Excerpts from KGI Singapore Research report
| Going into 2H 2020, our overall view is that we still expect the environment to remain favourable for equities and precious metals such as gold. The upcoming 2Q earnings season will be a reality check for the markets but should provide a good buying opportunity for investors. |
• Strong rebound in equity markets in 2Q 2020. Risk-assets such as equities have staged a strong rebound in 2Q 2020, driven mainly by the huge gains among technology stocks.
While it is true that the excessive amount of liquidity provided by central banks is partly fuelling the equity rally, and widening the disconnect between the financial markets and the underlying economy, such momentum can continue to push risk assets higher if investors are forced away from safe investments such as government or investment grade bonds.
• Technology: A much bigger disruptor than COVID-19. The pandemic will likely continue to disrupt many sectors such as tourism and commercial property demand over the coming years.
 "Our top picks are concentrated in the technology sector, which includes AEM, Silverlake, ISDN and Frencken." |
However, over the medium to long term, a bigger and deeper-seated challenge for many will be the disruption caused by technological development. Companies are realising they can do more with less people.
Therefore, our top picks are concentrated in the technology sector, which includes AEM, Silverlake, ISDN and Frencken.
Our recommendations for 2H2020 and catalysts for each stock are summarised below:
|
Company |
Catalyst |
|
TECHNOLOGY |
|
|
AEM (AEM SP) |
Strong capex spend by Intel |
|
Silverlake Axis (SILV SP) |
Expansion of its insurance Software-as-a-Service (SaaS) in Japan, and potential new business areas from digital banking license in Malaysia |
|
ISDN (ISDN SP) |
Overdue rebound in Industrial Automation, led by China |
|
Frencken Group (FRKN SP) |
Strong order momentum from semiconductor clients, mainly ASML |
|
CHINA |
|
|
Yanlord Land (YLLG SP) |
China’s strong property rebound |
|
Sasseur REIT (SASSR SP) |
Upside potential linked to China’s growing outlet retail mall sales, while offering downside protection with a fixed income component that increases 3% per annum until 2028 |
|
EC World REIT |
The only specialised and ecommerce logistics S-REIT that provides investment access into China’s booming e-commerce industry |
|
HEALTHCARE / CONSUMER |
|
|
Singapore Medical Group (SMG SP) |
Well-diversified small-cap medical services provider riding on healthy growth in Southeast Asia and Australia |
|
ThaiBev (THBEV SP) |
V-Shape in Thailand’s economic growth in 2021 |
|
COMMODITIES / PRECIOUS METALS |
|
|
Shandong Gold (1787 HK) |
Proxy to gold prices where we have a target of US$1,900/oz in 2020 |
|
CNOOC (883 HK) |
Largest upstream oil & gas company in North Asia with the highest beta to oil prices |
• Our other 2H 2020 top picks are China-focused stocks, ThaiBev, Singapore Medical Group and precious metals. In addition to the technology sector, we prefer companies with a higher exposure to China (two China pure-play REITs and one developer), consumer discretionary in Thailand, a smallcap Singapore medical service provider, and precious metals.
Supportive fiscal and monetary policies. Even with financial conditions having improved since 1Q 2020, we expect global central banks to continue the supply of ample liquidity to support the economy in 2H 2020, possibly extending well into 2021.
Furthermore, major economies such as the US have indicated that the government will support another around of stimulus measure to help companies and provide incentives for employees to go back to work.
The bottom line is that this will likely support an environment that is favourable for risk assets and precious metals such as gold.
First In First Out: China’s June PMI showing a quick recovery. Business activity for June is showing a recovery from the virus-driven contraction and the global lockdowns from March to May.
China is showing the most significant improvement in June 2020, continuing the recovery momentum in May when both manufacturing and services PMI came in positive. South Korea’s exports, a leading indicator of China’s shipments, narrowed its YoY decline to 11% YoY in June from the 24% YoY plunge in May 2020.
Other major economies such as the US and eurozone are also reporting a sizable improvement in June’s manufacturing and services PMI, and we expect the global economies to improve off the bottom as businesses reopen.
| Company profitability expected to take until end 2022 to fully recover to pre-COVID levels. Based on consensus estimates for the 30 components of Singapore’s main benchmark, earnings for most of them are only expected to recover back to pre-COVID levels by the end of 2022 (see Figure 2). Therefore, while we remain positive on the equity market in general, stock selection will be key to outperformance. It is still important to select companies with strong balance sheets to account for the risk that demand does not recover quickly enough, or if a second wave reemerges as we approach the winter months in the US, China and Europe. |
Full report here.