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DBS recommends yield stocks amid gradual recovery

Ng Qi Siang
Ng Qi Siang • 5 min read
DBS recommends yield stocks amid gradual recovery
All eyes are on the US presidential elections, with markets possibly fearing a Biden win.
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SINGAPORE (July 3): With interest rates likely to remain low until end 2021 as the economy follows a “U-shaped” or “L-shaped” recovery, DBS analysts Yeo Kee Yan and Janice Chua are recommending investors to load up on yield stocks for the foreseeable future.

“The US COVID-19 resurgence and concern of more outbreaks globally as economies reopen has put a check on the early June rally driven by optimism of a cyclical recovery. There is also a sense of caution heading to the 2Q results season as the full impact of the economic shutdown due to the ‘circuit breaker’ that lasted a little over 2 months will be felt,” they report.

The positive sentiment following a global reopening did not last long. The Straits Times Index (STI) rallied with a 3.2% increase m-o-m to 2,590 in early June when countries were emerging from their lockdowns, corrected downward following an additional rise in US case numbers in the US. Most European and Asian states -- including Singapore -- had already begun reopening too. Consumer staples led by Wilmar, Thai Beverage and Dairy Farm outperformed, but consumer discretionary stocks underperformed, with Genting and SIA suffering from falling tourism.

Yeo and Chua see limited downside to STI after the June rally. Its valuation is currently reasonable at below 12.6 times (below half a standard deviation) 12-mth forward price-to-earning (P/E) ratio after year-to-date cuts of 26% and 18% to FY20 and FY21 earnings respectively. Support levels are estimated at 2550 and 2500. While economic recovery is likely to be gradual, the worst appears to be over for local markets in 2Q2020. Near-term resistance is now 2635, with an upside break the signal of a turn towards optimism.

The US has experienced a surge in new Covid-19 cases to a record high of 45,225 cases on 26 June. The surge has been particularly severe in California, Texas and Florida, the first, second and fourth largest states in the US in terms of GDP, which has severely impacted the US economy. The analysts advise investors to carefully monitor the situation in Europe as countries begin to re-open their borders to inter-EU travel and tourism as the number of Covid-19 cases stabilise. They expect localised lockdowns to replace draconian country-wide restrictions going forward.

As for the ongoing Singapore General Elections, DBS notes that there is no history of a pre-election rally for Singapore markets. Nevertheless, it points out that there is typically a positive correlation over a one month period for the STI based on the change in the incumbent’s share of the popular vote. Post-GE, markets will likely focus on a return to earnings, which will overshadow any residual “animal spirits” that might linger within the markets post-hustings.

More interesting for investors will be developments in the US, with Democratic candidate Joe Biden taking a decisive 10 point lead over Republican incumbent Donald Trump due to his catastrophic management of the Covid-19 crisis and objectionable attitude to violence on African Americans. Markets may not view a Biden presidency favourably however, since he has vowed to increase corporate income tax from 21% to 28%, strengthen union power and more double the federal minimum wage to US$15/hour from US$7.25/hour.

Biden is also likely to pursue sustainable policies to fight climate change should he be elected to office. Energy industries such as fossil fuel companies could therefore find earnings somewhat curtailed. Nevertheless, this opens up interesting new opportunities for firms in the sustainable energy and other green industries.

The US Federal Reserve is moreover unlikely to raise interest rates going forward despite the resurgence in Covid-19 cases. The Fed has vowed not to resort to negative interest rates should the economic situation further deteriorate. All eyes will be on the monetary moves it will announce at its next Federal Open Markets Committee meeting in July.

Covid-19 resilient stocks are currently outperforming cyclicals amid the present market correction due to 2Q optimism. Despite currently remaining firm, the analysts do not rule out a buy-in-anticipation, sell-on-news if results come in below or aligned with consensus expectations. Riverstone, AEM, Mapletree Industrial Trust and Sheng Siong are in this category.

Casualty stocks, however, suffered over the past few weeks as investors sought to cash in on profits ahead of the 2Q results season. While markets have been on tenterhooks heading in to results for this quarter, the present correction yields opportunities for investors to capitalise on Phase 2 economic reopening, which has seen a rise in domestic demand. Retail REITs like Capitaland Mall Trust and Frasers Centrepoint Trust, as well as transport operator Comfort Delgro and F&B operator Koufu have been identified as potential prospects.

Despite a continued ban on inbound tourism and outbound tourism greatly discouraged, the reopening of 13 local attractions and a return of domestic tours for local clients marks the first tentative step on the road to recovery for tourism companies. Downside for hospitality REITs like Ascott Residence Trust and Far East Hospitality Trust and airport service providers, SATS, however, should be limited although recovery will continue to trail most Phase 2 beneficiaries.

“Yield stocks to remain in favour with interest rates expected to remain depressed till end-2021. Our picks for non-REIT large cap stocks with a dividend yield of at least 4.5% are SingTel and Dairy Farm. S-REIT picks are Ascendas REIT, Capitaland Commercial Trust, Mapletree Industrial Trust, Frasers Logistics and Commercial Trust and Frasers Centrepoint Trust,” conclude the analysts.

As of 3.15pm, the STI is currently up 18.58 points at 2,655.27.

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