It’s that time of the year again.
Every 6 months or so, I try to run this hypothetical exercise to build a completely new portfolio from scratch. I find it helpful for me to clear my mind, approach the market from a blank slate, and appreciate stock prices as they are, not as they should be.
In the previous version of the Top 5 Singapore Stocks / REITs from February 2019, I selected DBS, CapitaLand, Netlink Trust, Mapletree Commercial Trust, and the S&P500. For very obvious reasons, all 5 stocks have done superbly well since. So let’s see if we can match the same record with this new round.
The rules of the game are simple:
- Select 5 stocks that I am keen to buy at current market prices
- They should be suitable for me as a Singapore based investor
- Minimum holding period is 1 year, ideal holding period is 5 to 10 years.
Now the macro environment has changed massively from February 2019. In February 2019, the Feds were still talking about rate hikes (I know right…), the US-China trade war was in full swing, and the S&P500 just had a huge meltdown 2 months ago. Fast-forward to December 2019, and the Feds have cut 3 times (no more hikes in 2020), the US-China trade war has reached a Phase 1 deal, and the S&P500 has had an absolute monster of a year (13.8% returns).
The way I see it, it’s always harder to make investments in an exuberant market, than a fearful a one. So between the two, I would have preferred February 2019 any day. But alas, we have to take the market as it is, not as we want it to be, which of course is the key point of this exercise.
Note: This article was written pre-COVID-19/Coronavirus. COVID-19 is a game-changer for the world economy, and economic situations have changed materially – so this list is no longer valid. Take a look at our recent article here for more up to date views.
Top 5 Stocks / REITs for Singapore Investors
DBS Bank Ltd
DBS made its way into the original list of Top 5 Singapore Stocks / REITS in February 2019, and it retains its spot today.
DBS trades at about a 4.7% forward dividend yield, and about 1.3 times book value.
All 3 of the Singapore banks are pretty similar in that you get broad exposure to the strength of the Singapore economy, but I like DBS particularly because under Piyush’s guidance, I think they’ve navigated this digital transformation really well. Of the 3, I think they’re best placed to face up to the coming wave of digital disruption.
The market seems to agree as well, because DBS trading at the highest premium to book value of all 3 banks. It’s more of a personal preference ultimately though, so realistically speaking, any of the 3 local banks are fine.
But micro aside, the other reason why I picked DBS is to hedge against a reflation trade. Everybody is talking about a synchronised global slowdown these days. But the way I see it, there is a possibility that 2020 will surprise to the upside, and we’ll see higher than expected global growth. Trump will be having an election year, and he’s going to do everything in his power to keep the US economy chugging along well to improve his election chances. And say whatever you want about that guy, but he’s clever as hell, and he knows how to pull the right strings to get what he wants.
So if growth starts to surprise to the upside, then those US treasury yields are going to jump, and all those blue-chip REITs that had such an amazing 2019 are going to drop like a rock.
Because of that, I think it’s prudent to load up on some bank stocks like DBS to hedge against such a possibility. Especially for me when I have such big exposure to REITs. If interest rate expectations go up, or global growth improves, I think there could be lots of upside in Singapore banks (and downside to REITs).
Worst case if they languish at current prices, it’s still a 4.7% yield, which is much higher than the interest I get if I put the money in DBS Bank (deposit account). In fact, it’s even higher than Mapletree Commercial Trust’s 4% yield, which is just how crazy expensive the REITs are these days.
Netlink Trust is the second other stock that retains its position on this list.
Now Netlink trust is a funny one. At the 70 cents range, I thought Netlink was an absolute steal and I backed up the truck on this. At the 80 cents range, I thought it was still a great buy. At the 90 cents range, it’s definitely a lot less attractive (5.25% yield now), but when I look at the prices that blue-chip REITs are trading at, I still really like Netlink Trust.
I have an older article on Netlink Trust that covers the basics, and most of it is still relevant because it’s quite a slow moving industry.
For the benefit of newer readers, Netlink trust owns most of the fibre network in Singapore. Any time you sign up for a new Fibre connection with SingTel for example, out of the $40 a month you pay, about $12 goes to Netlink. Now if that’s not the definition of a monopoly, I don’t know what is.
