KEVIN SCULLY: Key takeaways from panel discussion at Invest Fair

The following article appeared on NRA Capital recently and is reproduced with permisison

Kevin Scully, chairman of NRA Capital. NextInsight file photo

Key takeaways from my panel discussion last Saturday at Invest Fair 2012 at Suntec on the Market Outlook 2012

Let me summarise the key points discussed by the panel:

Marco View

US economy is chugging along nicely but it will be difficult for the economy to see strong economic growth given the high levels of unemployment.  Any further QE will lilely be delayed until we see signs of weakness or a slowdown in the momentum of the economic recovery.

EU unlikely to break-up but problems are very serious and likely to last many years.  More LTROs will be needed as each country encounters problems.   High levels of unemployment and almost non-existent GDP growth will mean little chance of the EU coming out of the recession. US$ favoured over the Euro.

Stocks have rallied on the back of the better US economic data, a soft landing in China and no collapse of the EU.  Market likely to consolidate and correct from recent gains but should end 2012 higher than current levels barring a major crisis such as war in the ME with Iran.

My Views

The early 2012 rally has priced in much of the good news ie US economic recovery, soft landing in China and easing of credit in China, and a reprieve NOT a resolution to the debt problems in the EU through the LTROs but recovery will be difficult.

Going forward, I expect the market to give up some of its recent gains on profit taking and as we see the emergence of some “bad news” because expectations were too positive.  These include some bumps in the US economic recovery (such as the latest job data), problems in the EU starting with Spain but we could have a resurfacing of Greece or other PIGS members in the coming months.  This translates into increased volatility in the months ahead.  This excludes war in the Middle East with Iran – that could be a major negative if it materialises.

I expect the market to consolidate in the next quarter and am looking at a possible correction to the 2700 level on low volume.  The main concern for me has been that the rally started with fund managers who were underweight putting money into blue chips but volume in the blue chips has declined with the bulk of the market volume today in penny stocks.

How high can the STI Index go in 2012?

Hard to predict but if I assume that some blue chips (DBS< OCBC, UOB, Genting, Singapore Telecom and SGX) hit their fair value (mean target price of analysts) then the STI is likely to rise by between 150-200 points.  This means that we could see the STI Index rise to about 3150 to 3200 in the latter half of 2012.

Bank stocks are likely to drive the STI Index – with the exception of DBS (where the proposed Indonesian acquisition is likely to be dilutive on its financial ratios including price to book, the other two banks are trading at between 1.2-1.3 times price to book which is cheap. 

DBS is also trading at the same price to book but is paying a “high” price in my opinion for the Indonesian asset at more than 2.6 times price to book.  So banks (OCBC/UOB) would be good buys on any weakness in the broad market.

Because of the expected increased volatility, investors who are risk averse should be looking at yield plays (my yield portfolio) you can add Singapore Telecom to the list or even some corporate bonds such as GLP, Genting and OUE.

Oxley Holdings' Oxley Tower at Robinson Road: 65% of the 56 office units released have been sold, at an average of S$3,048 psf. As of 30 March, eight street-level café units had been sold at an average of S$6,653 psf, as well as 121 shop units on the second and third levels, at around S$4,820 psf on average.

Property – outlook still dependent on Government policy and as we seen more completions coming onstream – we could see further weakness in property prices. 

The key strategy here is to look for companies which have not been too aggressive in building their land bank at high prices or who are cashed up so that can land bank at better prices if and when prices start to ease. 

My preferred stocks here are Sing Holdings and I would add Oxley Holdings as well at the S$0.40 or below level.

Voluntary delistings and privatisations

Another important investment theme for 2012 is voluntary delistings or privatisations.  This is likely to occur in the technology and property sectors.  So far three and possibly 4-5 of my stock picks have been delisted at reasonable premiums.  

For the former – most stocks are trading below NAV and should see a strong recovery in business and earnings in 2012.  2011 was a perfect storm for the technology sector with the earthquake in Japan, weak US$ and floods in Thailand – 2012 should see business normalise.   My stock picks in the tech sector remain ASTI, Broadway, Armstrong, Juken.  I am looking to add AEM to the list once they are officially off the watch list.

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