20160627-DBS_Group-Investment_Insights_12页_576kb

Investment Insights Summary

Core Content

This document provides a detailed analysis of the financial market implications of the UK's decision to leave the European Union (Brexit), focusing on the short and medium-term effects on global risk assets, currency markets, and the UK economy. It also includes specific investment insights regarding Mapletree Greater China Commercial Trust (MAGIC) and Tencent Holdings Ltd, offering valuation, rationale, and risk assessments for these assets.

Main Points

Brexit Impact on Financial Markets

• Global Risk Assets: A significant sell-off occurred immediately after the Brexit vote, with European equities and the GBP suffering sharp declines. However, the overall impact is considered a knee-jerk reaction, and the long-term effects remain uncertain.
• GBP/USD: The GBP plunged against the USD, reaching a 1.3229 low, but the market does not view Brexit as a "Lehman moment."
• Central Banks: Central banks, including the Fed, ECB, and IMF, have shown readiness to intervene, with the Fed now pricing in a 10% chance of a rate cut in the near term due to market uncertainty.
• Market Sentiment: The overall bias in financial markets is towards further losses in risk assets unless the situation stabilises.

Key Factors Influencing Market Response

1. Fear: Market sentiment remains bearish, and unchecked fear could lead to significant asset price losses.
2. Contagion Risk: The potential for Brexit to spread economic instability to other EU members is a concern, though the UK's use of the GBP rather than the euro reduces direct financial implications.
3. Currency Stability: The GBP's weakness is a major concern, as prolonged instability could impact the UK's ability to import and affect its overall economic outlook.

Post-Brexit Scenarios

• EEA Membership: Would lead to a 3.4–4.3% GDP decline over 15 years.
• Negotiated Bilateral Agreement: Expected to cause a 4.6–7.8% GDP decline over 15 years.
• WTO Membership: Could result in a 5.4–9.5% GDP decline over 15 years.

These scenarios highlight the uncertainty surrounding the UK's post-Brexit trade relationships.

Political and Social Implications

• The UK's decision reflects growing dissatisfaction with the winners and losers of globalization.
• There are concerns about the unity of the UK, with calls for a second Scottish independence referendum.
• Other EU countries may follow suit, risking further global economic instability.

Investment Highlights

Mapletree Greater China Commercial Trust (MAGIC)

• Overview: A Singapore-listed REIT with a diversified portfolio in Hong Kong, Beijing, and Shanghai.
• Valuation: Currently trading at a 0.8x P/NAV with an 8% yield, offering an attractive discount to NAV.
• Portfolio: Comprised of three key properties:
  • Festival Walk (Hong Kong) – A defensive retail mall with strong local positioning.
  • Gateway Plaza (Beijing) – A Grade-A office building.
  • Sandhill Plaza (Shanghai) – A premium business park.
• Performance:
  • 4Q-16 DPU rose 10% YoY to 1.923 Scents.
  • FY16 DPU reached 7.248 Scents, up 11% YoY.
• Risks: Potential economic slowdown in the Greater China region.
• Balance Sheet: Gearing is below 40%, and NAV per unit rose to SGD1.23.

Tencent Holdings Ltd <TENCNT> [A2/A/A+]

• Overview: A leading Chinese internet company with a diverse range of services, including social media, online games, and e-commerce.
• Recent Acquisition: Acquired 84.3% of Supercell for USD8.6 billion, enhancing its game portfolio.
• Financials:
  • Strong cash flow generation with FY15 free cash flow exceeding CNY33 billion.
  • CNY91.2 billion in cash and liquid assets as of 1Q-16.
• Credit Assessment:
  • Fundamentals remain robust, but the company's debt levels may raise concerns with rating agencies.
  • Pro-forma net debt after acquisition is CNY9 billion, and leverage ratio is 2.2x, which could trigger a Moody's downgrade.
• Recommendation: Revised from Overweight to Marketweight due to the company's relatively expensive valuation and potential overpayment for acquisitions.
• Key Risks:
  • Shifting consumer preferences.
  • Overpaying for popular games.
  • Potential ratings downgrade if the company fails to de-leverage.

Key Risks and Outlook

• Market Volatility: Central banks may need to take more action to stabilise markets.
• Currency Instability: The GBP's weakness is a major concern.
• Rating Downgrade: The UK's credit rating has been downgraded by Moody's to "Negative", while S&P and Fitch have also expressed caution.
• Global Economic Impact: If more countries follow the UK's lead, the economic fallout could be severe.

Summary

The Brexit decision has triggered a global sell-off in risk assets, with the GBP plummeting and European equities suffering. While the immediate reaction is clear, the long-term impact depends on the outcome of the UK's exit negotiations and the broader geopolitical and economic implications. The document also highlights the potential of MAGIC and Tencent as investment opportunities, despite the uncertainties in the market. Investors are advised to remain cautious and monitor developments closely.