Local houses more upbeat for 2013

SINGAPORE - LAST week's column featured the views of a few mainly foreign houses on what 2013 might hold for equities. All were relatively solemn in their assessments, highlighting poor economic growth in Europe and the as-yet unresolved US fiscal cliff problem as a potential drag on the global economy, earnings and prices.

In contrast, local houses appear to be striking more upbeat notes, at least judging by the forecasts issued last week by DBS Group Research and OCBC Investment Research. The latter, for example, said in its Strategy 2013 that it sees better economic and market conditions and although earnings growth is still in the single-digit region, it is a recovery from the slowdown of 2012.

"Moving into 2013, we believe that the low interest rate environment and increasingly high property prices mean equities could come back into focus largely because of projected earnings growth and still-attractive valuations," said OCBC Investment Research.

It said the Straits Times Index is trading at only 14.6x 2012 earnings and 13.7x 2013 earnings and 1.4x book, numbers which are not overly demanding.

DBS, in the meantime, said the investment case for Asia in 2013 is looking positive because of an easing euro crisis, improving visibility in China and a modestly recovering US. "Asian markets are likely to outperform developed markets as growth accelerates next year. 'Infinite' QE (quantitative easing) provides room for PE (price/earnings) expansion and with growth across the region gathering pace (particularly China), foreign capital flows should return."

As for Singapore's economy, DBS is less optimistic.

It highlighted the 5.9 per cent Q3 real GDP contraction (quarter on quarter) which was driven by a broad-based fall in all key sectors and said the country would have dipped into a technical recession had the Q2 figures not been revised upwards.

"Yet Singapore's economic woes are far from over. External headwinds will continue to weigh on the economy while self-imposed structural constraints imply that Singapore will continue to underperform its potential as well as against regional peers."

However, DBS expects sequential growth to bounce back into positive territory in the Q4, albeit with subdued growth momentum, a view based on three assumptions.

"First, the US economy continues to muddle through at a below-potential pace of about 2 per cent in 2013. Second, the eurozone does not blow up in the next 12 months. Third, Asia's growth will pick up again, led by a rebound in Chinese investment."

DBS expects Singapore's real GDP growth to be 3.2 per cent for next year.

Meanwhile, about 54 per cent of fund managers polled by OCBC's Wealth Management unit said they were positive on the investment outlook for the first half of next year, citing benign inflation, growth pickup and easy monetary policy. So it looks like the buy side of the business shares some of the optimism of the sell side.

Amid all this optimism, is there scope for contrarians? Yes - Bank of America-Merrill Lynch in its Dec 10 Asia Equity Strategy said that because Asean markets have had a good run for the past six years, their defensiveness will count against them if risk appetite returns.

It said Asean's forward PEs and trailing P/BVs are now at or above historical means while moderating GDP growth could mute upside earnings surprises.

"Within Asean, we are moving Singapore down the pecking order due to its relatively weak macro outlook compounded by margin compression as cost pressures kick in," said the bank. "Our new country pecking order is Thailand, Philippines, Indonesia, Malaysia and Singapore."