Macquarie Equities Research said last Thursday that it sees the Organization for Economic Cooperation and Development (OECD) economies driving a pickup in global GDP growth. Singapore’s fortunes are more tied to North Asia / ASEAN where expectations are more muted, but MER still sees green shoots emerging with non-oil domestic exports, retail sales growth and productivity expected to rise. MER also expects the S$ to hold steady and see a quieter year ahead in terms of macroprudential policy.

Earnings per share to grow for first time in three years

MER’s FSSTI 2014 target of 3,376 implies ~13% total return. MER is not calling for a material re-rating of multiples. So EPS growth and yield must do the work. MER is looking for FSSTI EPS to grow for the first time in three years.

• Bottom up, MER expects high-single-digit growth. MER has reviewed the team’s sector and company growth estimates, and found them reasonable.
• The top down indicators highlighted above support low-single-digit EPS growth in 2014, but with risks to the upside.
• Singapore earning revisions are correlated to the OECD Asia Leading Indicator (LI), which is now inflecting. Assuming the inflection can continue, this would imply an end to the negative revision cycle in Singapore.

MER is also encouraged by MER’s AxJ strategy team’s upgrade of Singapore to Neutral from Underweight. MER cites improving macro, defensible EPS growth estimates, and reasonable valuations as drivers of the upgrade.

Cyclical bias to sectors and top picks

MER has refreshed its work around cyclical indicators:

• The OECD Asia LI is in a Recovery phase which could morph into Expansion by 2H14.
• The US 10 year government bond yield is set for Expansion / Slowdown (rising in both phases) throughout 2014.

These phases point MER to cyclical sectors, which is in line with MER’s AxJ and global strategy views. MER is Overweight Banks, Industrials, and selected Property and Consumer. MER is Underweight REITs, Telecom, Agribusiness and Transport.

Risks: Taper, Property bubble

• Singapore fared ‘well’ during the last taper scare, trading in line with AxJ, and outperforming its ASEAN peers, bar Malaysia.
• Property: no sharp price declines. The residential property Affordability ratio is in line with the previous peak in 2007 using the MAS’ normalized mortgage rate. But using market mortgage rates, the ratio is more in line with the past average. MER sees a gradual decline in prices (-3% for 2014-15 on average) as high supply comes through and demand is cooled by cooling measures like the recent Total Debt Servicing Ratio.

Key Macro Data this week
Mon 16 Dec:US industrial production; Euro PMI, trade balance
Tue 17 Dec: US CPI; Euro CPI; HK unemployment rate
Wed 18 Dec:US housing starts, building permits; China property prices; Japan trade figures
Thu 19 Dec:FOMC rate decision, exiting home sales
Fri 20 Dec:US GDP; Euro consumer confidence
 

Source: Macquarie Research - 16 Dec 2013