Having rallied from 2,898 points at the start of the year to close at 3,232 points on 6 September, the bellwether Straits Times Index (STI) has risen some 11.5% year-to-date – a remarkable feat and easily one of the best performers in Asia.
According to UBS, the bullishness has been sparked off by cyclical stocks [Investopedia: A cyclical stock is an equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items consumers can afford to buy more of in a booming economy and cut back on during a recession].
The Swiss investment bank believes that it is time to go defensive by buying into REITs and yield stocks, which have not participated much in this rally.
1. REIT sector
UBS urges investors to be selective by picking REITs with earnings growth prospects and a conservative balance sheet. They opined that the office sector may provide REIT players with superior returns as the office sector appears to have turned the corner while office rents appear to have found a bottom.
2. Banking Sector
The banking sector remains a preferred sector of UBS but warned that it has turned caution in the near-term due to concerns about the quality of its assets [Editor’s note: this means loan quality and fear of bad debt]. However, the Swiss bank believes that banks will continue to deliver earnings growth due to rising net interest margin alongside rising interest rates as well as improved asset quality notwithstanding its concerns about the quality of its assets.
Finally, UBS is structurally positive on the banking sector as renewed interest rate hikes could catalyze the sector’s outperformance in 2018. It also expects the banking universe to benefit from a rerating once the asset-quality woes fade [Editor’s note: this implies that oil & gas sector woes fade].
3. Property Sector
UBS is confident that the property sector will stand out due to stronger fundamentals. It sees green shoots in the residential segment after a four-year price decline, which may culminate in a multi-year recovery in this sector.
A 2% rise in home prices is what they are looking at after developers and buyers turned unanimously bullish on this sector. UBS also cited the willingness of the local developers’ to turn more aggressive in its land bids as another sign of bullishness. While foreign developers have been more pricing out some of the local boys, the latter may soon catch up after an improvement in sentiment among property buyers.