Because most residential households are already on Fibre, future growth for Netlink will need to come in the form of (1) population growth in Singapore, and (2) new uses of Fibre connection (eg. 5G, IOT).
5G will be a big one, because the 5G network needs to plug into a Fibre backend. There’s really only one player in Singapore for Fibre, so I’m pretty excited about the prospects for Netlink going forward.
There was some talk about how distribution yield is higher than free cash flow, which may point towards unsustainable yields. The official response from Netlink is that capex was higher than expected, so they took on some debt to cover the free cash flow gap. The way I see it, gearing is incredibly low (below 30%), and there’s still going to be growth in Netlink going forward, so I don’t view the capex point as a major one for now.
With the 10-year Singapore Savings Bonds at a 1.76% now, Netlink Trust’s dividend yield of 5.25% is a nice 3.49% yield spread. Which is pretty good in my books.
When it ain’t broke, don’t fix it.
I love this saying, especially in the context of investing. So many investors feel the need to constantly tweak their portfolio, when in reality, most of the gains comes from doing nothing at all. It’s definitely a problem I had in my earlier days, which is part of the reasons why I launched Financial Horse.
These days, when I feel the need to make changes to my portfolio, I just come here and write an article instead.
The S&P500 is probably the best way to bet on the overall strength of the US economy. And don’t forget that 2020 is going to be a US elections year. Trump is not going to allow the S&P500 to tank.
So I don’t know how he is going to do it, but I’m not going to bet against it. I’m just going to buy the S&P500 and ride the gains.
After the 2020 election, this investment will need to be relooked to take into account the views of the eventual winner (if say we get an Elizabeth Warren presidency, this investment looks a lot less appealing in the short term). But that’s still quite a far bit aways.
China Banks – China Construction Bank / ICBC / Bank of China / Agricultural Bank of China
As Patreon members know, I spent most of 2019 monitoring the China investment situation, but never quite pulling the trigger. I’ve been doing a lot more thinking recently, and I think it may actually be time to start dipping my toes in.
Most of the big 4 China banks listed above (traded in Hong Kong) are trading at 30 to 40% discounts to book value, and about 5 to 6% yields. That’s crazy.
Sure, the book values are a big question mark, but given their systematic importance to the China economy, I don’t think the central government or PBOC will allow a metaphorical run of any of these banks.
It’s super super tough to predict how 2020 will play out for China. Which is I find it easier to not bother. I just need to take a 5 to 10-year view here. And the question here is: Will China in 2025 or 2030 be much bigger than where it is now?
Personally, I think the answer is almost certainty a resounding yes. So I’m prepared to take a longer term view here, and look to start building a position in the China banks.
Banks are an easy way to get broad based exposure to the China economy because you can’t really index for China – there’s no S&P500 equivalent as the market is too inefficient. So I view this investment as a way to bet on the longer term growth of China.
There’s some tail risk from the real estate bubble (which all the banks are heavily exposed to), which is a whole other issue entirely, but hey, no reward without some risk right?
Most of the other investments on this list are probably okay with a 1-year investing timeframe, but I think for this last one, it has to be viewed with a longer term, 5 to 10-year lens. I’m getting a 5 to 6% dividend each year anyway, so at least I’m getting paid to wait.
For full disclosure purposes, please note that I have existing positions in all of the investments listed above (except for China banks), and I may be adding to my positions in the near future.
I also won’t be updating this list of Top 5 Singapore Stocks / REITs going forward, so do perform your own due diligence before initiating an investment.
If you want to take a look at my latest stock ideas (or my full stock portfolio), you can consider supporting this site as a Patron.
It’s going to be 2020 soon, and I’m actually really excited to see how this list will pan out.
Any great stocks that I missed out on this list? Share your comments below!
Reminder: We are running a Christmas promotion with $100 off the FH Investing Course. Find out more here!
Looking for a comprehensive guide to investing? Check out the FH Complete Guide to Investing for Singapore investors.
Support the site as a Patron and get market and stock watch updates. Big shoutout to all Patrons for their support!