How will the Straits Times Index (STI) perform by the end of the year? How should you position your portfolio before Q3 earnings are released?

These are common questions that investors are likely to ask, especially as we head closer towards the end of 2017.

We highlight DBS Research’s forecast for the STI as well as two market strategies from DBS Research for retail investors as we head into Q3 earnings announcement season.

3Q17 Earnings to indicate direction of STI

image1Source: TradingView

3Q17 results will be a crucial litmus test for determining whether the STI can achieve its 3,400-point target by the end of the year.

According to DBS Research, the negative earnings revision in 1Q17 and a mixed outcome in 2Q17 have been putting off investors. Currently, the STI is trading at 13.64x 12-month forward PE.

The year-end target of 3,400 is now pegged to 14.41x FY18F PE, which is 0.5x standard deviation above the average.

DBS Research believes that the current forward PE valuation of the STI is unable to stomach another round of earnings cut if it wants to end the year at 3,400.

Thus, in order for the STI to hit 3,400 points, the 3Q17 results have to show some signs of earnings upgrade.

Heading into Q3 earnings season, DBS Research recommends investors to adopt the following two market strategies for their portfolio.

1. Be selective on Singapore REITs

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Following the Fed’s hawkish stance in September’s FOMC meeting, bond yields have been on the rebound.

The MAS 10-year bond yield rebounded 25 basis points from September’s low of 1.95% up to 2.20%.

Moving forward, DBS Research foresees bond yield holding up above 2.05%. DBS Research’s interest rates strategist foresees interest rate to head towards 2.3% by mid-2018.

As such, DBS Research warns that investors should become more selective towards S-REITs.

DBS Research recommends a highly selective pick of REITs, which includes:

  • Mapletree Greater China Commercial Trust (SGX: RW0U) – $1.25
  • Far East Hospitality Trust (SGX: Q5T) – $0.70
  • Keppel REIT (SGX: K71U) – $1.23
  • CapitaLand Retail China Trust (SGX: AU8U) – $1.70

Mapletree Greater China Commercial Trust was highlighted for its attractive valuation and yield among large cap REITs.

The anticipated recovery of Singapore’s tourism sector prompted Far East Hospitality Trust’s inclusion into the pick.

Keppel REIT was singled out for the expected recovery in Singapore’s office space.

Lastly, CapitaLand Retail China Trust was picked following a turnaround in CapitaMall Minzhongleyuan and possible acquisitions in China.

2. Positioning Ahead Of Q3 Earnings

DBS Research recommends retail investors to position their portfolio ahead of Q3 earnings releases to capitalise on the potential upward movement in share prices.

Pick out stocks on track for strong earnings in 3Q17

DBS Research is positive on stocks that have enjoyed upward earnings revision during 2Q results season, despite a season of the mixed earnings announcement.

DBS Research believes that these stocks have the potential to build on its positive 2Q earnings to warrant an earnings upgrade in Q3.

The second criterion is for these stocks to have an upside of at least 10% to give investors margin for a decent return.

Among the stocks covered by DBS Research, OCBC, Genting Singapore and iFAST are stocks that fit into DBS Research’s criteria.

DBS Research is also positive on stocks that are expected to post strong quarterly results.

Pick out stocks with strong growth momentum

DBS Research notes that Hi-P continues to ride on strong growth momentum on robust demand for smartphones and computer peripherals Internet of Things (IoT).

For Thai Bev, its Q3 earnings will be boosted by stockpiling ahead of the increase in excise duties in Thailand since early September.

DBS Research also recommends Sunningdale as a stock that will post strong quarterly results.

DBS Research believes that Sunningdale’s order growth and margin expansion will continue to be key earnings drivers while mergers and acquisitions (M&A) could drive re-rating of share price.

Sunningdale’s recent inaugural interim dividend of $0.025 also sent a positive signal to investors.

Historically, 2H will be seasonally stronger, ahead of pre-year-end orders. This indicates that Sunningdale’s result is likely to surprise on the upside.

Target prices by DBS Research:

  • Sunningdale Tech Limited (SGX: BHQ) – $2.70
  • iFast Corporation Limited (SGX: AIY) – $1.26
  • Genting Singapore PLC (SGX: G13) – $1.45
  • Thai Beverage Public Company Limited (SGX: Y92) – $1.07
  • Oversea-Chinese Banking Corporation Limited (SGX: O39) – $12.80
  • Hi-P International Limited (SGX: H17) – $1.45