• STI fell 12% in 3 months
• Value is starting to emerge
• Cherry pick to position for long term

From Hero to Zero…

The Straits Times Index went from this year’s high of 3615 in May 2018 to a recent low of 3192 post the latest property cooling measures, a plunge of 423 points or 12%. This happened over a short period of 3 months. The last time the Singapore market saw a >10% decline in a 3-month period was in Jan 2016 due to China’s stock market crash and the drop in the Yuan. From up 6.2% this year at the high, the STI is now down some 5% for the year.

Pockets of Sunshine

Banks could benefit from a potential hike in lending rate, which could possibly result in better net interest income growth and better margin. Despite the cooling measures, we have a tactical overweight on the sector and current price levels also translate into dividend yields of 3.8% to 4.6%. Competition will be tough, and this is particularly acute for the telecommunications sector.

The entry of a new player, TPG Telecom, is likely to mean price wars ahead as telcos act to defend the departure of their subscribers. Companies with regional businesses also have to contend with weaker regional currencies, which is beneficial if these are manufacturing bases but is negative if these are their key exports markets.

STI Is Trading at -1SD for P/B – Historically a Good Level to Re-enter the Market

The ongoing threat of a trade war between China and the US has erased all the gains this year from equity markets, especially hitting the Asian markets hard. Volatility, as measured by the VIX index, remains low despite the potential threat of a full-blown trade war. While headwinds remain, we do not think that global economic growth is headed for a major slowdown.

Based on consensus estimate, economic growth rate is still healthy. The STI is currently trading at -1 SD for both P/B and PER. Historically, when the index was at these levels, during the Global Financial Crisis (GFC) and the Chinese stock market crash (2016), these also presented opportunities to accumulate stocks for longer term investors.

With the recent sell-down due to trade tensions, we are opting to be more prudent and have included several defensive stocks with good dividend yields into the list.

Source: OCBC Research - 18 Jul 2018