The first half of 2017 was a rewarding year for the Straits Times Index (STI) which gained 11.6%, ending the first half of the year at 3215, with growth mainly driven by banks, property, and technology stocks.
However, DBS Research reminds bullish investors that it is a “choppy ride ahead” as growth may slow down with increased headwinds in the second half.
Specifically, the fourth quarter is expected to experience a sharper slowdown as earnings cut continues as the current trend. The US Federal Reserve are also being closely monitored for further rate hikes which will affect the exchange rates directly.
Faced with higher volatility and uncertainties for the second half of the year, DBS Research takes on a more defensive stance for the third quarter. The STI is currently trading at 14x of price-to-earnings ratio, which is considered to be fairly priced by DBS Research.
Investors are advised to place their investments with stocks which constitutes as defensive yield plays such as ST Engineering and Sheng Siong.
Sheng Siong Group
DBS Research remains positive on the performance of Sheng Siong due to higher possibility of increased margins in the future.
The analysts cited the expansion of its distribution centre, further boosted by increase in direct sourcing, bulk handling and fresh mix which will all add up to increase its earnings.
With a P/E of 23.74x (as at 6 Jul 2017, 11:03 am), the valuation is considered attractive given that it is trading below its regional peers’ average of 30x. Furthermore, with a yield of 3.75%, DBS Research believes that it is an appealing stock for investors to own.
DBS Research: Sheng Siong Group Limited (SGX: OV8) – BUY; Target Price: $1.20
Singapore Technologies Engineering
Focusing on long-term growth, Singapore Technologies (ST) Engineering is zooming in on smart city solutions such as autonomous vehicles and smart healthcare systems to remain relevant in an increasingly automated environment.
DBS Research opines that the smart city market will be the main driving force for growth in the future as it expands.
Furthermore, the recent surge in terrorism is likely to result in higher spending on defence and therefore could give ST Engineering a great opportunity to profit from its defence-related engineering capabilities.
DBS Research: Singapore Technologies Engineering Limited (SGX: S63) – BUY; Target price: $4.12
DBS Research has spotted “early signs of recovery in the office and hospitality sectors” and aims to invest in REITs that are offering more than 5.0% worth of upside and growth potential. One of the REITs that fits the bill is Keppel REIT (KREIT).
With a potential recovery in the office market by next year, investors who want to ride the tide of rising profits from this sector can consider investing in KREIT with its Grade A office portfolio.
Currently, KREIT’s office portfolio is considerably undervalued since it is trading at value of $2,500 psf in contrast to the recent office market transactions that price similar spaces at about $2,800 to $3,000 psf.
Looking beyond the short-term challenges, DBS Research opines that KREIT’s current discount is “unwarranted” as office properties are believed to be able to remain resilient in the near-term.
Therefore, investors should make use of the current attractive discounts to invest in KREIT while enjoying an attractive yield of 5.0% to 6.0%.
DBS Research: Keppel REIT (SGX: K71U) – BUY; Target price: $1.23