Go for NAV and Asean consumer plays in 2013: CIMB
By Goola Warden

If Europe does not fall apart, CIMB figures that the more likely outcome in 2013 is continued weak global growth, the increased likelihood of a technical recession in Singapore, more money printing in the Western world and the eventual threat of inflation, or rather, stagflation.

At the moment, liquidity in Singapore is clearly abundant and flowing into property, bonds and REITs. Household cash surpluses keep growing and do not portray any sign of over-leveraging, notes Kenneth Ng, in a 220 page report titled Navigating Singapore. In the five years prior to 2008, CPF balances had grown by a CAGR of 7.6%. In the four years since 2008, the balances grew at a CAGR of 11.2%.

Too much of this money has found its way into property, says CIMB. “Numerous rounds of property-cooling policies have failed to make a lasting impact,” Ng notes in his report. “As a marker for comparing price points, Singapore’s GDP per capita today is 50% higher than Spain’s but its home prices, in psf terms, are four times the level of Spain – which is worrying.” Still, the increased property buying is not built on over-leveraging as banks mortgages are at loan to value ratios of 50-60%.

But, in a plentiful-liquidity environment, coupled with a rising Singdollar, CIMB says it is doubtful if the property market will correct dramatically. Besides, the labour market remains tight. And with low LTV ratios, the banks would be able to withstand a fall in property prices anyway. The only big risk is a spike in interest rates, which would benefit bank margins, but be deleterious to other sectors, especially the REITs.

CIMB is therefore now calling an underweight for REITs as the sector is now over-owned. It has only one recommendation in the REIT sector and that is Ascendas REIT.

Against this same background, CIMB is suggesting a few investment themes. Asset inflation and a rebound in China would imply that NAV plays do well. “Property stocks that are still trading at large-enough discounts to their NAV must command attention, especially after the strong performance of REITs which are now trading above their book values,” the CIMB report reasons.

Elsewhere, SMEs are coming under pressure, the report states. “In such an environment, NAV plays should serve investors well. Companies will have to manage rising business costs and earnings risks are still on the downside,” Ng says in the report. “Sold-down cyclical might start to perform as liquidity overflow and earnings disappointments taper off.”

Another growing consideration is how investors can take advantage of improving China dynamics. This means Singapore stocks with a China angle would be worth considering. Among property plays, CIMB’s top pick is CapitaLand. UOL Group is a mid-cap top pick.

For Asean plays, CIMB is recommending consumer staples, and the best managed among these is Dairy Farm International. Commodity sector is a selective overweight. Sidestepping Olam International and Noble Group, CIMB is recommending CWT and Wilmar International. For yield play, StarHub comes up tops. Among the capital goods companies, the preference is for Keppel Corp over Sembcorp Marine.

Meanwhile, the sectors to avoid are transportation and gaming, CIMB says.

The brokerage has a 2013 year-end STI target of 3,316 based on 13.2 times price to 2014 earnings, and 1.5 times 2013 NAV.