Towards Financial Freedom
DBS Equity Research: Wired Daily 17 Dec 2015
Singapore Strategy - Lift off in interest rates, currency volatility, oil prices, changes in domestic policies and restructuring initiatives to be key drivers for 2016
FED initials rate hike cycle, median forecast for rates to rise to 1.5% by end 2016
We publish our Singapore Strategy for 2016 - We see the lift off in interest rates, currency volatility, oil prices, changes in domestic policies and restructuring initiatives to be key drivers for 2016. We are overweight Transport, which is a beneficiary of low oil prices and Property developers, which are trading at distressed valuations with upside catalyst from potential policy relaxation. We pick smart nation proxies, beneficiaries of domestic policy changes and companies in value unlocking mode, generating upside in dividend payout. Our stock picks are Capitaland, CityDev, Ezion, Frasers Centrepoint Ltd, Japfa, Mapletree Greater China, ST Engineering, Sheng Siong, Thai Bev and Venture Corp.
The shadow of higher interest rates, more earnings disappointments during the upcoming 4QFY15 results season and uncertain growth outlook next year could be a near-term drag for equities. Heading to the end of the year, we believe that any attempt at a 'Capricorn Rally' will be short-lived. Near-term resistance for the STI is at slightly above 2900, immediate resistance 2860. Stocks could start the New Year with a 'thud' rather than a 'BOOM'. History has shown that the initial 1-3 months is negative for equities once the FED starts its rate hike cycle.
The consolation is that after the dismal YTD decline of more than 17%, STI's valuation is inexpensive. At 2800, STI trades at 11.46x (-1.5SD) FY16F PE vs EPS growth of 5.9%. We expect a trading range of 2650-3100 over the next 6 months. We see weakness in 1QCY16, throwing up opportunities to accumulate for a tradable rally
US markets rally in the initial few hours following the widely anticipated rate hike move by the FED that lifted rates by 25 bps to 0.5%. Investors took the move positively as a sign of the FED's confidence in the US economy. Still, we observed that Janet Yellen commented the median forecast is for the Fed Funds rate to rise to about 1.5% by end 2016, 2.5% by end 2017 and 3.25% by end 2018. This is 'faster' than consensus expectation for rates to rise by just 50bps in 2016.
Source: DBS
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