Singapore dollar's continued weakness could hit local bourse

Despite a hazy October, outperformers were Singtel, Starhub, and Netlink Trust, amongst others.

In late October, the Straits Times Index (STI) dropped 8% from 3,257.05 to trade below 3,000 as of lunch close, a first since 2017. The Singapore Exchange (SGX) revealed that the event was caused by investors ditching tech stocks over growing concerns on consumer data privacy in the US.

The local bourse was also hit by trade war worries, rising interest rates and correction in the US stock market, DBS Equity Research said.

The worst hit STI stocks were Genting Singapore, City Developments and Jardine Cycle & Carriage which averaged a 13.7% decline. On the other hand, stocks of Golden-Agri Resources, Dairy Farm International and ST Engineering were able to weather the downturn as they were able to average a 2.6% decline.

November will be marked with a possible rebound, the firm believes. However, risks for the local bourse could come from the continued weakness in SGD, they added.

Also read: STI plunges below 3,000 for first time since January 2017 amidst US tech equities sell-off

“Our target is pegged to 12x FY19F PE amidst uncertainties over the impact of US-China trade war and rising interest rates environment,” DBS Equity Research explained. “Bear-case scenario for the STI assuming US imposes 25% tariffs on all Chinese imports is 2,800, pegged to 10.49x FY19F PE.”

The firm noted that a possible November bounce could have the Straits Times Index (STI) cap at 3,130. Moreover, the firm thinks that defensive stocks will continue their relative outperformance in the current slowing growth and rising interest rates environment.

Amongst which are telco stocks such as Singtel and Starhub and utilities such as Netlink Trust which have have outperformed the broad market since July. This points out that investors’ focus had turned to the ‘early contraction’ cycle outperformers, DBS Equity research said.

Also read: Singtel's share price could get a boost from associate's climbing contributions

Other stocks such as consumer staples including Sheng Siong and Koufu as well as defensive ST Engineering should also fare well, they added.

“Growth uncertainties are likely to continue with the ongoing US-China trade war,”the firm commented. “Meanwhile, the FED is expected to hike the FED funds rate by 25bps before year end to 2.25% with more to come next year.”

The report also noted that the US is expected to unveil measures and programs for the Indo-Pacific region at the 6th US-ASEAN summit.

“ASEAN benefits from trade diversion due to the US-China trade war,” DBS Equity Research said. “Potential beneficiary is Venture Corp as bulk of its manufacturing facilities are in Malaysia.”

Meanwhile, the firm also revealed five large cap stocks that have fallen close to a 5-year valuation trough which includes Thai Beverage, Genting SIngapore, Starhub, UOL, and City Developments.

“The significance of this is that in the near-term, price action for these stocks tends to be more resilient to negative news as concerns are ‘priced in’ and are candidates for a trade should the stock market rebound from its current oversold level,” they explained. Beyond the short term though, the risk is that any change to parameters of the valuation peg will alter the trough valuation level.”