In the first half of 2017, the benign bond yields provided support to lift equity markets across the globe.

However, with the US Federal Reserve (Fed) raising benchmark interest rates, the bond market has since taken a slight dip. DBS Research’s contrarian stand on the market in 1H17 helped investors yield good returns as Singapore stocks put up a strong performance in the past six months.

The performance was buoyed by optimism that the worst of 2016 slowdown had passed and global economic recovery was gaining traction.

Fed rate hike against consensus

While the rate hike in June was expected by the market, investor sentiment could turn cautious should the Fed make another interest rate move in the September 2017 Federal Open Market Committee (FOMC) meeting.

DBS Research opines that the US Dollar will strengthen and equity markets could face correction if the Fed surprises with a September hike, following the comments made by several Fed officials that the US stock market valuation is looking rich.

Risk of earnings cut

The market was hopeful that corporate earnings cut would subside. However, the downward revision trend on earnings resumed in 1Q17 as FY17F and FY18F earnings were revised downward.

As economic recovery moderates, DBS Research warns of the possible risk of continued downward revision trend in 2H17.

Citing the possible risk events in 2H17 and the current market condition, DBS Research recommends four investment themes for 2H17 that investors can build their medium-term portfolio upon.

1. Staying safe with yield

Singapore REITs

One of the investment themes that DBS Research recommends is to stay defensive with yield plays. This includes defensive stocks in the consumer goods, services sector and the REITs sector.

Under the REITs sector, DBS Research prefers REITs that offer more than 5.0% in yield with the potential for growth and capital gains.

Recommendation: Sheng Siong, ST Engineering, Mapletree Logistics Trust, Mapletree Greater China Commercial Trust, Keppel REIT

2. Betting on alpha

DBS Research balances its recommended portfolio with an alpha return investment theme. Under this theme, DBS Research screens for stocks with above market earnings growth and a potential upside of more than 15 percent.

Apart from these two criteria, DBS Research screens for stocks that have specific catalysts to drive performance over the next three to six months.

Recommendation: BreadTalk, ThaiBev, City Developments, Genting, CapitaLand, Dairy Farm

3. Oil rebound trades

Keppel Corp, SembCorp

DBS Research initially foresaw a possible oil rebound in 2H17, following optimism on supply moderation after OPEC cut production in late 2016.

While prices have been kept high, DBS Research believes that the current level of US shale production cost signals that oil prices cannot stay below US$45 per barrel.

Thus, DBS Research projects that oil prices will move towards US$55 per barrel by the end of 2017. Singapore rig builders like Keppel Corp and Sembcorp Marine are proxies for the recovery in oil prices.

Recommendation: Keppel Corp and Sembcorp Marine

4. Mergers and acquisitions

Merger and acquisitions (M&As) continue to gain momentum as we head into 2H17. GLP has already received formal bid proposals while United Engineers is also looking likely to be acquired by Perennial Real Estate.

Under the M&A theme, DBS Research attempts to sift out potential candidates by sector as each sector offers different criteria and value that vulture funds or private equity funds are looking for in order to unlock value in these companies.

Recommendation: Fu Yu, Venture, Hi-P, Sunningdale, Banyan Tree, Metro, Bukit Sembawang

Stay tuned for articles highlighting the investment merits of the stocks mentioned in this article!