Consumer stocks favoured as Goldilocks works her charms

Singapore

AFTER a triumphant Year of the Rooster when Asian markets are up anywhere from 20 to 40 per cent, investors are in a bullish mood.

Despite rich valuations all around and the threats of higher interest rates, investors remain charmed by Goldilocks, the little girl who liked porridge that was "just right".

This year, the global economy is similarly expected to be neither too hot nor too cold, boosting financial markets.

Consumer stocks in particular appear to be more favoured than before. "With a broader recovery globally, people are more optimistic," said Nikko Asset Management senior analyst Peter Monson.

In North Asia especially, companies like department stores are seeing same-store sales growth pick up, according to Mr Monson. For the house's Asia ex-Japan funds, it has shifted from a "neutral" position on consumer firms a few months ago to an "overweight" position now. This means it is holding more consumer stocks relative to the benchmark.

Stocks it bought include a hotel firm exposed to China assets, a Korean media stock, and Indian real estate, jewellery and consumer staples stocks.

On the other hand, tech stocks have been trimmed. "Technology had a very, very good year ... It's unlikely to continue to deliver the same strong earnings growth, particularly on the memory and hardware side," Mr Monson added.

In South-east Asia, an improving economic outlook should trickle down to consumers, said a DBS report. Profits can be driven by operating efficiencies and cheaper agri-commodity costs, it noted.

Earnings at Asean consumer companies under DBS' coverage are expected to grow by 13.6 per cent in 2018 after a relatively lacklustre 6.8 per cent in 2017.

Its top large-cap picks are Thai spirits maker Thai Beverage, Indomie maker Indofood, and Filipino fried chicken seller Jollibee.

It also likes local restaurant and bakery play BreadTalk. Bakery openings and more efficient food court management can drive earnings growth in 2018. Selling its stakes in properties like Chijmes and Axa Tower can also unlock shareholder value, DBS said.

Financial markets, in their typically exaggerated manner, have swung from depression at the beginning of 2016 to euphoria throughout much of 2017.

A weak US dollar also boosted emerging markets as capital chased higher returns in riskier places.

After trading of the year ended on Dec 29, 2017, Singapore's benchmark Straits Times Index (STI) closed at 3,402.92 points, up 18 per cent from 2016's close of 2,880.76 points.

The total value of the 746 companies listed on the Singapore Exchange (SGX) tracked by The Business Times soared past the S$1 trillion mark, up from S$879 billion at end-2016.

The index rally was driven by banks and property stocks. But technology counters of all stripes did even better, with many doubling in value at least in the course of the year. Some small-cap stocks are even up three to six times.

Real estate investment trusts (Reits) also rose to record highs not seen since the mid-2013 bout of worries over US monetary tightening.

Favourable macroeconomic conditions are putting investors in a good mood. DBS chief investment officer Hou Wey Fook said in an outlook report that weak inflation might allow central banks to keep monetary policies loose, leading to a hunt for yield.

"Equities and corporate debt will continue to be beneficiaries. We therefore think the likelihood of a bear market emerging over the next three to six months is low," he noted.

At UBS, the largest wealth manager in Asia and across the world, Asia-Pacific chief investment office head Tan Min Lan said that Asia's economic outlook looks positive.

"We're excited about the rise of innovation as the region's next driving force," she added. "We see more upside to Asian equities, and are most positive on the equity markets of China, Indonesia, and Thailand."

Asia is at the mid-point of its economic cycle, with the focus shifting from trade recovery to investment and domestic consumption, according to UBS. Innovation will drive growth due to a swift rise in tertiary educated workers, more research and development spending, and pro-innovation policies, it pointed out.

Asian equities should outperform bonds, and in real estate, Singapore is the only Asian market expected to make a gradual recovery, UBS said.

In Singapore, banks are favoured as net interest margins go up with interest rates. With a better economy, loan growth can pick up, along with wealth management businesses.

OCBC Investment Research said in a mid-December note that the STI is still inexpensive, with a "decent" dividend yield of 3.3 per cent.

According to Bloomberg, at 3,400 points, STI forward earnings multiples are at one standard deviation above the 10-year average, while the price-to-book ratio is at half a standard deviation below.

Valuations are not considered excessive largely due to good corporate earnings growth, OCBC said. It favours property stocks, with top picks including CapitaLand, City Developments, UOL, Wheelock and Wing Tai.

Based on technical analysis, said CIMB Research, the upward trend of the STI remains intact. In the near term of one to three months, the index could grind higher as long as the 50-day exponential moving average (EMA) of 3,386 points holds, it said.

It added that a realistic target is 3,549 points, a three-year high, with two resistance levels at 3,460 and 3,525 points. But a possible retracement to the 100-day EMA of 3,336 points is possible after the strong run in the past 12 months, CIMB felt.

Meanwhile, RHB Research pins an end-2018 target of 3,650 points for the STI, or a 7 per cent upside from current levels.

"We are witnessing early signs of recovery in domestic demand - a gradual recovery in the residential property market, and a steady uptick in retail sales," it said.

The house likes consumer companies which are exposed to non-Singapore markets. Its calls include regional supermarkets and convenience store play Dairy Farm International, and Food Empire, which sells instant beverages in Russia and Ukraine.

It also likes Reits which are direct beneficiaries of improvements in the economy, have strong balance sheets and can undertake acquisitions that will add to distributions for unitholders. Here, industrial play Ascendas Reit and hospitality play OUE Hospitality Trust are its top picks.

Meanwhile, RHB head of Singapore small and mid caps, Jarick Seet, highlights recruiter HRnetGroup, semiconductor tester Avi-Tech, and Indonesia water treatment firm Moya Asia Holdings as his top three small-mid cap picks.

On the whole, investors might worry about valuations, but they continue to dance.

In Bank of America Merrill Lynch's (BofAML) latest survey of fund managers in December, there was a record proportion of 45 per cent saying equities are overvalued.

Meanwhile, some 83 per cent think that bond markets are overvalued, near an October record of 85 per cent.

Nevertheless, cash levels are at 4.7 per cent, above a 10-year average of 4.5 per cent. This paves the way for more upside for risk assets in the first quarter, the report said.

People are "long boom, short bust", it said. Contrarian trades will be to short equities and banks, while going long bonds and utilities.

Looking ahead, BofAML said the average investor still believes in "Goldilocks" in 2018. Some 54 per cent of investors it polled expect the high growth and low inflation scenario this year.

However, Keith Wade, chief economist at asset manager Schroders, pointed out in a note that the risks are skewed towards higher inflation, which can bring about higher interest rates.

A global trade boom can push commodity prices higher and lead to stronger growth and inflation around the world. In the US, tax cuts and increased infrastructure spending can also drive inflation higher, he said.

Mr Wade expects three rate hikes from the US Fed this year, which will mean overnight rates at 2.25 per cent at end-2018.

Other major developed economy central banks in Europe and Japan are also expected to tighten monetary policy.

Yet central bank tightening is at an early stage, said JP Morgan Cazenove in a global equity strategy report. According to it, if equities were to tank, it is unlikely that the US Fed will continue with rate hikes.

"The central bank put is still in place," it added.

For more stories on BT Outlook 2018, visit bt.sg/outlook2018.

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