Business

STI kicks off 2017 on firm note in thin trade

A 120-point jump in the Dow futures and jumps in the Jardine group push the index up 18.2 points in the afternoon

In contrast to 12 months ago, when a crashing China market brought the sellers out in force, the Straits Times Index (STI) kicked off 2017 on a more positive note, trading within a narrow band until a 120-point rise in the Dow futures and jumps in the Jardine group pushed it 18.21 points up to 2,898.97.

Turnover, however, was a weak 1.8 billion units worth S$798 million - in line with the S$852 million done on the first day of 2016, when the STI plunged 1.6 per cent. This time, trading was a lot more sedate, albeit firm, with the broad market recording 242 rises versus 158 falls excluding warrants.

After the index had briefly dipped into negative territory, the push came in mid-afternoon, when the Dow futures indicated a firm start to 2017 for Wall Street. Jardine Matheson and Hongkong Land were the main targets, their combined gains adding 10 points to STI.

Among banks, DBS was weak for most of the day, eventually finishing with a S$0.02 loss at S$17.32 on volume of 3.6 million.

OCBC Investment Research, in downgrading DBS, said that while the global outlook is showing some signs of improvement, the underlying softness for the Singapore economy and selective sectors (including oil and gas and property) remain.

The broker said: "For DBS, the five-year average price/book (P/B) ratio is around 1.15, but with a still-mixed outlook for the region; we think that for the near term, the stock will continue to trade at a discount to this level, likely within the 0.95x-1.05x P/B band (translating to fair-value estimates of S$16.94 to S$18.72). With the recent re-rating of banking stocks, we have moved our valuation peg to 1x book, giving fair-value estimate of S$17.83.

"At current prices, we are downgrading the stock to a 'Hold'; a better level to re-enter the stock will be at S$16.80 or lower."

Maybank Kim Eng (MKE) in its Jan 2 Singapore Strategy said the outlook is poor for all the factors it deems important for market performance.

"Economic growth is sluggish, index valuations are not compelling, earnings expectations are weak with downside risks. There are liquidity risks, with the region tightening capital outflows and risks of protectionism in the West," it said.

"Our end-2017 index target is 3,000, based on a bottom-up and top-down (trailing 13.5x mean price/earnings) approaches that yield a 2,943-3,168 range."

Although this offers only small upside, MKE said proper stock picking could provide a return of 10 per cent, adding that its top picks are Raffles Medical and CapitaCommercial Trust.

EXPECTED DECLINE

RHB in its Jan 3 Singapore Strategy said its economics team expects Singapore to witness another challenging year this year, with an expected decline in GDP growth rate, a slowdown in export growth, a decline in manufacturing output and moderation in private consumption.

"We forecast GDP growth to slow to 1.2 per cent in 2017, from an estimated 1.4 per cent in 2016," said RHB, which set an end-2017 index target of 3,010.

"We derive our STI index target based on a price/earnings (P/E) multiple on 2017 forecast earnings per share. Amid the lack of strong re-rating catalysts, we value the STI based on forward P/E of 14x, which is in line with the historical average P/E of 13.9x and also where the index is trading right now.

"Our index target of 3,010 for end-2017 offers 4.5 per cent return. Including a 3.9 per cent dividend yield for the market, this implies a total shareholder return of 8.4 per cent in 2017."

This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts