The STI index has been outperforming the region recently, gaining 0.3% over the past two weeks. In contrast, the MSCI Asia Pacific index fell 1.5% over the same period of time. On 25 October, Macquarie Equities Research (MER) released a research report stating their views on the index as well as the different sectors in Singapore. Some excerpts from the report are stated below.

Impact
REITs worth a revisit. REITs dominate the early reporting and tend to hit their numbers. 3Q13 has been no different so far. But the macro backdrop has changed: budgetary disruption and soft payrolls in the US support MER’s US team’s call for Fed tapering to be delayed to March 2014. This can sustain a stronger S$ and lower Singapore risk free rate. MER’s top down model now elicits 14% total return for the FTSE Strait Times Real Estate Invest Trust Index. MER’s key bottom-up picks are CapitaMall Trust, Ascendas REIT, CapitaCommercial Trust, Suntec REIT and Mapletree Commercial Trust. AIMS AMP Capital Industrial REIT is MER’s top small cap pick.

Looking for Industrials top picks to follow Keppel’s lead. Keppel’s big beat this quarter was broad based, with strong margins boosting the O&M division. MER remains positive on this group and expects O&M peer SMM to come good as pent up revenue recognition drives a strong quarter. Ezion, the first mover in Asia’s emerging Self Elevating Unit market, looks set for another strong showing with 130% YoY earnings growth.

Coming down from the sugar rush: Agri names have outperformed recently, buoyed in part by the recovery in sugar prices (+17% since Sep). Earnings exposures vary (Noble: ~7% in steady state MER estimates, Wilmar: 11%, IFAR: 4% from Brazil / 23% from Indonesia MER estimates, Olam: hard to pin down). MER sees many headwinds buffeting the non-sugar related assets for these names and expect another unruly reporting season. Wilmar looks best placed within this avoidable group with respect to 3Q13 reporting, in MER’s view.

Banks: expect decent results at OCBC and DBS, but risks at UOB. In this large but fairly valued sector, MER is looking for significant improvement at OCBC on a QoQ basis thanks to stable bond markets in 3Q13. MER expects DBS’ net interest margin (NIM) to hold up well, with credit costs staying low. By contrast, MER sees risks at UOB where asset yields and NIMs may still face greater pressures.

Genting Singapore due some luck: GENS’ last two quarters have been impacted by weak hold rates, causing profits to be 15-35% understated according to MER. MER hopes for a clean quarter which will show GENS’ true earnings capacity and await further updates on capital redeployment opportunities, including Japan.

Outlook
MER remains Neutral on the STI index with only 7% total return to MER’s index target of 3,319. MER has replaced China Minzhong as a midcap top pick (limited liquidity post large stake increase by Indofood) with Asian Pay TV Trust (11% yield; 48% total return; stock should also benefit from an extended lower risk free rate environment).

 
Key Macro Data this week
 
Mon 4 Nov: Eurozone PMI, USfactory orders
Tue 5 Nov: US ISM Non-manufacturing index
Thu 7 Nov: ECB rates decision, US GDP, US jobless claims
Fri 8 Nov: US non-farm payroll, US personal income and outlays, US consumer sentiment

Source: Macquarie Research - 4 Nov 2013