STI started the new year at 3,402, which is 13.9 times 12-month forward price-to-earnings. This valuation puts the STI at 0.25 standard deviation above its historical 12-month PE.
In the first two trading days alone, STI rose by close to two percent on the back of better-than-expected 4Q GDP flash estimates. If the 4Q results season in February keeps up the good performance, DBS foresees STI to push even higher from its current year-high.
With the current investment landscape, DBS recommends three investment strategies that ride on the latest macro trends.
Investors Takeaway: Three Macro Investment Strategies To Start The Year With
- Follow The Fed’s Lead
With The Fed expected to raise interest rates three times this year, the Fed’s rate will hit 2.25 percent by end-2018. Singapore’s 3-month SIBOR jumped to 1.501 percent while the 12-month SIBOR also jumped 29 basis points to 1.73 percent recently. While it has come down slightly, the Fed’s rate hike cycle will continue to push SIBOR higher in 2018. According to DBS interest rates strategist, the 3-month SIBOR could rise further to 2.15 percent by end-2018, on the back of influence from the Fed’s rate.
Based on DBS’ sensitivity analysis, the latest SIBOR rise will be a boon for the financial sector. DBS’ analysis shows that a rise in SIBOR will lift the net interest margin for UOB and OCBC by one percent and two percent respectively. DBS is also expecting the re-rating on Singapore banks to continue on the back of accelerating loan growth and lower provisions. As such, DBS is positive on both OCBC and UOB. Although DBS is positive on both OCBC and UOB, its preferred pick is OCBC.
According to DBS, OCBC has the ability to maintain lower-than-peer credit cost trends and serves as a better wealth management play. Furthermore, there could be possible earnings surprises from its insurance business in the current rising interest rate environment.
- Riding On The Long-Awaited Republican US Tax Reform
After months of debate and voting, the US congress has finally given the approval for sweeping tax reforms. The tax reform includes the highly anticipated corporate tax cut from 35 percent to 21 percent.
DBS Chief Economist believes that the tax cut will have less impact on Asia than Europe and Latin America. He is confident that any risk of diverting investments from the rest of the world back to the US due to the tax cut poses a bigger risk for Europe and Latin America. The labour cost advantages, economies of scale, and the component ecosystem is well engrained in Asia.
DBS notes that the tax cut will benefit Singapore-listed companies with operations in the US. ST Engineering, Cityneon and Venture Corp are the top beneficiaries from the US tax reform.
- Let The Growing Service Sector Guide Where You Invest
Among the three investment strategies, the last strategy is led by macro trends closer to home.
The latest 4Q GDP estimates has raised market confidence that improvement in Singapore’s real economy is broadening steadily from the manufacturing to the services sector. The services sector saw an uptick in growth on a year-on-year and quarter-on-quarter basis. Against the services sector growth, DBS believes that there will be an uptick in interest for services subsegments such as consumer, financial, transportation, retail and storage.
Among the Singapore stock universe, DBS’s preferred picks are Genting, mm2, Cityneon, OCBC and UOB.