The STI has been trading within a narrow range this week after reporting two consecutive weeks of strong gains. The Singapore benchmark dipped 0.2% in the auction yesterday after returning gains from the second half of the trading session.
 
Macquarie Equities Research (MER) issued a report on the Singapore economy last Wednesday (14 October) after the MAS policy announcement. Here are some excerpts from the report.
 
MER remains comfortable with their 3,215 index target for FSSTI post MAS’s scheduled policy announcement this morning.
 
Impact
A bit more hawkish than expected. MAS said it will continue with its gradual appreciation policy for the Singapore dollar, albeit at a slightly reduced rate. This marginal easing reflects MAS’s softer outlook for the global economy and its call for domestic GDP growth to remain ‘modest’ at 2.0-2.5% in 2015 and 2016. That said, consensus came into the event expecting a higher degree of easing via an upward re-centring of the policy band.
 
This lends some support to the Singapore dollar on the margin. MER’s index target is correlated to the Singapore dollar (stronger Singapore dollar = higher target). MER’s ASEAN economist PK Basu’s prevailing FX forecasts of $1.44 (end-2015E) and $1.42 (2016E) look well underpinned to MER here.
 
MER remains constructive. Whilst consensus forward earnings expectations for the market have come off 5-7% since the start of the year, Singapore’s growth expectations are among the most reasonable in the region. Set against this, MER thinks the market is not expensive at 12.3x next twelve months earnings (for FSSTI) while offering the region’s highest dividend yield.
 
MER made some tweaks to their target index weights reflecting new company research published since MER’s September strategy update:
 
MER reduced their underweight in commodities and consumer.
Rising concerns over Wilmar’s carry trade income look exaggerated on MER’s numbers, which drove MER’s upgrade to Outperform. Somesh Agarwal has also upgraded Genting Singapore to OP, which he now sees as the cheapest casino stock in Asia with improving capital management.
 
This is principally offset by a larger underweight in Industrials, where the Jardine head stocks have been removed as index constituents (MER still like them and have Jardine Strategic as a top pick). This leaves a preponderance of Offshore & Marine (O&M) and Maintenance, Repair and Overhaul (MRO) exposed names (which MER don’t like).
 
MER stay overweight the Financials sector. Whilst the more hawkish than expected policy outcome may arrest the ascent of SIBOR, Thomas Stoegner sees SG banks as well positioned on asset quality trends, which he sees as the sector’s key price-setting theme in the next 12-18 months.
 
MER continues to selectively overweight Property via inexpensive recurring income stories like CapitaLand, now trading near trough valuations as per Tuck Yin Soong’s calculations. Prem Jearajasingam thinks concerns over a potential fourth mobile operator overlook some big challenges and have opened a buying opportunity. MER agrees and keep Telecom as an overweight position via SingTel.
 
Outlook
Despite the solid performance since MER’s last update, MER still have 10% total return to their FSSTI target and remain constructive. The next catalyst will be 3Q15 earnings season, which kicks off in earnest next week.

Source: Macquarie Research - 21 Oct 2015