As the Straits Times Index (STI) turned in a “respectable performance” in the 1Q2021, PhillipCapital’s head of research Paul Chew writes that he remains positive on equity markets, in an April 1 report.

This comes on the back of a pick-up in global economic momentum, as well as signs of reflation around the world, notably in commodity and housing prices.

Global Purchasing Managers’ Index (PMI) is above pre-pandemic levels.

Container imports into the US surged 32% in the first two months of 2021 and prices of several commodities – including copper, tin, iron ores, soybeans and palm oil – reached decade highs.

The STI, as at March 31, closed at 3,165.34, gaining some 11.3%, outperforming most global equity indices and asset classes, with the exception of commodities.

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During the quarter, cyclical stocks such as shipping, transportation and finance led the rally while REITs dragged the index’s performance. Distribution per units (DPUs) during the FY2020 were cut by 16%, with lacklustre recovery in most REIT sub-sectors.

Furthermore, rising interest rates dampened investor appetite for the sector, notes Chew.

While the rising rates have created nervousness and periodic selling in the market, Chew says he is more sanguine compared to market concern that the Federal Reserve (Fed) will tighten monetary policy earlier than the 2024 projection.

This, he says, is due to rising interest rates historically coinciding with major rallies in the equity markets. The “ultra-accommodative” monetary policy, despite the recent spike in interest rates, is also another reason behind his more positive outlook.

“With the US economy expected to jump 6.5% in 2021, current 10-year yields of 1.7% will hardly hinder economic activities. In past periods when US economic growth topped 5%, interest rates were as high as 6%, or 2.5% in real terms,” he writes.

“Finally, we do not expect the Fed to pre-emptively tighten monetary policy, a mistake it made in late 2018. Instead, the Fed has repeatedly communicated that it is far from its goal of maximum employment. Any rise in inflation is expected to be transient due to reopening and base effects. The Fed is telling us, the music will still be playing, so investors should keep dancing,” he adds.

Looking ahead, Chew views Singapore’s economy recovery as “nascent”, with the easing of large group gatherings and employees returning to their offices being underway.

The way he sees it, cyclical sectors such as electronics, commodities and banks should be the “first beneficiaries” of the global economic recovery.

“We expect a multi-year boom for electronics from demand for autos, 5G, Internet of Things (IoT), data analytics, cloud computing, gaming and of course, bitcoin mining. The upsurge in commodities is spurred by China’s re-leveraging and reinvestment cycle,” he says.

“We still favour banks. Banks’ head fake in accelerating loan provisions last year due to the pandemic and loan moratoriums is unravelling. Earnings should spike in FY2021. As the economy recovers, we expect loan growth to return, followed by fee income and later interest rates (or margins),” he adds.

“Another bonus for investors would be a normal resumption of dividends if the MAS allows. Singapore banks now have a Common Equity Tier-1 (CET-1) of 14.6%, against their preference of 13%. Special dividends that are double the level of 2019 are possible, in our opinion.”


SEE: PhillipCapital starts Pan-United Corporation at 'buy' on recovery in construction


That said, despite the buoyant outlook, Chew notes that optimism over international travel still looks “inflated”.

“SIA's market cap is at a decade-high, despite considerably more leverage and relatively unchanged global competition,” he says.

Among the REIT sectors, Chew is positive on US offices, with attractive yields at 8% and returning confidence in the USD and employment rates.

“Land transportation should recuperate from increased taxi and rail traffic as the workforce returns. We recently initiated coverage of two building-material stocks: BRC Asia and Pan United. We expect a rebound of as much as 31% in contracts for the construction sector in 2021, after the paralysis last year,” he writes.

“Both building-material stocks have material market shares and are poised to secure a slice of the construction contracts, regardless of which contractors win,” he adds.

Phillip Absolute 10 Portfolio movements

PhillipCapital’s Phillip Absolute 10 Portfolio, which tracks the brokerage’s top 10 picks for absolute returns, underperformed the STI in the 1Q2021.

The model portfolio declined 3.7% against the STI’s 11.3% gain, attributable to a 52% drop in Yoma’s share price.

That said, Chew says he still believes the brokerage’s thesis on Yoma was “sound” at the time.

“Myanmar was growing fast. Yoma had a 10-year property-development land bank, profitable fintech business with a 2 times growth rate and a US$73 million ($98.1 million) cash infusion from Alipay, a nationwide KFC franchise and a conglomerate looking to inject US$155 million into the group at a 38% premium to share price,” he shares.

“Unfortunately, it was a painful lesson of sacrificing political risk for growth in emerging markets.”

During the 3Q2020, PhillipCapital added Yoma Strategic and Asian Pay Television Trust (APTT) to its model portfolio while removing StarHub, Sheng Siong and UOB.

In 4Q2020, the brokerage added ComfortDelGro (CDG), Manulife US REIT (MUST) and SGX, while removing Ascott Residence Trust (ART), DBS and Venture Corporation.

In 1Q2021, it added ART back into the portfolio along with Keppel Corporation and removed Netlink NBN Trust and SGX.

In the coming 2Q2021, the brokerage has included Q&M Dental in its portfolio and removed Yoma Strategic.

“We have removed Yoma from our portfolio. We do not envisage any positive outcome in the near term for the Myanmar economy. Protests and paralysis in the country continue, with no resolution in sight,” says Chew.

“We keep existing REITs in our portfolio for their yields and portfolio stability. An easing of work arrangements and group gatherings in Singapore should prop up retail and office REITs. We added Q&M as an alpha bet on the basis of organic growth from its dental-clinic expansion by at least 20% per annum for the next two years. Sales of Covid-19 PCR test kits and lab tests are expected to provide new earnings streams.”

As at 4.22pm, the STI is trading 3.45 points lower or 0.11% down at 3,206.29.