Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Strategy Overview: Asia Equity
Market Outlook
Singapore's re-rating
We are maintaining our Overweight for Singapore despite the
risk of profit taking after the market had rebounded 80% from
the bottom. Singapore's valuations are among the most
attractive in the region. That should leave room for a re-rating
in the market as its P/E premium to the region looms near the
historical low end (Fig. 20). A look at Singapore's historical
market P/E vs GDP growth clearly establishes a strong case for
Singapore's current valuations to re-rate on the back of a
strong economic recovery. (Fig. 19)
Fig. 19: Singapore fwd PE vs. GDP growth
(% ) (x)
15
26
10
5
0
-5
-10
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Singapore real GDP growth (%YoY, LHS)
Singapore 12-month forward PER (x, RHS)
Source: Datasream, DBS, IBES
Fig. 20: Singapore P/E relative to the region
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
re-rate
(x)
Source: Datasream, DBS, IBES
re-rate
de-rate
93 95 97 99 01 03 05 07 09
24
22
20
18
16
14
12
10
8
Upturn after the downturn
The Singapore economy emerged from the recession with a big
bang by posting a remarkable 20.7% QoQ saar in the second
quarter, led by the manufacturing sector. Recovery in that
sector was broad based, while the recovery in services sector
was mainly from financial services. The impact of the recession
has also been less severe than initially feared, thanks to the
slew of "counter measures" introduced by the government.
Going forward, we believe Singapore can post better second
half growth vs the region as the synchronized global upturn
evolves.
Structural changes
It may be too early to declare success on fighting the recession.
But Singapore government has laid in place plans for structural
changes even before the downturn came, which partly
explained the speedy recovery we had so far. Some earlier
initiatives are geographical and products diversification in
exports, fiscal incentives for the development of the financial
services sector and promoting diversified industries in
establishing bases here in Singapore. In addition, the major
longer-term on-going structural transformation on population
targets to promote domestic demand for a self-sustaining
model.
The latest initiatives are the construction of integrated resorts,
which is estimated to add 1.5% to Singapore's GDP, creating
60,000 direct and spin-off jobs in the process. The ripple effect
from these two iconic developments is expected to be far
reaching, ranging from gaming, hospitality, property to service
providers such as retail, media and transport operators.
Stock market revamped
In line with the revamp of the financial services industry, we
also see major changes happening in the stock exchange as
well. Other than having stocks, which are exposed to the
domestic economy, the stock market now has sizeable
exposure to emerging markets in growth sectors such as palm
oil, coal, oil & gas; and other markets such as Indonesia, China,
India and Vietnam. Structurally, Singapore's P/E de-rating was
also largely due to its loss of luster as an emerging Asia
country as the economy matures and new emerging market
darlings like the BRICs markets, Taiwan and Korea were
attracting a lot of investors' interest and fund flows. With the
revamp, Singapore should now be more attractive to investors
who are interested in developed markets with emerging
markets' exposure. Singapore's P/E de-rating is also very much
evident in relation to Hong Kong - its closest developed market
peer in the region with similar dynamics. It now trades at a
discount to Hong Kong, which we believe is unjustifiable and
the market should re-rate accordingly. (Fig. 21)
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