• Equities correction
• Banks fell about 4% on Monday
• Buy on further price weakness

Event: Equities Reacted to Trump’s Comment

On Sunday, Trump said he would increase tariffs on US$200 billion of Chinese imports from 10% to 25% on Friday. He also mentioned that he would impose duties on US$325 billion of Chinese goods currently not subject to tariffs. Equity markets reacted on Monday and in Asia, the Singapore market fell 3.0% while the CSI 300 Index fell 5.8%, but both managed to close off the day’s lows. This was the same for the S&P 500 Index, which recovered from the day’s low (-1.6%) to post a more modest loss of 0.4%.

Impact: Probability of More Tariffs

Meantime, according to wire reports, the Chinese delegates are still going ahead with the trade meeting this week. With this sudden change of events, the probability of a breakdown in trade talks has increased, and this in turn means that the probability of an increase in tariffs has also similarly moved higher. There will also be heightened uncertainty and volatility in the next few trading days. The VIX index (Chicago Board Options Exchange Volatility Index) has also spiked up to 15.44 on Monday, up 20% from 12.87 on Friday.

Analysis: Accumulation on Further Price Weakness

In Singapore, banks and oil & gas stocks took the brunt of the selling on Monday (see Exhibit 1). The FTSE ST Financial (FSTFN) Index fell 3.2%. Since April 2019, we have been downgrading several stocks, largely on valuation grounds as the market has posted good YTD gains.

As of 3 May 2019, the STI was up 11.8% YTD, with several sub-sectors posting gains of between 12-21% YTD. In total, we downgraded 9 out of 43 stocks (or 21%) since April. In addition, there were more hold-rated stocks than buy-rated stocks, largely to reflect the increase in valuation versus historical trends.

REITs were resilient and only saw a very modest 0.7% decline on Monday. We recently downgraded both DBS and UOB to HOLD, largely on valuation grounds.

In our report for DBS (titled “Find joy at lower price level” dated 30 April 2019), we recommended that investors take profit and buy at S$27.50 or lower. Similarly, for UOB (report titled “Time to lock in some profits” dated 3 May 2019), we recommended investors to lock in profits and buy at S$27.30 or lower (this is cumdividend of 70 cents price or ex-divided price of S$26.60).

With Monday’s correction, share prices of both banks have come off about 4.3-4.5% from last Friday’s closing prices. At current prices, both stocks have already corrected sharply and are now below our recommended reentry price levels as mentioned in both reports.

With estimated dividend per share of S$1.20, dividend yield is around 4.5-4.6%. The trade situation is still unclear, and this could mean higher volatility and uncertainty ahead.

While price actions could be volatile in the next few days, for longer term investors looking for exposure to the Singapore banking sector, we recommend gradual accumulation on price weakness.

Source: OCBC Research - 7 May 2019