Excellent economy: Singapore dollar to appreciate 8% against USD in 2011

What’s New

• The recent market selldown reflects rising equity risk premium in line with our defensive view for 2H11. We see persistent volatility in 2H11 and seek safety and outperformance in defensive REITS, telcos and low-beta stocks.

Strategy

• More choppy waters ahead. Continued overhang from external risks could cap the stock market’s performance in 2H11. We see the market trading in a narrow range of 2,900-3,400 in 2H11 on elevated risk premium imposed until the external overhang clears.

• Tactically defensive in 3Q11, BUY on dips. We are cautious in the near term on expiry of QE2 and would look to position ourselves defensively with a view to buy on weakness. In our view, themes that could outperform include: a) stocks with high/sustainable dividends, b) industrial REIT revolution, and c) undervalued laggards with catalysts. US dollar-based investors will also get a lift on dividend yield stocks due to Singapore’s strong currency.

• Resilient domestic economy to pull through. Inflation appears to have peaked (UOB ETR forecasts: 4.2% in 2011 and 3.2% in 2012) while GDP growth outlook is projected at 5.7% for 2011 and 5.0% for 2012. The banking sector remains well-capitalised and job creation has been strong (unemployment of 2.1%). All these point to economic resilience in challenging times. We forecast the Singapore dollar would appreciate 8% against the US dollar in 2011 after registering a 10% rise against the greenback in 2010.

• OVERWEIGHT telcos, REITS and banks. We seek safety and outperformance in defensive REITS (Cache Logistics and Frasers Centrepoint Trust), telcos (M1), ST Engineering and selective banks (DBS and OCBC) as investors switch out of developed country banks into Singapore banks that are more defensive and well-capitalised.