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OUTLOOK 2020

STI forecast to advance by strong single-digit gain this year

Analysts are more aligned on predictions for 2020, bolstered by better growth prospects and a low interest-rate environment

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After a year of recovery for equities, the Boar will soon pass the baton to the Rat, which is likely to oversee another year of earnings turnaround - helped by better growth prospects and a low interest-rate environment.

Singapore

AFTER a year of recovery for equities, the Boar will soon pass the baton to the Rat, which is likely to oversee another year of earnings turnaround - helped by better growth prospects and a low interest-rate environment.

Of the forecasts covered in last year's outlook, DBS Group Research's was the most bearish of the lot but its end-2019 target for the Straits Times Index (STI) of 3,250 turned out to be the most accurate.

When trading ended on Dec 31, the Straits Times Index (STI) finished at 3,222.83, chalking up gains of 154.07 points or 5 per cent from 2018's close of 3,068.76.

Within the STI, consumer staples and property plays including real estate investment trusts (Reits) were among the biggest gainers.

For the region, the MSCI Asia Pacific Index added 16.6 per cent and the MSCI Asean Index was up 5.2 per cent.

The STI's gain in 2019 was lower than North Asian benchmarks in Japan (up 18.2 per cent) and South Korea (up 7.7 per cent), which have larger exposures to the recovering tech manufacturing sector. That being said, the STI advance was above the South-east Asian average.

In its base case for 2020, DBS has a 3,500-point target for the STI - 13.2 times forward price-to-earnings (PE) - an 8.6 per cent increase over 2019's close. This assumes US-China trade relations will continue to improve. In the event such ties worsen quickly, DBS has a bear-case target of 3,060.

Stocks that DBS cover are forecast to post 8.2 per cent earnings per share (EPS) growth in FY2020.

But unlike a year ago, when analysts had divergent forecasts for 2019 due to mounting uncertainty in both the geopolitical and economic spheres, their views are more aligned this time.

There is greater confidence on the year's outlook, where consensus estimates point to a 6.6 per cent core profit growth for the STI.

The US-China "Phase One" trade deal is likely to be signed in early January, the US Federal Reserve is unlikely to adjust interest rates and the case for a global tech recovery continues to build up. All this makes profit disappointment risks low, said Maybank Kim Eng in a recent report.

The brokerage has a target of 3,470 for the STI, representing a 7.7 per cent upside. It expects a 2020 EPS growth of 3.1 per cent in companies it covers.

Similarly, RHB Securities, which had a 2019 forecast of 3,300, estimates an end-2020 STI target of 3,460, a 7.4 per cent gain from current levels.

"With expectations of a moderate recovery in gross domestic product (GDP) growth - and a better corporate earnings growth outlook for 2020 - the index's valuation does not seem expensive," RHB Securities head of research Shekhar Jaiswal said.

He added that the STI's yield of 4.2 per cent is the highest in Asia and factoring that in, the STI could deliver a total return of 12 per cent in 2020.

In the broader Singapore market, the total value of the 716 companies listed on the Singapore Exchange (SGX) fell to S$887.8 billion from S$892.4 billion across 733 companies at end-2019.

By sector, utilities (up 31 per cent) and Reits (up 21 per cent) were the big gainers while hotels and restaurants (down 16 per cent), and commerce (down 19 per cent) were the laggards.

For 2020, CGS-CIMB head of research Lim Siew Khee has upgraded the local banks to "overweight". At 1.1 times price-to-book, valuations are attractive and below its long-term average of 1.3 times.

Moreover, the trio - DBS Group, OCBC Bank and UOB - have an average yield of 5 per cent and could deliver further upside through increased payouts provided no major acquisitions are made by the lenders, Ms Lim added.

Maybank is "overweight" on financials too. The brokerage's head of Singapore research Neel Sinha noted that loan growth, "while slowing, has still been mid-single digits".

Mr Sinha also expects net interest margins to continue to rise with loan yields "catching up with their characteristic lag to past rate hikes". UOB is Maybank's pick of the bunch.

RHB Securities, which is "neutral" on the lenders, has UOB as one of its top picks. It has the smallest loan exposure to Greater China, which is experiencing slowing economic growth, RHB said.

Consumer staples are also being favoured, with some likely to get a further lift from the listing of subsidiaries.

DBS expects Thai Beverage (ThaiBev) - the STI's best performer in 2019 - to record steady earnings growth along with better contributions from Sabeco and small losses from its non-alcoholic beverage businesses.

In addition, ThaiBev could be considering the listing of its regional brewing assets. CGS-CIMB said: "We agree that this could help to de-leverage its balance sheet. It could also allow for tie-ups with potential partners for the newly-listed entity."

Singapore-focused supermarket operator Sheng Siong is being favoured as a defensive play. Its earning growth for 2020 will be driven by its new store openings of the past year.

Crude palm oil prices have climbed sharply since October 2019 on supply constraints, but the outlook is still positive as prices are likely to continue their upward trajectory. While agribusiness firms are trading at a slight premium, CGS-CIMB said that valuations are justified due to demand outstripping supply in the near term.

DBS's top picks within this segment of consumer staples include Wilmar International, First Resources and Bumitama Agri.

Of the three, DBS noted Wilmar's likely first-quarter listing of subsidiary Yihai Kerry in China's A-share market would strengthen its market leadership position and could result in a possible special dividend for shareholders.

Reits are another segment that could see price gains in 2020 despite a 19.6 per cent run-up in 2019 when investors, chasing yield, turned to the asset class ahead of Fed cut rates.

At a recent investment outlook briefing, Credit Suisse noted that Singapore Reits are unlikely to face price corrections despite yield compression in the second half of 2019 as long as borrowing rates stay low.

The wealth manager believes that with strong acquisition pipelines, opportunities to recycle and enhance their assets, Reits should do well.

While 2020's outlook appears clearer, the often testy and unpredictable nature of the US-China relationship can always head south.

A follow-up deal is likely to cover more contentious areas, making it tougher to find agreement; moreover, the complete elimination tariffs is unlikely to happen just yet.

In the Chinese Zodiac calendar, the Rat is analogous with perseverance and adaptability.

To capture such opportunities in 2020, analysts said that investors should allocate for growth but balance those risks with yield plays like Reits.

DBS is one of those advocating such a strategy for 2020. Its top picks for growth stocks include AEM Holdings, Genting Singapore, SIA Engineering, ST Engineering, ThaiBev and Wilmar.

Meanwhile, its Reit picks include Ascendas Reit, Ascendas India Trust, CDL Hospitality Trusts (CDLHT) and Mapletree Logistics Trust.

A similar tack shows at RHB Securities. Its growth picks include CapitaLand, Keppel Corp, ST Engineering, and UOB. RHB's preferred Reits are CDLHT, ESR Reit, Manulife US Reit and Suntec Reit.

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