Joanne Goh, Equity Strategist
DBS Group Research
Rates: Too volatile
The intraday moves in US hours were remarkable, adding to the volatility in the early part of the week when market digests the China-US trade truce. 10Y UST yields had a 10bps trading range, touching as low as 2.82% at one point before closing at 2.89%. Barely a month ago, 10Y yields were above 3.20%. The moves in the equity space was also sizable, registering a 700pts intraday swing before closing modestly lower. Market jitters over the trade truce and Fed hikes clearly dominate.
The rally in the long end of the curve has been impressive. 10Y and 30Y yields are down by some 34bps and 30bps respectively from their recent highs, significantly flattening the US Treasury curve in the process. The 2Y/10Y spread is now down to 13bps, sparking recession fears. Notably, the 2Y/5Y and 3Y/5Y segments of the curve are already in mild inversion.
Meanwhile, IG and HY OAS credit spreads have widened by some 30bps and 90bps since early September. While the collapse in oil prices probably skewed the HY space, these still amount to a fair bit of tightening in financial conditions. To be fair, the moves thus far are noteworthy, but in the context of absolute levels, credit spreads are still quite some ways off the high seen in early 2016. However, back then, US yields were still very low (10Y yields were below 2%) and the Fed had barely done one hike in the current normalisation cycle.
The disconnect between US macro (still strong) and the markets (flashing warning signals) should be closely monitored. For now, key support for 10Y yields at 2.80% has held and the large reversal day could prove to be a short-term capitulation of positions. Thus far, we do not think that market volatility warrants a pause in rate hikes. However, if US economic data starts to weaken, we would have to re-examine our assumptions.
Equities: Large cap China property names preferred
In Nov, the China property sector rebounded by 12.6% alongside HSI’s 6.1% recovery in the month on better sentiments amid signs of easing tensions on trade disputes. Sector valuation concurrently recovered from its trough of 3.9x FY19E PE so far in 2018 to the current 4.5x. Given the absence of near-term catalysts, we expect the sector to range-trade between 3.9x FY19 to 5.5x FY19PE. Currently valuation is sitting in the middle.
According to the CRIC database, simple-averaged y-o-y presales growth of 36 key developers in 11M18 mildly picked up to 40% from 38% in 10M18, largely driven by developers accelerating their project launches towards year-end to meet their full-year presales targets. We expect developers which are still falling short of their targets to keep their pedal to the metal in Dec, while those which have already secured high presales target lock-in ratios to delay some of their contract signings for 2019.
We like large-cap names with a strong balance sheet to facilitate market share expansion in 2019. In the near term, stocks with high final dividend yields, good dividend payment records and low refinancing pressure are preferred.