From Daiwu Capital Markets: A common picture that arises from an analysis of macroeconomic data and company-level earnings indicators is the emergence of a two-track stock market. While property developers and companies geared to global trade, technology cycle, and external factors (ie, US Fed rate hikes) are seeing upward earnings revisions, those exposed to domestic demand, technology-led disruption and government policy are facing declines.
In aggregate, we are raising our 2017-18 Singapore market earnings by 1.6% and 0.5%, respectively. Accordingly, our new FSSTI target is set at 3,285 (now for mid-2018 vs. end-2017 target of 3,115 previously), which is based on an unchanged 15-year average forward PER of 13.1x. While the upside to the FSSTI remains limited, investors should take advantage of divergent outlooks within the sectors. On the long side, our preferred trades are: 1) banks, for their above-market earnings growth potential and due to the prospect of Fed rate hikes, 2) property developers, as we now expect a recovery in prices amid improving demand, 3) a basket of exporter stocks, and 4) corporate restructuring and M&A plays with robust fundamentals, like ST Engineering and Wilmar. Meanwhile, we think investors should avoid: 5) telecoms, on the new entrant threat, 6) supermarket operators, due to disruption from online retailers, 7) land transport names, due to private hire car risks and policy uncertainty, and 8) the power sector as mid-2018 market liberalisation would only compound sector woes.
Sector-wise, we upgrade property developers to Overweight (from Neutral) as we believe residential property prices have bottomed after 4 years of “softlanding”. In addition, we are downgrading consumer services to Underweight (from Neutral), reflecting the poor outlook for its constituent stocks. Meanwhile, we remain Overweight the banks, Underweight the telecoms and oil & gas sectors, and Neutral on consumer goods and industrials.