The Straits Times Index (STI) benchmark slid 1.56% following a season of lacklustre 2Q earnings. The situation was not helped by the rising geopolitical tensions along the Korean peninsula.
Will hurricanes in the US affect Fed’s rate hike decision?
The market is expecting the Fed to hold its interest rate steady at 1.25% in the upcoming FOMC meeting on 20th September.
The consensus is that the next rate hike is likely to be pushed back to 2Q18 as the US headline inflation is unable to hit the Fed’s target.
Moreover, non-farm payrolls in previous months have been revised downwards to reflect lower job creation. Job creation appears to be in jeopardy as hurricanes Harvey and Irma rake up a huge economic loss.
Under these circumstances, DBS Research believes that the Fed is unlikely to raise interest rates anytime soon.
August choppiness could extend into September
Markets could be in for a choppy ride as the European central bank begins discussion of winding down its quantitative easing in October.
The Fed will also be making its decision on whether to wind down its balance sheet in late September. With uncertainty surrounding Central Bank policies, market choppiness could extend into September.
Moreover, the risk of escalating geopolitical tensions in the Korean peninsula is increasing by the minute. Neither the US nor North Korea seems to be backing down.
The situation in North Korea escalated after North Korea fired an intermediate range missile that travelled 2,700km over Japan.
North Korea also tested the detonation of a hydrogen bomb designed to be mounted on its intercontinental ballistic missile.
Focus on yield stocks; take profit from fully valued stocks
Given the uncertainty that is heightening, DBS Research recommends investors to turn their attention to yield stocks.
Among the office REITs, DBS Research’ preferred pick is Keppel REIT (SGX: K71U; TP $1.23). For industrial/business park REITs, DBS Research recommends taking positions in Ascendas REIT (SGX: A17U; TP $2.85) and Frasers Logistics & Industrial Trust (SGX: BUOU; TP $1.15).
Within the hospitality sub-sector, CDL Hospitality Trust (SGX: J85; TP $1.75) and Far East Hospitality Trust (SGX: Q5T; TP $0.70) are among the top picks from DBS Research.
For non-S-REITs, DBS Research recommends a few stocks that have met its yield criteria of at least 3.0% and double-digit FY17F earnings per share (EPS) growth.
These stocks include BreadTalk Group Limited (SGX: 5DA; TP $2.04), Hong Leong Finance Limited (SGX: S41; TP $3.20) and Frasers Centrepoint Trust (SGX: J69U; TP $2.35).
Within the universe of stocks, DBS Research recommends investors to trim positions in UOB, Suntec REIT and Riverstone. According to DBS Research, these three stocks are fully valued with less than 5.0% potential upside.
Moreover, these three stocks have yet to outperform the STI year-to-date. DBS Research opines that these three stocks are prone and vulnerable to profit taking in the month of September 2017.