•        Rocky ride ahead, start of QE tapering could offer temporary respite
•        Prefer recovery proxies in US/Europe with yield support
•        Stay away from stocks with emerging market exposure
•        Key picks are STE, Venture, CSE, Hi-P, HPHT, Ezion, Goodpack, Comfort Delgro and Singapore Post


Held hostage by emerging markets uncertainties. The reversal in fund flows out of Asia and emerging markets back to developed economies, triggered by the anticipation of QE tapering, rising US 10-year treasury yields and a rebound in the USD, Euro and GBP had exposed the structural vulnerabilities of emerging market economies with high current account deficits. While the Singapore market has outperformed regional bourses, we expect a rocky ride for Singapore equities, held hostage by the still developing emerging markets uncertainties.
 
Start of QE tapering could offer temporary respite.  STI has fallen 10% to 3088 since May 22 when FED Chairman first hinted of QE tapering. We are close to the support level of 3050, at 13.1x PE (-0.5SD). Consensus has been expecting the FED to start to taper in Sept, a positive signal that the US is on a firmer footing for recovery, which could provide some stability to the market. Recovery names should outperform in this situation while yield sensitive sectors such as SREITs will remain under pressure. If tapering of QE is pushed back, volatility continues, and could push STI to test 2900 (12.9x PE or -1 SD) if the sell-down in emerging economies continues.

Recovery proxies in US and Europe.Growing optimism about the improving US recovery and Europe’s economy moving past the recession trough should see a return in interest among recovery names and companies with significant revenue exposure in both regions. Technology stocks are early recovery plays – CSE and Venture have significant exposure to US/Europe and offer attractive yields of 4.7% and 6.7% respectively. CSE’s proposed listing of its UK subsidiary could lead to a dividend bonanza on successful listing. Selected industrials – Ezion and Goodpack will leverage on their niche positions in the global arena.  Stocks with earnings visibility supported by yield are likely to remain in favour - our picks are SingPost, Comfort Delgro,.ST Engineering and Hutchison Port.

Shying away from emerging markets exposure
Avoid stocks with exposure to emerging markets which are likely to underperform.  Petra, Acott REIT should see some impact from the weak Rupiah while Religare and AIT will be affected by the weak Rupiah and spike in bond yields. SingTelis caught in the currency storm with 42% of earnings from emerging markets (Indonesia, Philippines and India) and 25% from Australia.