A sovereign-debt crisis in Europe will cast a long shadow over the local market in 2012. So,analysts are advising investors to stay defensive. Yet, their uniform macro view belies their diverse opinion on where exactly you should put your cash.
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| Kenneth Ng of CIMB |
Expectations for a strong recovery in the equity market this year were very quickly dashed first by a
popular up-rising in the Middle East, then by a
tragic earthquake in Japan, followed by a
struggle over the budget in the US and now a
steadily worsening sovereign-debt crisis in Europe. This last issue continues to weigh heavily on market sentiment and analysts all agree on one thing: Investors should not be taking too much risk in the year ahead. 'We
don't think the issues in Europe can be resolved quite so easily,' says Kenneth Ng, head of research at CIMB Research. 'Debt ratios in Europe are too high.' (
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Besides, Ng thinks it will be a reach for the European powers to agree on the big bail-out that the eurozone needs. 'The bazooka is not there. It's just a fictional hope. And even if we do get [more funds], it will just solve a liquidity issue, not the funding issue. Liquidity and funding are two different things.' Ng thinks after the confidence hit that the sovereigns and the banks in Europe have taken, future fund-raising will become much more difficult. And, with some European banks trading at almost half their book values, any equity issue would be severely dilutive.
'The implications for Singapore and Asia, then, are that the world is heading towards a
potential banking crisis,' Ng says. 'And it's clear that the stock market in this environment will not go much higher.' He says the
Straits Times Index could sink as low as 2,040 to 2,280 points this year, over the inevitability of a sovereign default. If such a default can be dealt with decisively, Ng is hopeful that the market can recover to 2,680 points. Otherwise, he says, it will be a
long road to recovery.
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| Timothy Moe, Goldman Sachs |
Yet, fundamentally, analysts also agree that Asian companies are not in bad shape. 'We're still going to have
7.1% GDP growth next year. Earnings growth will be moderate, but it will still be positive. And we think, more importantly, that it will pick up in 2013. Valuations are quite inexpensive. Asia's overall fundamentals are attractive,' says Timothy Moe, chief Asia-Pacific strategist at Goldman Sachs Asia.The only thing investors need to be cautious about, he says, is that company fundamentals are likely to be a driver of share prices only in 2H2012 because market sentiment will still be dominated by Europe issues in 1H.
Moe is less positive on the Singapore market.
From a regional perspective, he has a
'market weight' rating on the region, preferring other
Asean markets such as Malaysia and Indonesia. He says the benchmark STI is very biased towards bank and property stocks. And, indeed, property represents a large chunk of the large-cap stocks listed here. 'The slower-growth environment as well as the fact that we expect a period of oversupply for many parts of the property market this year suggest that the earnings picture for banks and property will be under more strain as we go into 2012,' says Moe. '
So, we're not that optimistic about earnings.' He adds that,
although valuations are fair, they are not significantly cheap.
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| Sakthi Siva, Credit Suisse |
Sakthi Siva, head of research for Singapore at Credit Suisse, disagrees. 'Singapore has been the only dog in Asean. It's a huge laggard,' Siva says. By her calculations, the
Singapore market is trading at a price-to-book valuation of 1.2 times. In comparison,
the Philippines, Thailand and Indonesia trade at 1.8, 1.9 and three times, respectively. 'The reason is that
Singapore's exports-to-GDP is very high, so it's seen as a cyclical market,' Siva says, arguing that this is
already priced in.
She does, however, advocate selective stock-picking and recommends investors stick with counters that are
at or near previous valuation troughs. 'Over the last 10 years, if you had bought the four cheapest markets, you would have
outperformed the region 77% of the time after three months but about
91% of the time after 12 months,' Siva says. Since August, she has recommended that investors buy the stocks that are close to their 2008/09 lows on price-to-book basis. This strategy has outperformed the
MSCI Singapore by about 11%, Siva adds. 'We prefer to buy stocks where, hopefully, the valuations are so low that, even if the upside is not that big, the
downside is actually quite limited,' she says.
The traditional place to take shelter while waiting for clearer skies is under the high-yield umbrella: telecommunications companies and real estate investment trusts. CIMB's Ng says REITs today have significantly better capital structures than they did in 2008. Short-term debt is now just 8% of total debt versus 38% then. 'Less pressing short-term liabilities would reduce the likelihood of cash calls,' he says.
Among the REITs, his favourites are CDLHospitality Trusts and Ascendas REIT. He likes the former for its better valuations and as a play on expectations of sustained visitor arrivals next year. Units in CDL Hospitality Trusts have fallen 26.2% year-to-date compared with an average fall of 16.7% for the sector, so the stock is currently trading marginally above its book value versus its five-year average of 1.3 times.
Meanwhile, he likes Ascendas REIT's exposure to stable long leases. Some 42% of its exposure is to long leases on single-tenanted buildings and many of them are also pegged to the consumer price index. Some positive rental reversions are also expected on expiring leases that are currently below market levels.
Of the three local telcos, Ng's top pick is StarHub, as it currently has the highest yield. The company has also committed to a fixed quarterly dividend of five cents a share, which is appealing in the present volatile environment. His projections are for StarHub to generate free cash flow of 24.6 cents a share this year, which means the committed dividend remains sustainable.
Another
defensive stock that Ng likes is ComfortDelGro Corp, which operates buses, taxis and trains in Singapore and other countries. Ng says that, so far, ComfortDelGro has shown a commendable ability to keep costs under control despite an increase in energy prices. Potential earnings growth could come from outside Singapore while the local transport market offers a degree of stability. Incidentally, ComfortDelGro is also one of CreditSuisse's top picks at the moment because its valuations are below trough.
