SINGAPORE (Mar 13): RHB Research says investors should stick with quality stocks on the Singapore market amid slowing economic growth and an uncertain external environment.

Investors should also stay selective and focus on buying stocks that offer stable earnings, strong balance sheets, and sustainable dividends.

In a Wednesday report, RHB is “overweight” on REITs, banks and the consumer sectors with Sheng Siong, Wilmar and Genting Singapore its preferred consumer sector picks and ST Engineering is its preferred industrial sector pick.

For real estate investment trusts, ESR REIT has replaced Ascendas REIT as RHB’s preferred industrial REIT while banks should see reversal of underperformance as the year progresses.

“Our preference is for United Overseas Bank (UOB) over DBS. We remove Venture from our Top Picks following its strong share price performance,” says analyst Shekhar Jaiswal in a Wednesday report.

Meanwhile, RHB’s earnings downgrade continues in the aftermath of weak FY18 results.

“Dairy Farm, GENS, and Golden Agri reported FY18 results that missed expectations, while Best World, Raffles Medical and Thai Beverage’s results beat,” says Jaiswal.

StarHub (+7%) and Thai Beverage (+6%) had highest earnings upgrades, while GENS (-7%) saw earnings downgrade. Earnings revisions for STI remained negative, with 2019’s consensus EPS downgraded by 2% in the last four weeks.

Post results annoucement, RHB has also upgraded ComfortDelGro to “buy” from “neutral” and downgraded Ascendas REIT to “neutral” from “buy”.

To be sure, the Singapore market has exhibited strong YTD performance despite persistent macro headwinds.

“Expectations of slower US federal fund rate hikes as well as positive impact from a likely resolution of the trade war between the US and China have helped the STI Index to deliver 5% YTD returns, making it the best performing Asean market,” says Jaiswal.

However, RHB remains aware of headwinds from slowing non-oil domestic exports and the slowdown in GDP growth to a tad below 2.5% from 3.2% in 2018 – based on guidance provided by Singapore’s Ministry of Trade and Industry.

This is because historical trends suggest that Singapore’s stock index returns track the country’s nominal and real GDP growth closely.

Still, the Singapore market remains inexpensive trading at 12.5x 1-year forward P/E while STI’s valuation sits slightly above its -1SD band.

According to Jaiswal, the -1SD level has been tested only twice since the global financial crisis – each time, the market witnessed a sharp rebound. 4.2% forward yield, which is 1SD above historical average – looks attractive as well.

“Compelling valuations, along with expectations of a moderate appreciation in the SGD, should bring long-term investors back into the market, in our view,” says the analyst.