Think twice before snapping up cheap Singapore stocks, analysts warn

Low prices might not be worth it after all.

Singapore is generally considered a defensive, resilient, and relatively inexpensive equity market. However, Maybank Kim Eng analysts warn that low stock valuations in the local bourse might not be worth it if equity markets come under severe stress.

Maybank Kim Eng used a worst-case scenario of a 10% cut in revenue, 10% FX depreciation and 100bp hike in interest rates. This test showed that cheap valuations will easily turn costly when forecasts are stressed, and even the strong capacity to pay dividends will erode when cashflows are put under pressure.

“The four big sectors – offshore & marine, property, REITs and banks – are all under pressure and our test results suggest that their biggest challenges could still lie ahead as rising interest rates, falling oil prices and depreciating currencies collide with declining pricing power and sluggish demand,” said the report.

For instance, highly-indebted offshore players will face consolidation while property developers will suffer cashflow constraints. Even banks will face profit and dividend pressures under this worst-case scenario.

“Even defensives telcos and REITs may not be unscathed. Telcos here have high USD costs, and earnings and FCF could succumb to the higher USD. Third, still on the defensive theme, the percentage of dividend-paying companies could fall markedly as we stress-tested our revenue and FCF assumptions,” said the report.

“If we sell these sectors, what are the alternatives? The most resilient sector, surprisingly, turned out to be in the China water stocks, and more predictably, healthcare and manufacturing. Liquidity is the biggest stumbling block however. Ultimately, Singapore is still a market that rewards stock-picking,” the report noted.