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UBS : SG outlook 2013

UBS : SG outlook 2013

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Published by: Benjamin Wong on Jan 03, 2013
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UBS Investment Research
Singapore Market Strategy
Outlook 2013
Global conditions favour cyclicals but domestic conditions challenging
We expect incoming data to support a thesis for improving cyclical conditions.Singapore’s small, open economy benefits from a pick up in global growth.However, domestic conditions will pose a challenge. In 2013, the government willpublish 3 documents on population, land use and land transport policy. Thesepapers will indicate its long term policy plans as it restructures S’pore’s economyto enable sustainable, “good quality” growth. We expect investors’ attention to berefocused on housing, wages and land transport issues, discussion of which willgenerally cast a downbeat note for stocks driven by domestic demand, in our view.
Yield stocks to stay in favour
Amid these conditions, we expect stocks which offer decent dividend yields toremain in favour. This theme worked well in 2012, and valuations are in manycases no longer at bargain levels. However we believe yield compression isustified. The combination of loose global monetary conditions, gradualappreciation of the Singapore dollar, strong domestic household balance sheets,healthy corporate balance sheets, high domestic inflation and low imported interestrates will sustain interest in yield plays through this year in our view.
Stock picks: CCT, CAPL, DBS, KEP, GENS, Noble, Suntec, Singtel, Tiger
Our top picks feature at least 2 of the following: Benefits from a global cyclicalrecovery; has credible and generous dividends; can avoid the worst of tighterdomestic conditions; can tap demand growth via operations outside Singapore. Ourtop picks are CapitaCommercial Trust, CapitaLand, DBS, Keppel Corp, GentingSingapore, Noble, Suntec REIT, SingTel, Tiger Airways. FSSTI target is 3,430.
Global Equity Research
Equity Strategy
2 January 2013
Cheryl Lee, CFA
 Analystcheryl.lee@ubs.com+65-6495 5914
Singapore Research Team
This report has been prepared by UBS Securities Pte. Ltd. (Reg. No. 198500648C)ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 35.
UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in makingtheir investment decision.
Singapore Market Strategy
2 January 2013UBS
Global conditions favour cyclicals.
On one hand, we believe that incomingdata in the early part of 2013 will support a thesis for improving cyclicalconditions for Asian equities. Singapore’s small, open economy traditionallybenefits from a pick up in global growth. Loose global monetary conditions alsofavour Singapore, given the sovereign’s solid triple-A credit rating and strongcorporate balance sheet.
Singapore economy being restructured.
However, domestic conditions willpose challenges for Singapore equities. In early 2013, the government willpublish a Population White Paper, its land use master plan and land transportmaster plan. The papers will provide signposts to the government’s long termpolicy plans on these topics; the White Paper will be debated in parliament inJanuary. With the discussion, investors’ attention would be refocused onhousing, wages and land transport issues. Importantly, the government has madeit clear that while economic growth remains important, it wants to achieve“good quality economic growth”, not growth at all costs. It hopes to improveper-capita wages for Singapore by driving productivity growth rather thanadding cheap foreign labour.
Domestic conditions difficult.
Discussion of these issues will generally cast adownbeat note for domestic stocks, in our view. With an economy at fullemployment, more restrictive immigration policies, and above-average inflation,short-term cost pressure will continue to restrain margins for companies whichgenerate most of their revenue within Singapore. The issue of housing demand –or more pertinently, the higher vacancy rate from H213 – that could result fromtighter immigration policy, will also be of concern. Meanwhile, Singapore’sMonetary Authority, in a recent paper, has also indicated additional vigilance onloan quality.
Yield stocks to stay in favour.
Amid these conditions, we expect stocks whichoffer decent dividend yields to remain in favour. This theme worked well in2012, and valuations are in many cases no longer at bargain levels. However webelieve investors are today willing to accept somewhat compressed yields. Thecombination of loose monetary conditions, gradual appreciation of theSingapore dollar, strong domestic household balance sheets, healthy corporatebalance sheets, high inflation and low imported interest rates will sustain interestin yield plays through this year in our view.
Summary of sector views.
Overweight Industrials, S-REITS (Office and retail),consumer discretionary. Neutral Developers, financials, telco. Underweighttransport.
Stock picks.
Our stock picks focuses on companies which benefit from a globalcyclical recovery and at the same time have demonstrated a high propensity forgenerous dividends to shareholders. We favour stocks which are well placed toavoid the worst of tighter domestic conditions (e.g. possess pricing power,flexible business model, wages as % of cost is low) as well as stocks which cantap demand growth via operations outside of Singapore. Our top picks areCapitaLand, CapitaCommercial Trust, DBS, Keppel Corp, Genting Singapore,Noble, Suntec REIT, SingTel, Tiger Airways.
Singapore Market Strategy
2 January 2013UBS
EPS growth and FSSTI target.
The Singapore market is trading on 15.5x end2012E PE and 14.8x end-2013E PE (based on UBS estimates). While this isabove the historical mean of 14.0x, we believe valuation is supported by lowbond yields. The 10Y spot bond yield is currently 1.33%, versus the 10-yearaverage of 2.7% and the long term average of 3.2%. We thus believe currentmarket multiples are justified. If global cyclical conditions improve, we expectupside to UBS 2013E EPS estimates; we see 2013E EPS growth improving from+4.6% to +7.5%. On this approach, we set our FSSTI target at 3,430. Thiscorresponds to 15.5x end 2013E PE based on current UBS estimates.

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