Strategy

Strategy: A key theme affecting the Singapore market going into 2016 would be the impact of US rate-hikes on the USD/SGD.

The Fed had lifted rates in Dec, and is signalling for four more in 2016. This may weaken the SGD further against the USD, which Maybank-KE estimates to be at $1.47/USD by 4Q16.

As the street sees a similar forecast, there is a possibility of a surprise if the Fed becomes more hawkish.

With the rate hike, the unwinding effects from seven years of easy monetary policy would result in an outflow of capital in low-yielding asset classes such as bonds and real estate. It may also result in a spiral in headwinds on the Singapore economy.

Historically, Singapore stocks have an uneasy relationship with USD strength. Over the last 20 years, the inverse relationship has been tight. During previous bouts of USD strength in the magnitude of 9-25% - Asian financial crisis, dot-com bust, global financial crisis and eurozone crisis - the STI gave up 29-55%.

On average, a 1% appreciation of the USD is accompanied by a -2.9% move for the STI. In this cycle, both have moved in greater lockstep: USD has appreciated 14% against the SGD while STI has fallen 14%.

Meanwhile, Maybank-KE opines that Budget 2016 should be supportive of companies, especially since it will be Mr Heng Swee Kiat’s first Budget as Finance Minister.

Under the house coverage, stocks that stand to benefit from a rising USD include Venture, Innovalues, ST Engineering, SIAEC, Riverstone, and UG Healthcare. Meanwhile, retail REITs could be hurt as regional currency depreciation would affect demand. Consumer stocks with regional operations could also fall victim to translational losses.

The only sector Maybank-KE could emerge as a winner on all fronts is manufacturing. In this space, Venture (Buy, TP $10.70) is Maybank-KE’s top pick. Its revenue is entirely in USD and the group has no USD Debt.

Another manufacturer that would benefit from the USD strength is Innovalues (Buy, TP $1.02). The group has a revenue exposure of 90-100%, while most of its operating costs are in countries with depreciating currencies against the USD. USD-denominated debt for Innovalues is also minimal.

In addition, Innovalues adopts a forex-volatility-sharing revenue formula, whereby for every 3% change in USD against SGD, half of the delta will be shared with its customers. While this reduces its gain, or pain, in both directions, Innovalues emerges a net winner of the USD strength.

However as a double edged sword of the USD strength, Maybank-KE notes that this could weaken sales for American customers, as products are less competitive globally.