WITH global markets in disarray following Britain's exit from the European Union (EU), analysts at DBS Group Research are advising investors to seek shelter in yield plays and real estate investment trusts (Reits) in Singapore.
Analysts Janice Chua and Yeo Kee Yan said Brexit's economic impact on the city-state is limited, and valuation is already at historically low levels, trading at forward price/earnings ratio of 11.3 times versus eurozone low of 10.4 times.
"Assuming Brexit does not spiral into a contagion scenario, the Straits Times Index (STI) will be relatively resilient and should hold at 2,630," they said.
At 3.40pm on Monday, the STI was trading at 2,745.62, up 0.37 per cent, or 10.23 points.
For more coverage of the EU referendum, visit bt.sg/BrexiT
However, they voiced their concerns that Brexit might ignite a chain reaction among the Eurosceptics of political parties from other EU nations demanding to hold their own referendums, leading to a break-up of the EU.
"EU accounts for 12 per cent of Singapore non-oil domestic exports and 31 per cent of total foreign direct investments. Currency turmoil, the possibility of a depreciating CNY and its domino impact on emerging currencies is the other key risk. These events could push a deeper correction to 2,500 on STI."
According to DBS currency strategists, the pound could fall a further 10-20 per cent against the greenback in a worst-case scenario.
Singapore companies with exposure to UK/Europe are mainly property-related and Reits. These include City Developments, which has 36 per cent of its assets exposed, Ho Bee (35 per cent), Frasers Hospitality Trust (23 per cent), Ascott Residence Trust (27 per cent) and CDL Hospitality Trusts (5 per cent). HPH Trust will be affected as Europe accounts for 20-25 per cent of its total throughput.
As for Comfort DelGro and Sembcorp Industries, they said the translation impact is marginal, at only -1.7 per cent and -0.5 per cent of net profits for every 10 per cent change in the pound.
DBS dividend yield picks include M1, ARA Asset Management, Sheng Siong, Venture and ST Engineering which have zero or minimal exposure to Britain, and have sustainable free cash flow and high payout ratio, the analysts said.
They added that the interest in Singapore Reits should see an uptick as the US Federal Reserve is expected to keep rates low for longer. Consensus now sees the Fed holding rates steady this year, down from 1-2 rate hikes before the Brexit event.
DBS Reit picks include Frasers Centrepoint Trust, Mapletree Greater China Commercial Trust, Parkway Life Reit, Mapletree Commercial Trust and Ascendas Reit.
Telco stocks, they said, could shine given the higher risk aversion and "the possibility of a fourth telco player diminishing due to funding difficulties".
"Our pick for Singapore telco is M1, the current target price of S$2.60 factors in the impact of potential new entrant. If there is no fourth telco entry, M1 could benefit the most as reflected in our bull-case TP of S$3.30 implying potential returns of more than 30 per cent, with an added yield of nearly 6 per cent."
M1 was trading at around S$2.52 a share, down three cents, at 3.40pm on Monday.