Singapore is “one step closer to dawn”, according to DBS Group Research analysts Yeo Kee Yan and Janice Chua, after companies’ earnings in 2Q20 bore the brunt of the global lockdowns with a sharp 14.9% cut in FY20F earnings for stocks covered by the bank.

“With global economies reopening, manufacturing activity in recovery and Singapore’s shift out of circuit breaker from June, we believe that the worst of earnings cuts has passed,” they write in a report dated September 7.

Unsurprisingly, companies from the travel and leisure sectors such as Genting Singapore and Singapore Airlines (SIA) took the biggest hit, followed by telco Singapore Telecommunications (Singtel), and a one-off cut for property developers (CapitaLand Limited, UOL, and City Developments Limited), possibly due to rental waivers and minimal shopper traffic.

Conversely, companies in healthcare and technology such as UMS, Frencken, and Hi-P saw an increase in earnings during the same period.

Yeo and Chua also estimate that bank earnings will drop by 35% y-o-y for FY20F on provisions for credit losses and tightening net interest margin (NIM), but valuations are at “trough” with price-to-book value (P/BV) trading close to 2 standard deviation (SD) for UOB and OCBC.

Looking beyond 2Q20, the analysts see opportunities arising from companies that saw upwards earnings revisions of 5% and more, or recommendation upgrades. Such companies include Hutchinson Port Holdings Trust, ST Engineering, SIA Engineering, Wilmar International, UMS, and Venture Corp.

As the race to find a vaccine for Covid-19 is ongoing, the analysts foresee that interest in travel and leisure stocks should pick up, while recovery in air travel will be “swift” once the vaccine materialises.

“Empirical evidence is found in the sharp recovery to near pre-COVID levels in a pre-vaccine environment within five months for China’s domestic air travel. Look beyond the near term to accumulate travel-/leisure-related stocks in anticipation of a possible industry recovery next year,” they say.

On that, Yeo and Chua are positive on SIA Engineering, China Aviation Oil, ComfortDelGro, Ascott Residence Trust, and Far East Hospitality Trust.

A broadening manufacturing recovery and revival in trade activities look to be on the horizon upon strengthening manufacturing purchasing managers index (PMI) from the US and China.

“We pick Venture Corp, UMS and Frencken. Hutchinson Port Trust is a proxy to improving global trade activity with an estimated 11% yield to offer. Separately, we like Yangzijiang for its improving order flow and attractive valuation,” they add.

Straits Times Index

The benchmark Straits Times Index’s (STI) earnings per share (EPS) contraction has deepened to -36.1% y-o-y for FY20F. However, Yeo and Chua predict that there will be an equally sharp +35.4% y-o-y jump for FY21F, boosted by the estimated +5.5% y-o-y GDP recovery due to the low base in 2020.

See also: STI slides 0.8% on Nasdaq plunge

The STI, which now trades above a 13.2x average forward price-to-earnings ratio (PE ratio), is attractive on its P/BV, and less so on earnings.

“P/BV is attractive, at a mere 0.84x that is slightly lower than the global financial crisis (GFC) trough. While US markets should pause for a breather in coming weeks, we think equities will remain in favour amid optimism of vaccine development, broadening recovery and lower-for-longer rates,” say Yeo and Chua.

“Our year-end target of 2,850 is pegged to 14.4x (+1SD) FY21F PE. We maintain our year-end target, and technical support at 2,440. STI should continue to trade at above average PE in the current recession year when earnings forecasts factor in the 2Q global lockdown, while GDP is expected to recover going forward,” they add.

Looking ahead, Yeo and Chua predict that the federal reserve board will likely hold rates steady at 0.25%.

The S&P Transportation index, which saw a 14.76% m-o-m growth, outperformed the S&P500 at 7% m-o-m growth in August, a sign of recovery in manufacturing activity.

“A pause in US equity indices rally spanning September-October is possible following August’s strong run-up on election uncertainties,” they say.

“However, we do not foresee a major correction because of growing optimism of a cyclical recovery led by the semiconductor and manufacturing sector, and liquidity underpinned by an accommodative FED that reiterated a ‘lower-for-longer’ interest rate stance,” they add.

The Straits Times Index closed 1.57 points higher, or 0.06% up, at 2,511.21, on September 7.