Time to sell your stocks in Singapore

Downgrade Singapore market to Underweight from Neutral; FSSTI target lowered further to 3,000 (from 3,440). In contrast to nascent calls calling this period a buying opportunity, we take the opposite view that the current reprieve is a selling opportunity. We sense the probability of more shocks than positive surprises ahead. In such an environment, unexpected events tend to trump value, low forward earnings multiples become a myth and the attraction of relative value can change quickly.

We were already among the first to downgrade the Singapore market from Overweight to Neutral in May. We now downgrade the market further to Underweight from Neutral. Our end-FY11 target has been lowered from 3,440 (14x CY12 P/E) to 3,000, now based on 13.3x CY12 P/E (top-down, mid-range of trough to mean P/Es).

• Risk-reward analysis: current levels not compelling. The FSSTI’s forward CY12 P/E now is 12.1x, one standard deviation below mean. At 2,874, the market might appear oversold on P/E valuations, but one has to recognise that earnings forecasts can be fragile at the onset of a recession; we think there is a high probability that we are on the verge of one.

Our risk-reward analysis suggests that 25% downside for the FSSTI in the event of severe financial market dislocations whereas in a blue-sky scenario, we envision 14% upside from current levels. Without an economic shock but assuming recession scenarios, we value the FSSTI at 2,584. We think the risk-reward is not attractive, particularly as macro pitfalls loom large.

• Sector preference for defensives. Financials remain an Overweight because of their relative defensiveness and reasonable valuations. We have also raised REITs and Telcos to Overweight. Our Underweight sectors are Transport and Commodities/Plantations. Transport had already been downgraded earlier in the year; the latter joins it.

The very well-owned Capital Goods sector has been downgraded from Overweight to Neutral while Property remains a Neutral; despite a lack of positive catalysts, stocks have underperformed significantly YTD and gearing levels and inventories are not the same as before the crisis. 

• Top picks. Our top picks are geared towards defensives, spiced with a few cyclicals which we would buy when markets tumble. Among the former, preferred stocks are AREIT, Cache, CMT, DBS, F&N, M1, STE, SingTel and Wilmar. Among the cyclicals, we will gun for Genting Singapore, Venture and STX OSV at suitable entry levels.