Source: Straits Times Index, Bloomberg

Source: Straits Times Index, Bloomberg

2016 is a volatile and unfruitful year for the Singapore equities market. Locally, the offshore and gas sector has dragged down the performance of the Straits Times Index (STI) and worries are far from being over.

Looking forward, Singapore’s equities market should still be supported by cheap valuations and its defensive nature.

The Interest Rate Effect

Source: Federal Funds Rate, Trading Economics

Source: Federal Funds Rate, Trading Economics

Analysts from UBS expect a hike of interest rates by the Federal Reserve (Fed) in December this year and twice in 2017. When a rate hike takes place, REITs are first in line to lose out from the rising interest rates. Risks for REITs are also high as rental reversion continue to weaken. If investors are looking to invest in REITs, they should be wary of their debt profile.

On the other hand, banks will benefit in the medium term as the rising interest rates will expand its net interest margins (NIM).

Based on current valuations, Singapore banks seem undervalued as compared to their peers internationally.

Investors should also be looking at defensive stocks. Companies such as SATS, ComfortDelGro (CD) and Genting Singapore (GENS) that have a healthy balance sheet or net cash position are preferred.

Poor Corporate Earnings

Based on the past three quarters this year, corporate earnings remain sluggish as they registered huge earnings miss. The lack of earnings is expected to bring about dividend cuts. Despite lower earnings, free cash flow increased due to better profit margin from cost savings. Banks are expected to see higher non-performing loans (NPL) from the oil and gas sector. A potential catalyst may come from the rumoured potential government assistance to the sector.

Telecommunication sector might not be as defensive as before with their yield being at risk from the 4th telco. MyRepublic and TPG are both huge contenders and are expected to put further price pressure on the market. TPG is well known in Australia for their pricing and has significantly contributed to the pricing competition.

1. ComfortDelGro Corp

Source: ComfortDelGro, Google Finance

Source: ComfortDelGro, Google Finance

ComfortDelGro (CD) is a multinational land transport company that is involved in public transport services, car rental and engineering services. Given the nature of its business, the cash flow of CD is relatively projectable and stable. It is currently trading at a dividend yield of 4.1 percent. Analysts from UOBKH gave CD a “Buy” call with a target price of $2.90.

2. DBS Group Holdings

Source: DBS Group, Google Finance

Source: DBS Group, Google Finance

With the impending rise of interest rates, DBS is the stock that is well poised to gain from it. With a price-earnings ratio of 10 times, the stock is more undervalued as compared to other international banks. The dividend yield of 3.7 percent will give it a balance of potential capital growth and dividend yield. Analysts from UOBKH gave it a “Buy” call with a target price of $20.15.

3. UOL Group

Source: UOL Group, Google Finance

Source: UOL Group, Google Finance

UOL is the preferred type of property stock at the moment. Though it has a low yield of 2.6 percent, the structure of the company will give it stable cash flows. Besides developing properties, UOL is also an investment holding company whose portfolio includes Novena Square and Pan Pacific Hotels.

Currently, UOL is trading at a price-earnings ratio of 15.9 times. Analysts from OCBC Research gave UOL a “Buy” call with a target price of $7.30.