Rising bond yields and its implications

Rising bond yields and its implications: UOB Kay Hian has sector report. House note that rising bond yields and regulatory risk could crimp share prices of developers. Conversely, banks and cash rich companies are beneficiaries of a potential gradual rise in interest rates. Since 14 Nov 12, US 10-year govt bond yields have risen 36bp to 1.91%. Comparatively, SGD denominated 10-year government bond yields have also trended upwards by 23bp to 1.55%. This could put upward pressure on interest rates on corporate debt. In terms of interest rates forecast, UOB Economics Treasury Research (UOB ETR) projects interest rates to rise in 4Q14. Effects are as per follows: 1) Banks: Higher bond yield would typically have a positive impact for the banking sector. Higher bond yield would support wider spreads for loans to businesses, thus providing a stabilising effect for NIM and growth in net interest income. House positive view for the banking sector is based on attractive valuations, a potential abundance of liquidity flooding the stock market and brighter economic outlook for 2H13. Re-iterate BUY on DBS (TP: $19.90) and OCBC (BUY/TP: $12.68). 2) Developers: Although rising interest rates are clearly negative for developers, particularly residential developers, more concerned over regulatory risk. A gradual rise in interest rate is indicative of a general improvement in the economy and given expectations of resilient employment, think residential demand will remain buoyant. Nevertheless, due to rising supply and the recent property cooling measures that could rein in investment demand, forecast a 5% yoy fall in physical residential prices and a 20-40% yoy decline in transaction volume in 2013. Top pick is OUE (BUY/TP: $3.36) 3) REITS: Limited impact on REITs. Although a rise in I/R could compress the spread of S-REITs’ yield over risk-free rates, believe the spread is still sufficiently compelling. Currently, the S-REITs’ spread over risk free is 4.06%, which compares to its LT spread of 3.83%. Also, vs REITs in other countries, which offers a lower spread of 2.03-3.27%, S-REITs still offer one of the highest spread over risk-free rates. Top picks include Suntec REIT (BUY/TP: $2.03) and CCT (BUY/TP: $1.79). 4) Cash Rich Co’s: A rise in interest rates will benefit cash-rich co’s. Within house coverage, co’ with the highest net cash as a percentage of its market capitalisation include SIA, Venture, Wheelock, Genting SP, SIA Engineering and Super Group. Out of these stocks, top picks are SIA Engineering (BUY/TP: $5.20), Super Group (BUY/TP: $4.54) and Venture (BUY/TP: $9.10). 5) Highly geared Co’s: Conversely, highly-geared Co’s will be adversely affected by rising interest rates. Analysis of house universe indicates that the top five highly geared co’s in descending order include Swiber, Guocoland, Olam, NOL and Ezra. All these stocks have net gearings of more than 100% and could be negatively affected by rising rates. Overall, house remain selective on the market with a year-end target of 3,500 for the FSSTI. See deeper value in the mid-cap space, particularly the oil services and consumer segment. Top picks in SG are DBS, OUE, M1, Ezion, Courts, Suntec REIT, Sino Grandness, Triyards and Ho Bee.