After the markets closed last Friday, Macquarie Equities Research (MER) released a research report about their strategy in Singapore. Some excerpts from the report are shown below:

Rising Organization for Economic Cooperation and Development leading indicators (OECD LI) and Bond Yields favour Industrials
Two series that correlate well with Singapore returns: The OECD LI is in expansion, and the 10-year US bond yield (BY) is in the latter stages of Recovery and poised to enter expansion. The Singapore market has risen 18% in past expansion phases although this phase looks like it will be more muted, biased to the US, and distorted by QE. MER’s FSSTI Index target of 3,319 implies only 6% total return. Still, MER wishes to highlight the following sector implications:

Industrials perform best when these series are in Expansion. MER sees incremental support for calls on Sembcorp Marine and Vard and would highlight Keppel Corp from a strategy perspective despite its Neutral rating. These names have fallen off the radar but are set for strong order intake in 2H13 based on MER’s analysis.

Too early for Consumer Staples. The Staples sector (Wilmar, GGR and Olam) has also outperformed in past Expansion phases. MER is seeing rising interest in them but MER thinks all three are wrestling with oversupply and restructuring issues not present in past cycles.

Financials (Banks, Property)have performed in-line in past OECD LI Expansion phases and slightly outperformed in BY Expansion. MER remains neutral on the Banks with the view that volume momentum is set to slow post a strong 1Q13. On margins, short term rates matter more than 10-year rates, and rises there are still a ways off. In Property, MER stays cautious on domestic developers but see good value in names with international exposure (CMA, HKL, GLP).

Not piling into REITs
Bottom-up upside emerging: MER’s targets imply 18% weighted average total return for the REIT sector post the recent selloff.

But macro drivers are not supportive. MER’s top-down model, which bakes in 1) the current SG 10-year yield, 2) flat USDSGD FX rate, and 3) MER’s bottom-up modelled dividend growth of 5%, elicits only 5% total return for FTSE Straits Times Real Estate Investment Trust Index (FSTREI). MER’s FICC team sees risks tilted to higher SG bond yields, and expects SGD to stay flat. That kind of profile poses further downside risk to FSTREI’s returns profile.

Top Picks: Sticking with Singapore’s Sweet Spots
Singapore’s transition from a labour-led to a productivity-led model will take time. MER sees only 6% total index return and are advising institutional clients of the following views:

Earnings quality with an overseas bias: MER believes that SMM and VARD set to win more orders in 2H13. GENHK is a Singapore’s most compelling SOTP story with the Travellers IPO being a clear catalyst, likely in the third quarter of 2013.

Chinadomestic demand: Retail sales growth has held up, supporting CMA and GLP. MER thinks that food play China Minzhong is cheap and set for a maiden dividend.

Singaporevisitor arrivals: While the haze is a near term risk, MER thinks this remains a positive domestic medium term trend, best played through GENS.

Source: Macquarie Research - 24 Jun 2013