The stock is currently the only stock among the top 30 by market capitalisation in Singapore that is trading at price-to-book valuations below the 2008/09 lows: 1.5 now versus 1.6 then.
While Sembcorp Industries is
not commonly thought of as a defensive stock, Ng thinks it could be a relatively
safe investment in the year ahead. After its purchase of the US-listed water firm Cascal in 2010, the company is now among the world's largest players in the water space, Ng says. He adds that the local utilities business is likely to escape a downturn unscathed and there could be earnings growth from new utility projects in the pipeline.
Besides ComfortDelGro, Credit Suisse's other favoured stocks now are some names with
slightly higher beta but
similarly attractive valuations. Keppel Corp, for instance, is trading not just close to its crisis price-to-book valuations but also one standard deviation below its historical average price-to-earnings ratio of 14.5 times. If credit conditions ease next year, Keppel could also re-rate on a recovery in deepwater rig orders, Siva adds. Then there is City Developments (CDL), which is trading at a near-trough 38% discount to its revised net asset value of $14.50 and at a 39% discount to its historical average price-to-book value of two times.
While the
common view is that the local property market is overvalued, Siva disagrees. She notes that, despite a rise in physical property prices since the crisis, shares of property stocks in general and CDL in particular have not gone up in tandem ' suggesting that weakness is already priced in. Besides this, Siva says that although property prices in absolute terms have gone up a lot, nominal income has risen too. 'In classic bubbles, the rise in property prices is many times the rise in nominal GDP,' she says.
In Tokyo, it was eight to nine times; in New York and London, three to four times. 'Singapore is not a classic bubble. The issue is the inequality in income. For the bottom 20% of the population, incomes have not grown. The solution should be more social housing, which we have seen recently,' she says. Besides being cheap on price-to-book valuations, Siva says both Keppel and CDL are good examples of what she calls a structural ROE (return on equity) story. 'Our definition of a structural ROE story is rising ROE with low or falling gearing,' she explains. In 2001, CDL's ROE fell as low as 1.4% before rising to 9.7% in 2009. 'We believe this improvement is structural, as net debt to equity for City Developments has fallen sharply over the period ' from 87% in 2001 to an estimated 18.4% this year.
Traditionally, corporates improve
ROE by gearing up the balance sheet. But, in City Developments' case, it has de-geared the balance sheet and yet ROE has risen at successive troughs in global growth.' Similarly, Keppel's ROE has risen from 5% in 2000 to 13.3% in 2003 and is now at 18.5%. Two other stocks with low price-to-book valuations that Siva highlights are
Olam International and CapitaLand.
The former is trading at 1.6 times book value, which is below its 2008/09 lows of two times.
The latter is trading at 0.7 times, or 12% above its pre-vious low of 0.6 times.
There are high expectations for Asian governments to stimulate growth this year if it becomes necessary. Inflation has peaked in many countries and is actually falling in some, while balance sheets of governments remain strong. Consumer-oriented stocks are therefore a big theme for 2012. One way to play this locally is through the tourism market. CIMB's top pick is
Genting Hong Kong, as fundamentals have improved considerably now that the previously loss-making cruise business is turning around. Ng says Genting Hong Kong is exposed to a growing gaming market in the Philippines through Resorts World Manila. The development saw gaming revenue growth of 80% y-o-y in 3Q, outperforming Macau and Singapore casinos.
Goldman Sachs' top pick, on the other hand, is Genting Singapore. The bank thinks the Singapore gaming market is more attractive than Macau's because it is on firmer footing, has high gambling velocity, low gaming taxes and less aggressive competition for commissions and a low risk of new concessions. Another consumption stock that Goldman Sachs likes is Jardine Cycle & Carriage, whose principal asset is a 50.1% stake in Indonesia-listed Astra International. Astra has the largest sales and distribution network for motorcycles, automobiles and trucks in Indonesia. It also has a 79.7% holding in PT Astra Agro Lestari, one of the largest producers of crude palm oil (CPO) in Indonesia. Goldman Sachs says Indonesia is likely to be less affected by the situation in Europe because of its strong domestic market.
Wilmar expected to benefit from changes in export tax
The bank is also positive on the soft commodities sector, particularly the plantation companies. Tighter supply-demand dynamics and higher oil prices suggest that the price of CPO could see upside next year. Its top picks in this space are
GoldenAgri-Resources and Indofood Agri Resources, the two largest Indonesian plantation companies listed here. Also operating in the soft commodities sector is
Wilmar International,which CIMB's Ng likes. He sees Wilmar's earnings next year benefiting from
recent changes to the export-tax regime in Indonesia, which should give the company better refining margins on its palm products. He says valuations have yet to price in the earnings enhancement from this development.
Ng also suggests
Global Logistic Properties as a consumer play, but with a real-estate kicker. GLP is a provider of logistics facilities and is therefore closely tied to the manufacturing and retailing sector. As it covers 21 major cities in China, Ng says it has
unique exposure to growth in the country. The stock also trades at a 20% discount to its revised net asset value. Finally, he is optimistic about DBS Group Holdings, given the company's improving earnings quality. 'Throughout 2011, DBS has been able to navigate volatile investment markets and a low-interest rate environment better than its peers,' he says. As European banks pull out of certain segments of the market, he sees opportunities for DBS to step in.
