Buy Singapore stocks to weather the COVID-19 storm: Morgan Stanley

Its defensive market should still be able to provide earnings despite some bad quarters.

As COVID-19 continues to spread worldwide, investors could take shelter on Singapore stocks to guard their wealth against the virus’ impact, Morgan Stanley said in a note.

In a note, the bank recommended a defensive stance by reducing beta and active risk, lifting the quality of assets, but remaining open for possible stimulus.

Singaporean and Australian stocks were preferred given their traditionally defensive markets.

Singapore banks are quite resilient to near-term disruption as dividends will be paid even if there are a couple of bad quarters, placing a floor on the potential downside, noted Morgan Stanley financial analyst Nick Lord.

Also read: Coronavirus outbreak to drag on Singapore banks' loan growth and earnings

Further, whilst bank earnings could dip somewhat in 2020, Lord sees a sharp rebound in 2021 although this was yet to be fully priced into current valuations.

In terms of local property stocks, home sales growth is expected to be sustained despite near term disruptions, which in turn should support developers’ share prices, according to Morgan Stanley’s ASEAN Property analyst Wilson Ng

For REITs, the falling interest rate expectations could be supportive, particularly for segments which are less impacted by COVID-19 such as industrial REITs.

Also read: S-REITs hit 2% returns in 2020

Morgan Stanley also moved China’s stocks to overweight, as it can deliver positive albeit only single-digit earnings per share (EPS) by Q4 2020 should the outbreak not persist until Q3. This is compared with a third consecutive year of modestly negative EPS for emerging markets (EM), as well as expected negative earnings from Japan.

However, the bank lowered their earnings forecasts and targets for China stocks on the basis of a gradual production recovery in the country.

“For the China indices, the current pattern of economic impact, initial progress towards production recovery, additional stimulus and a relatively stable CNY profile sees us downgrade earnings by less than for Japan and EM,” the report stated.

The bank expressed caution for Korean and Japan stocks, noting their soft Q4 earnings. Amongst the former, Morgan Stanley recommended buying Korean IT stocks, and dropping consumer stocks, including autos.

Meanwhile, Japan remains preferred over EM for its better governance as well as profitability trends, but the bank advised seeking better cyclical opportunity later in the year.

Morgan Stanley has named three scenarios in the coronavirus outbreak. The first is a full-containment by this month, which projects a recovery in the second half of the year to overturn any declines in H1 2020. The second scenario sees demand and supply-chain disruption extending into Q2 2020, which would drive global growth to dip 2.4% YoY in H1 2020.

A third scenario sees the virus persisting into Q3, which escalates global recession risks. The latter would see Japan and Europe slip into a technical recession, whilst Hong Kong, Singapore, Thailand are also headed towards negative-growth paths.