Singapore Strategy:Gimme Shelter

Event.

A weaker outlook for Singapore’s key top down drivers raises the spectre ofearnings contraction for the FSSTI. When coupled with cuts to our team’sbottom up price targets, we arrive at a new FSSTI target of 2,950, 8% belowour previous 3,215. The silver lining is that this still implies 20% TSR post theYTD selloff. In fact, Singapore is trading at the third lowest PER in Asia, whileoffering the region’s highest dividend yield (Fig 4), and our Outliers frameworkidentifies many ideas that we think can provide shelter amid the volatility.

Impact.

We are lowering our twelve month FSSTI index target by 8% to 2,950,which is driven in roughly equal measures by reductions in our top down andbottom up index valuations (our target is the average of the two. Top down:2,800, bottom up: 3,100).

Top down: potential earnings contraction for FSSTI in 2016. Our topdown model suggests risk of a ~2% EPS contraction for the FSSTI whichcontrasts with the +4% growth both our bottom up forecasts and consensuscall for. As the bottom up earnings forecasting track record has been poor, themessage from the top down model (R-squared of 83%) is worth heeding.

Bottom up: Outliers framework still identifies many interesting shelters.

Given a backdrop of potential earnings disappointments, we look for namesthat have demonstrated a solid earnings trend over the last twelve months,which our team also sees as sustainable. We then further drill down to thosenames whose share prices are not pricing in these positive earnings trends /outlooks. Our Outliers screen does this in a succinct manner, and we performa final sense check with our research team to ensure a consistency of views.