The STI fell 7.3 percent in the month of October as trade war worries, rising interest rates and correction in the US stock market weighed on the local market. The underperformance was underlined by weaker performance from property and O&G stocks after new property measures were announced and amidst the oil price correction.

DBS: STI To End Year On A Weaker Note

Given the uncertainty over impact of the US-China trade war and rising interest rates environment, DBS foresees STI to end on a weaker note at the end of the year. DBS lowered its target for STI from 3,550 to 3,200. In particular, DBS is concerned that bank stocks could be a potential drag for the STI. However, the recent fall in market has created more attractive valuation levels.

Going forward, DBS recommends investors to adopt two investment strategies for short-term tactical realigning of their portfolio.

Investors Takeaway: 2 Short-Term Strategies To Tactfully Re-Adjust Your Investment Portfolio

Strategy 1: Opt For Defensive Names As Market Turns Cautious

DBS opines that there are lingering market concern over slowing growth and rising interest rates environment grows. Moving forward, growth uncertainties are likely to continue with the ongoing US-China trade war. At the same time, the Fed is expected to hike the Fed funds rate by 25bps before year end to 2.25 percent. DBS’ economists are also forecasting more rate hikes to come next year. Given the current risk-off climate, DBS expects defensive stocks to continue their relative outperformance.

So far, telco stocks like Singtel (BUY, TP $3.64) and Starhub (BUY, TP $2.45) have already outperformed the STI. Utility stocks like Netlink Trust (BUY, TP $0.87) has also shown outperformance since July 2018. DBS notes that this is a sign that the market is turning its focus to the ‘early contraction’ cycle outperformers. DBS recommends investors to consider adding consumer staples like Sheng Siong (BUY, TP $1.24) and Koufu (BUY, TP $0.84) into the portfolio as defensive plays. Another defensive play that DBS also recommends is ST Engineering (BUY, TP $4.30), which should be in the market’s favour as well.

Strategy 2: Undervalued Large Cap Stocks That Have Fallen To 5-Year Valuation Low

In the last few months, stock prices have generally fallen across the board with the market downturn. Moving forward, DBS recommends zooming in on large cap stocks that have fallen to -2SD of their valuation over a 5-year period. DBS believes that such stocks have already priced in the negative news and concerns. As such, they will be more resilient towards any negative sentiments and should limit their downside. Should the stock market rebound from its current oversold level, the price action for these stocks makes them a strong candidate for a tactical trade.

The five stocks that DBS has identified in this strategy are: Thai Beverage, Genting Singapore, UOL, City Developments.

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