings of the Fund:

Focusing on a bottom-up stock-picking process, the Fund is benchmark-aware but not benchmark-constrained. This means the fund manager can invest in stocks that are not represented in the benchmark.

In order to generate stock ideas that can withstand the short-term vagaries of the market for our portfolios, our investment process allows for and encourages independence in idea generation. While the primary responsibility of researching for new and promising stock ideas rests with the equity analysts, anyone within the investment team may propose a stock for investment consideration.

Once a specific stock idea that offers a promising investment thesis has been identified, more in-depth research and analysis will be conducted on the stock, including the scheduling of targeted company visits, the construction of models for a deeper analysis of the company's financial statements, as well as the construction of cash flow and earnings models.

We adopt a two-dimensional rating system to encapsulate our views on the quality of the company and its stock's forecasted total return over a three-year investment time horizon.

New stock ideas that have undergone the research process mentioned above may be brought up for peer review and discussion at a weekly meeting. The weekly meeting also serves as a platform to conduct a regular review of the existing stocks in our portfolios to ensure that they remain well positioned and relevant to the market.

The resulting portfolio usually hovers around a holding of 50 stocks with the top ten holdings representing typically about 35 to 45 per cent of the total portfolio. Sector bets against the benchmarks are not predetermined but are a consequence of stock selection decisions. Hence, while the process is benchmark-aware, it is not benchmark-constrained, and a stock will not be purchased simply because it is represented in the benchmark.

Which sectors are you most positive about for the next 12 months? Where are the Fund’s biggest overweights relative to the benchmark?

Within Singapore, we expect tourism-related stocks to benefit from stronger visitor arrival numbers. This should benefit companies such as Singapore Airlines, Tiger Airways and Singapore Airport Terminal Services. Hotel operators such as CDL Hospitality Trust will also be a beneficiary of higher hotel occupancy rates.

In view of the improving domestic economic outlook, Singapore banks' earnings growth are forecast to rise 15 to 20 per cent in 2010, led by rising loan volumes, better fee income and falling credit costs. Among the Singapore banks, DBS has the most leverage to higher interest rates over the medium term, although we note that interest rates could likely remain low for the rest of this year.

The commodity-related as well as oil and gas stocks have experienced a substantial correction, and we are beginning to find pockets of value in these sectors, amid concerns of weakening demand from China. Noble Group and Keppel Corp are interesting investments resulting from that perspective.

Aside from the Noble Group, commodity plays like Wilmar International and Golden-Agri-Resources are also among the Fund’s top holdings. Can you explain the rationale for investing in these companies?

We are positive on these companies due to their long-term fundamental drivers, on the back of increased demand from China and India.

Finally, there is only one property stock among the Fund’s top ten holdings? Does this mean you are cautious about the outlook for the local property sector?

With continued low interest rates and a strong economy with low unemployment, we believe fundamental demand drivers are still supportive of the residential property sector, especially since rents have turned the corner and will be supportive of capital values.

In our view, mass-market residential prices are likely to be near the peak, based on the upgrader affordability index, and have already surpassed the last peak in early 2008. The primary market has slowed while the secondary market is narrowing the gap in the meantime. Mid-tier housing is at or around historical peak prices, while the prices of high-end housing are still some 20 to 30 per cent from the historical peak.

The Government has released a significant number of units on the Confirmed List for the second half Government Land Sales programme. This will help temper land prices and replacement values of new private residential units, going forward, as developers have more choices and will see a less urgent need to bid for more upcoming sites. However, supply side measures will impact the market more in the medium term over 3 years when the physical units come on-stream, and will not immediately have an impact on prices.

The Government will likely be adopting a "wait-and-see" stance but we could expect marginal tightening by the authorities, should prices surge upwards and volumes rise excessively.

Developers in the mid-tier space are trading at significantly wider discounts to their underlying assets or landbank - these include companies like Allgreen and Wing Tai.

At the same time, a two-tier office market, where there is relocation and expansion in new prime office space, supports Prime Grade A landlords like Keppel Land. Retail REITs (e.g. CapitaMall Trust and Frasers Centrepoint Trust) are relatively defensive, and offer some value in relation to their Distribution Per Unit (DPU) growth profile due to positive rental reversions from asset enhancement initiatives. CDL Hospitality Trusts will see strong organic DPU growth from its Singapore hotel portfolio, which forms a majority of their rental income, on the back of the structural improvement of Singapore's tourism sector.

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