The STI lagged the region yesterday, plunging 2.4% compared to the MSCI Asia Pacific Index 0.9% decline. Investors who wish to gain exposure to the local index can do so via Macquarie warrants. Bullish investors may consider the call warrant while bearish investor may consider the put warrant, which is one of the only financial instruments available to retail investors to profit from the index’s decline.

 
Macquarie Equities Research (MER) released a research report last Friday on 12th December with a 9% total return target for STI in 2015. Some excerpts from the report can be found below….
 
Event
MER thinks Singapore has a ‘seat at the table’ in 2015: MER’s 3,500 year-end 2015 target for STI implies a 9% total return, including a 3.5% yield that looks attractive amid the disinflationary environment MER’s economists are calling for.
 
Impact
Muted macro in 2015… what else is new. A muted domestic economic outlook coupled with an uneven external picture doesn’t exactly set the pulse racing and MER does not see potential snap elections in 2015 providing major catalysts. Domestic productivity and labour reforms are unlikely to get rolled back and macroprudential measures, like the total debt service ratio (TDSR), are also likely stay in place for the foreseeable future.
 
Any stimulus measures in FY15’s budget will likely echo financial year 2014’s, providing marginal benefits to most listed companies outside of the healthcare and small medium enterprise (SME) spaces MER thinks. MER could see incremental initiatives directed to the citizenry, but does not see FSSTI’s consumer space as a great play on that theme.
 
Still, MER thinks Singapore has a seat at the table in 2015. MER sees a second consecutive year of ‘quiet compounding’ ahead for the STI amid a noisy backdrop of sloshing global liquidity. Aggregate index earnings expectations are holding firm and Singapore has the least aggressive growth expectations in Asia ex Japan going into 2015. The market multiple is not stretched and Singapore’s dividend yield is the highest in the region alongside China’s.
 
MER does not expect MAS to shift to a looser monetary policy as inflation remains on the higher-than-comfortable-side despite a recent decline, which should help arrest the slide in the Singapore dollar. That is good for the STI (-65% correlation with USD/SGD) and its healthy dividend stream.
 
MER’s sector and stock picks reflect a slightly more defensive bias than before as MER moves Telecom to ‘Over weight’, alongside Financials and Property where MER continues to favour names with stable and recurring earnings stream that have scope to grow meaningfully, i.e. not domestic developers or REITs. MER has cut Industrials to an ‘Underweight’, joining Agribusiness, Consumer and Transport.
 
MER’s Top Picks generally share two characteristics which MER thinks will be key in a disinflationary low rate environment: pricing power and attractive yields. MER sees some combination of those in SingTel, UOB, CapitaLand, Asian Pay Television Trust, Sheng Siong, Cordlife, and ARA Asset Management. Noble stays a Top Pick despite a weaker thematic fit, as MER thinks the benefits of its Agri stake sale remain underappreciated.
 
The common theme underpinning MER’s Underperforms is structural headwinds that trump any perceived near term fillips like lower oil prices (NOL, SIA) and the visitor arrival and retail sales rebounds MER forecasts (GENS, OSIM).
 
MER’s outlook
MER’s regional strategy team rates Singapore a slight Underweight (+9% total return versus +11% for Asia excluding Japan). But as a relatively defensive market with the least demanding earnings estimates regionally, an undemanding multiple, and one of the highest dividend yields, MER thinks Singapore can keep quietly compounding and certainly has a ‘seat at the table’ for global investors – who MER senses are Underweight Singapore – in 2015.