SINGAPORE (Dec 26): RHB Research is targeting 3,300 for the Straits Times Index (STI) by end-2019 and advises investors to remain defensive amid anticipated volatility in the year ahead – by focusing on buying stocks that offer stable earnings, strong balance sheets and sustainable dividends.

The research house’s caution comes despite inexpensive overall market valuations, in the research house’s view, with the STI trading at 12.7 times its one-year forward P/E at the -1SD band as at the close of Dec 13.

In a Dec 14 report, RHB says that while it expects “compelling valuations” and moderate appreciation of the SGD to bring long-term investors back into the market, it prefers defensive sectors as well as to focus on a bottom-up stock picking strategy for 2019.  

RHB is forecasting 2019 GDP growth to ease to 2.8% from 3.2% this year, and expects Singapore’s equity market to remain volatile amid uncertainties over trade tensions between China and US. The consumer and industrial remain the research house’s preferred sectors for their tendency to outperform the broader market.

“In both sectors [consumer and industrial], we prefer companies that offer earnings growth visibility and/or sustainable high dividends. Sheng Siong and Wilmar International are our top consumer picks, while we like ST Engineering amongst industrials on revival of its profit growth,” says RHB. 

Sheng Siong and Wilmar have been given the respective target prices of $1.27 and $3.58, while ST Engineering has a $3.97 target price.

RHB also remains “overweight” on banks for its high growth and dividend yields despite slower loan growth of late, with UOB as his preferred sector pick for its more-reasonable valuations and the likelihood of a higher dividend payout. RHB’s target price for the bank is $30.80.

Among Singapore REITs (S-REITs), the research house prefers industrial and hospitality REITs which are beneficiaries of improving economic activity and with strong balance sheets. Ascendas REIT (A-REIT) and CDL Hospitality Trust (CDL HT) are the top “buy” picks in this space with target prices of $2.90 and $1.80, respectively.

Lastly, out of the small and mid-cap stocks under RHB’s coverage, Silverlake Axis, HRnetgroup, FuYu Corp and Singapore Medical Group (SMG) are expected to deliver strong returns in 2019. These stocks come with target prices of 65 cents, $1.18, 23 cents and 56 cents, respectively.

“Singapore’s economic growth is highly dependent on exports, as evident from the fact that its total trade is more than two times the country’s GDP. An escalating trade war between China and the US would have a direct impact on Singapore’s economy and in all likelihood, STI earnings growth as well. A prolonged trade war will hurt economic growth and result in further cuts to corporate earnings, which could be negative for the Singapore market,” concludes RHB.