“I am a Tariff Man.”
Donald Trump declared this on his Twitter feed last December, and I couldn’t help but imagine the orange-haired US president dressed in a superhero outfit and continuously shouting “Stupid Trade!” while zapping away huge piles of Chinese imports with his laser-eyes.
As trade tensions between the US and China continue to stay uncertain, you might be seriously considering if you should start pulling your money out of stocks.
We don’t recommend doing that at Dr Wealth. In fact, staying invested is one of the key investing principles we follow – and we might even double down on our positions if your investment theses are still intact and the prices are attractive enough.
However, for investors who want to be better protected in their stock portfolios, we have picked out the top 5 safest Singapore blue-chip stocks you can invest in even during these uncertain times.
We screened these stocks based on a few preliminary criteria:
- Be part of the Straits Times Index (STI) top 30 stocks by market capitalization
- Net profit margins more than 10% (or gross margins more than 15%) for the past 5 years
- Interest coverage more than 3 times for the past 5 years,
- Positive free cash flows for the past 3 years, and
- Growth in dividends per share for the past 5 years
These criteria ensure that the stocks we select have the financial strength to ride the waves of any impact that may come from trade tensions, as well as reduce the risk of loss for shareholders like us through growing dividend payouts.
We then screen further based on more qualitative criteria including low exposures to the US and Chinese markets, wide diversification of revenue streams from different business segments and geographies, and high adaptability to industry disruptions.
We also favor companies that are service-based rather than product-based, as these companies tend to be impacted less by tariffs being imposed by the US and China.
Of course, the caveat here is that while these stocks can hold their value in uncertain times, they might grow at a much slower rate than most investors can handle.
With that, let’s dive into top 6 safest Singapore blue-chip stocks that would be least impacted in a trade war (in no particular order).
1. CapitaLand Commercial Trust (SGX:C61U)
Unsurprisingly, we see a couple of Real Estate Investment Trusts (REITs) pop up on our screener. Because all REITs are mandated to pay out 90% of their earnings to unitholders, they provide some protection against capital loss to investors, thus making them “[one of the] least trade-sensitive sectors you can own” according to Forbes.
After assessing the qualitative aspects of these REITs, we felt that CapitaCommercial Trust (CCT) is the most insulated from the US-China trade war – both in terms of their building locations and their tenants’ exposures.
CCT primarily holds office buildings in Singapore, and has only one overseas office outfit in Germany. Tenant mix largely includes large stable companies like GIC Private Limited, HSBC, RC Hotels Ltd, CapitaLand Group and JPMorgan Chase Bank.
These are companies with strong financial positions to weather trade uncertainties, hence, we do not foresee any problems with tenant occupancy at least in the near- to mid-term with this trade war.
Moreover, the Weighted Average Lease Expiry (WALE) is at 5.8 years, which gives CCT more-than-sufficient time to find new tenants and maintain profit performance if tenants are negatively affected by the trade war.
|Return on Equity:||7.97%|
|P/E Ratio:||13.46 times|
2. SATS Ltd (SGX:S58)
Although SATS is heavily service-based, it still has a pretty significant segment in “food solutions”, the catering arm of SATS, which might be affected by the trade war.
The ingredients used to prepare food will markedly be costlier due to the trade war – and hence, this puts increasing price pressure on SATS.
However, we felt that SATS is well-buffered due to its diversified geographical operations in over 60 locations and 13 countries across Asia and the Middle East. Moreover, revenues from emerging markets like India and Vietnam could grow, being the beneficiaries of the trade tensions.
|Return on Equity:||16.51%|
|P/E Ratio:||21.48 times|
3. DBS Group Holdings Ltd (SGX:D05)
Although DBS receives most of its revenues from Singapore (62%), it has a sizeable presence in Hong Kong and Greater China. Thus, DBS will likely be hit in the short term as credit stress is increased and new loans go down.
However, the impact might be lessened as they would expect to receive higher revenues from beneficiary countries of the trade war in the South and Southeast Asian regions like Indonesia.
Moreover, DBS has put in place a robust risk management strategy that includes broad-based business growth from engaging in multiple businesses. For instance, DBS had acquired ANZ’s retail banking and wealth management business in Asia early-2017, which continues to add to loan demand and market share for DBS.
|Return on Equity:||12.05%|
|P/E Ratio:||11.51 times|
4. ST Engineering (SGX:S63)
We tend to be more cautious about sectors in engineering and manufacturing because they tend to be the most exposed to the effects of the trade war. However, ST Engineering has been all along well-diversified in their revenue streams across business sector, geography and customer type.
For instance, revenues for its business segments are rather evenly spread with 39% for Aerospace, 32% for Electronics, 19% for Land Systems and 9% for Marine. Geographically, ST Engineering is geographically spread between Asia (73% of Group revenues), US (18%) and Europe (8%).
Management expects that although higher tariffs will affect performance in the short term, they believe that the US infrastructure market will continue to grow in the medium and long term – owing to the development of Smart Cities – which will prop up their specialty vehicles segment and road construction segment.
|Return on Equity:||22.03%|
|P/E Ratio:||24.75 times|
5. Genting Singapore Limited (SGX:G13)
Genting Singapore tends to be insulated from the effects of the trade war as a service-based operator. Moreover, its leisure and hospitality operations take place primarily in Asia. More specifically, in Singapore’s iconic Resorts World Sentosa (RWS), which contributes 99.98% of revenue (2018).
Genting Singapore is flushed with cash to ride through the trade war uncertainties – at 37.21% free cash flows to sales and 31 times interest coverage. We note that the company is preparing for the bidding of developing integrated resorts in Japan – which will very likely come to fruition given the brand name, track record in catering to the Asian hospitality and gaming market, and its strong financial position.
|Return on Equity:||9.51%|
|P/E Ratio:||14.18 times|
So there you have it – 5 stocks that are well-buffered to the US-China trade war.
Notice that most of them are mature blue-chips which have been around for a long time. They aren’t new entrants into the STI Top 30.
These companies have been through worse – the 2008 Financial Crisis, the European Debt Crisis, and possibly many other smaller recessions.
Hence, they should have no problem riding out the US-China trade war.
However, that’s not to say they aren’t exposed to other kinds of risks. For instance, if the debt crisis in the US goes out of control, DBS will be hit pretty badly (as compared to the other 4 companies). Investors should still manage their expectations and understand that even defensive stocks are not guaranteed capital preservers.
Do you agree with the list? Let us know below!
Equity investment analyst at Dr Wealth. Value investor and online marketer.