Singapore Strategy:Earnings risk lingers

Event.

    Our top-down FSSTI index earnings growth model now calls for contraction ofthe order of ~7%, below both our own and consensus bottom up expectations(see chart on the left). This lingering earnings risk, coupled with an uninspiring4% upside to our 2,950 12-month index target leave us equal weight onSingapore. That said, our bottom up ‘Outliers’ screen still identifies somecompelling ideas within our overall defensive sector positioning.

    Impact.

    We keep our FSSTI target at 2,950. This masks a mid single-digit cut, whichis offset by a six-month roll forward to mid-2017. Our target is set at theaverage of our top-down (2,850) and bottom-up (3,050) index valuations.

    It is the top-down index target that has seen the underlying pressure(~10% lower assuming no roll forward). Key macro inputs like NODX andretail sales have weakened. The S$, by contrast, has seen some recentstrength. But the risks are to the downside, as MAS’ move to a neutral policysetting in April leaves the currency more exposed to the Fed rate hike thatMacquarie’s economists expect by September at the latest. Overall, the topdownmodel now predicts a ~7% earnings contraction in 2016E versus ~2%at the start of the year.

    The magnitude of the predicted decline looks extreme in an historicalcontext, but we think the cautionary message is worth heeding given the topdownmodel’s solid R-squared of 83% and decent ability to predict bottom-upearnings cuts in the past (at least directionally).

    Bottom up: Outliers framework still identifies interesting ideas. Given abackdrop of potential earnings disappointment, we are more defensivelybiased, albeit with some tactical exceptions (Fig 4). In terms of stockselection, we look for names that have in the past 12 months demonstrated asolid earnings trend, which our team also sees as sustainable, and which themarket has not yet rewarded.

    In terms of our index positioning:T We are OW Property and Telecom, which continue to show solidearnings trends, but have unjustifiably sold off for various reasons. Toppicks include CAPL and ST. We are more neutral on the banks, but havea small overweight in Financials, largely driven by SGX which enjoysdifferent fundamental drivers. We are less keen on the REITs given lowDPU growth, but see MCT as compelling (replaces CCT as a top pick).

    T We are UW Industrials, Commodities and Consumer, which do notscreen well on earnings trends, though there are some exceptions(unfortunately many of those are also expensive). That said, we do seesome interesting non-index ideas in these two otherwise uninspiringsectors, and have JS, SPOST and SSG as top picks.

    Outlook.

    We do not see many compelling catalysts to drive up our 2,950 target forFSSTI. With only 4% upside and 8% total returns, coupled with lingeringearnings risks, we are equal weight on Singapore.