Trying to figure out what’s next for Singapore, Hong Kong shares
Singapore’s straits times index (STI) is the only developed market index in Southeast Asia. However, the STI has also fallen victim to the US-Chinese trade war and outflows from Asian equities due to US monetary tightening and a higher US dollar, down 5 per cent in the first seven months of 2018 while the Singapore dollar has depreciated to 1.37. Singapore’s macro momentum is still intact, though the economic slowdown in China will have an inevitable impact on property/consumer spending trends in Singapore.
Yet Singapore attracts me as a value investment proxy on four major fronts. One, the valuation of the STI is low at 10.4 times earnings, a huge 200-basis-point discount to its average valuation multiple in the last decade. Two, corporate earnings estimates are still robust at 13-14 per cent in 2018 and 10 per cent next year. Three, Singapore banks are on a roll due to strong loan growth/fees and the STI has a 43 per cent weighting in bank/financial stocks. Four, the Singapore government’s recent restrictions on property will lead to near term market angst that could well create a compelling risk reward calculus for new money in August or September. Of course, the new curbs make it imprudent to invest in Singapore office and retail Reits, though the technology based logistics revolution and the fall in the local 10-year government bond yield increases the relative appeal of industrial Reits such as Cambridge and Mapletree. Favourite names? DBS, Capital Land and Sing Post.
Singapore cannot remain immune to the impact of a full-blown trade war that could wreck havoc with corporate supply chains in China, Japan, South Korea, Taiwan and Malaysia. This would have an adverse impact on the investment psychology and capital flows in Singapore. Yet if the trade tensions do not escalate into trade war. Singapore’s economy could well deliver 3.8 per cent GDP growth in 2018. The steeper and higher interest raise curve makes Singapore banks attractive, even though the property cooling measures could have an impact on loan growth/credit risk at the margin. I expect my buy/sell zone on the STI to be 3,200-3,600 points for the last five months of 2018.
It did not surprise me that Hong Kong’s Hang Seng index surged from 28,000 to 29,000 points in two trading sessions after China’s State Council promised more fiscal stimulus and the People’s Bank of China made $74 billion available for fresh lending in the Chinese banking systems while regulators promised to rollback draconian curbs on the shadow banking system. The mere hint of monetary/ credit stimulus is enough to galvanise the Hang Seng index since it is 50 per cent weighted in financials, led by HSBC and China’s Big Four state owned banks which trade at rock-bottom five to six times earnings (for good reason, the PRC’s biggest money centre banks have been recapitalised twice since the late-1990s).
I believe the Hang Seng index can well rise to 31,000 by year end if China’s stimulus programme offsets poor sentiment related to the trade war. Bank of China, historically the most international of China’s state-owned megabanks, is my pick among the Big Four. I also believe there is 20-25 per cent upside in the Hong Konglisted shares of Chinese insurer Ping An Insurance due to low valuation, high cash reserves and stellar EPS momentum-based on the rise of protection products. It is no coincidence that Ping An Insurance rose 5 per cent after the China stimulus, news, almost double the Hang Seng index. One country, two stock markets!
Imran Khan’s win in a Pakistan general election marred by terror attacks and deep state interference is positive for Karachi’s stock exchange index. With 120 seats in the National Assembly, Imran’s PTI can implement structural economic reform without the risk of a hung parliament. Any initiative to battle the cancer of corruption and elite “state capture” can well lead to a new bull market in Pakistan, Asia’s cheapest market. Yet the economic crisis means Pakistan must seek an IMF bailout, which means another rupee devaluation this winter. Relations with Washington, Beijing, Kabul and New Delhi will, as always, shape Pakistan’s destiny. Pakistan’s banking shares should be the prime beneficiaries of structural reform and at least another 100 basis point rise in policy rates while fertiliser/ cement shares are cheap relative to their earnings potential.
The mere hint of monetary/credit stimulus is enough to galvanise the Hang Seng index since it is 50% weighted in financials