Selective Yield Plays Remain Attractive

Land transport stocks may experience margin squeeze due to higher electricity and diesel costs, but
their yields remain attractive. We have BUY calls on CD - ComfortDelgro(Target: S$2.00) and SMRT (Target: S$2.08),
with current FY yields of 6.6% and 4.8% respectively. In addition, Suntec REIT (Target: S$2.05), which
will record positive rental reversions going ahead, offers current FY yield of 5.8%. SPH (Target:
S$5.00), with profit recognition from Sky@Eleven over the next two years, also offer a high yield of
7.0%.

Fundsupermart Recommendation on 20.06.2008

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June 20, 2008 Our Market Recovery Portfolio Stock markets have plunged from their highs in 2007. Fears over the impact of a US slowdown are fuelled by an endless barrage of negative news about the US economy. Globally, investor sentiment is negative. The endless debate over whether the US is in a recession has been covered to death by the media, and investors have grown numb. Author : FSM Research Team

Our Market Recovery Portfolio Stock markets have plunged from their highs in 2007. Fears over the impact of a US slowdown are fuelled by an endless barrage of negative news about the US economy. Globally, investor sentiment is negative. The endless debate over whether the US is in a recession has been covered to death by the media, and investors have grown numb. Table 1 Fund Investment Amount Percentage of Portfolio Equity Portfolio DBS Shenton Global Opportunities Fund $4,000 40% First State Asian Growth Fund $2,000 20% Fidelity Global Financial Services (EUR) $2,000 20% Bond Portfolio Fidelity Funds �C European High Yield Fund $2,000 20% Total $10,000 100% Source: Fundsupermart.com compilations After a volatile start to 2008, Asian markets stabilised as strong first quarter earnings results suggest an overdone sell-off, and money is slowly re-entering the markets. Investors should now focus on the recovery of stock markets. To help investors capitalise on the recovery, we have constructed a diversified recovery portfolio. This article discusses our suggested investment ideas during the market recovery. The portfolio is targeted at moderately aggressive or aggressive investors, with a large exposure (80%) to equites. However, given the attractive valuations of equity markets, even balanced investors should consider a larger equity position. The allocations are spread out amongst sectors which we feel will perform well as the market recovers. Global Equity To construct a diversified portfolio, we recommended allocating a significant proportion (about 40%) of the portfolio to developed markets, as this adds stability to the overall portfolio. To achieve this, we recommend the globally diversified DBS Shenton Global Opportunities Fund. In addition to market diversification, the fund is also diversified across asset classes with exposure to gold and commodities (as of end March 2008). It achieved a gain of 31.9% in 2007 (in SGD terms, with dividends re-invested), a highly commendable performance considering its diversified nature, and we believe the fund will continue to perform strongly in the anticipated market recovery. Asia ex-Japan Equity The Asia ex-Japan region remains a growth-centric region, and we are very positive on Asian equities. We believe there are opportunities here, as a recovery will see money flowing back into areas of high growth potential. Collateral damage from the US subprime crisis has caused steep falls in many Asian markets. The resulting valuations are attractive, with estimated PE ratios of 14.1X for 2008 and 12.9X for 2009 (as at 13 June 2008). Instead of selecting specific countries, we recommend a diversified regional fund like the First State Asian Growth Fund, which should ride the recovery wave in Asian markets. The fund has also shown resilience during downturns, falling just 11% in the first quarter of 2008, compared to its peers' average of 17.4% (in SGD terms with dividends re-invested). High Yield Bond Despite the aggressive nature of the recovery portfolio, 20% has been allocated to high yield bonds as we believe that credit spreads have widened too quickly in the current market turmoil, and a recovery in the financial markets will see bond prices increase as the credit spread narrows. Positive events, which include credit rating upgrades, improved earnings, management changes and positive product developments, tend to have a positive impact on high yield bonds as they are more sensitive to the economic outlook and earnings than investment grade corporate bonds. Instead of high yields, our recovery portfolio looks to the capital appreciation of high yield bond funds when the economy eventually recovers. Thus we are taking up the fund with an annual, rather than monthly, payout feature. We recommend the Fidelity Funds �C European High Yield Fund (Annual Distribution Class) to be included in the portfolio. (Note: For more information on high yield bonds, please refer to our article: "Good Payouts from High Yield Bonds Now".) Global Financials The global financial sector bore the brunt of the subprime crisis, with stocks of many financials falling to their lowest levels in years. While many may argue that the assets of the banks have declined due to the huge write-downs, our sensitivity analysis of the Price/Book (PB) ratios of both US and European financial institutions has shown PB ratios to be lower than average, even after factoring in further write-downs. US financials are trading at their most attractive levels in 17 years, with a PB ratio of 1.39X (as at end May 2008), The only time US financials traded at lower PB ratios was during the Savings & Loans Crisis, where PB ratios hit a low of 0.94X in September 1990. Similarly, European financials are also trading at attractive PB ratios. As at end May 2008, the PB ratio for European financials was 1.43X, lower than the average of 1.87X since October 1996. While the earnings of some financial institutions are not expected to be strong in the near term, we feel that low PB ratios present an opportunity for investors to accumulate global financials with a long-term view. The Fidelity Global Financial Services (EUR) makes up the supplementary portion of our recovery portfolio, as we see tremendous upside potential in the sector when markets recover and confidence (and liquidity) returns. (Note: For more information on global financials, please refer to our articles; "Global Financials Back In Contention - Part I " and "Global Financials Back In Contention - Part II".) Conclusion As value investors, we do not encourage investors to time the market, but to buy when valuations become attractive. We do see significant value in current markets, and our recovery portfolio encompasses this idea with a diversified core portfolio, and a targeted investment in global financials in the supplementary portfolio. As it contains the various core markets, the recovery portfolio forms the building blocks for a longer term investment, so investors can add on to the portfolio in the future. For our views on the market recovery, please see 'Riding On The Market When It Recovers'.