US Stocks Ripe For The Picking / Key Stocks And Risks To Look Out For

Foreword from ShareInvestor

This article “US Stocks Ripe For The Picking / Key Stocks And Risks To Look Out For” by Grace Leong was first published in The Straits Times on 08 Feb 2015 and is reproduced in this blog in its entirety.

An upbeat outlook for the US means it is time to study counters with better returns, equities

The United States economy is powering ahead while much of the rest of the world slows. So the time may be ripe for Singapore investors to grab a slice of that American pie, especially in the light of a recent share correction there.

It’s not as if there are that many alternatives.

While the US economy is rolling along at the fastest clip in a decade, Europe is on the brink of its third recession since 2008, China is still restructuring its economy and a consumption tax hike has crimped Japan’s recovery.

Outlook For The US

US equities kicked off the year on a negative note as large-cap multinationals disappointed on the back of the strong US dollar, although Amazon and Apple did beat expectations.

In addition to the challenge of an appreciating greenback, potentially higher labour costs represent headwinds for US corporate margins over the next few quarters, despite the benefits of lower energy costs, notes Mr Sean Quek, head of equities research at Bank of Singapore.

But this presents buying opportunities. The stronger dollar should boost firms whose revenues are derived primarily from within the US, more than export-based companies, he added.

This is especially so for companies that source inputs from outside the US as a stronger dollar helps lower raw material costs.

Take Starbucks, which buys coffee beans from Africa, Latin America and the Asia-Pacific, and yet derives more than 70 per cent of its revenue from America. It is benefiting from the stronger US economy.

Conversely, companies with large revenue exposure outside the US could be hit by the stronger dollar.

Procter & Gamble, which derives 60 per cent of its revenue outside the country, disclosed that global currency devaluations resulted in a US$1.4 billion (S$1.9 billion), or 12 per cent, plunge in net profit for the last fiscal year.

Russia, Ukraine, Venezuela, Argentina, Japan and Switzerland accounted for more than US$1 billion of that drop.

Why Buy Now?

With the US dollar strengthening against the Singapore dollar, capital gains or dividends will be worth more when converted back to the Singdollar.

In addition, some US blue chips – many are household names here – have seen price corrections recently, says Mr Benjamin Goh, retail market strategist with CIMB Research.

“Some of the biggest names that have underperformed – Microsoft, Caterpillar, P&G and Pfizer – are companies that have large overseas exposure,” he notes.

“Investors can still consider these stocks because they are now cheaper than a few weeks back. For investors with lower risk appetites, they can look at companies which make most or all of their revenue domestically, such as telcos and utilities.”

What Are The Risks?

But Mr Goh warns that one risk is that the current US earnings season may throw up more negative surprises, indicating that the strong US dollar is cutting into earnings more sharply than previously thought.

If this happens, the profit-taking may be more pronounced, he adds.

Mr Ronnie Liew, DBS Bank’s vice-president of business development, equity products, notes: “As with any foreign investments, investors should be mindful of risks such as currency fluctuations, political and economic and social developments.

“Investors should monitor for changes in the legal and taxation systems.

“For example, if a tax was introduced on stock exchange transactions by foreigners, this would affect your returns and impact the value of your investments.”

What To Buy?

The more defensive health-care and consumer staples did well last month despite increased volatility. On the other hand, energy and finance sectors were hit by the oil price slump and disappointing results so far from the US banks, Mr Quek says.

But he is upbeat on the consumer discretionary segment: “The improving US economy and labour market have started to translate into higher wages.

“These would in turn boost consumer spending, especially as household balance sheets have improved significantly over the past few years. Lower energy costs would boost disposable income.”

Among its key picks are Ford Motor and Las Vegas Sands, he said.

He notes that sentiment for energy plays remains poor even though value has started to emerge.

“In particular, we see further near-term volatility for oilfield services and equipment players as capital expenditure cuts set in,” Mr Quek says.

Nonetheless, investors with a longer-term investment horizon should see the pull-back as a buying opportunity for quality energy plays such as ExxonMobil and BP, he says.

Bank of Singapore has maintained a neutral call on financials, saying US banks, led by Bank of America, came under selling pressure last month, triggered in part by disappointing fourth-quarter results, says Mr Quek.

“Despite the pull-back in US banks, we continue to prefer European and UK banks over their US peers as we see the former benefiting from the recently announced quantitative easing programme by the ECB.

“Buy-rated names here include BNP Paribas and Lloyds Banking,” he says.

How To Buy US Stocks

Singaporean investors can invest in US stocks by setting up an equity trading account with financial institutions or any of the nine retail brokerages here.

They will have to fill out a W-8BEN form for the US Internal Revenue Service (IRS).

It establishes that the investor is neither a US citizen or resident and is not connected with the conduct of a trade or business in the US.

They must also fill out the Foreign Account Tax Compliance Act (Fatca) form to certify their citizenship and tax residency status.

All foreign investors trading into US stock exchanges have to declare their tax residency to US authorities.

Singapore investors who are not US residents will not be taxed, but they will be subject to transaction fees when they trade stocks.

They will also have to acknowledge receiving a copy of the Risk Warning Statement from their broker and that they understand the risks associated with such products. They will have to pass a competency check if they want to trade in more sophisticated products.

What Are The Fees And Charges? 

Investors using OCBC to trade on US exchanges pay a minimum commission of US$30, or 0.415 per cent, of the contract value, whichever is the higher, for broker-assisted transactions.

Using OCBC’s online brokerage costs US$20 or 0.3 per cent, whichever is the higher.

Investors going through DBS Vickers for phone-assisted transactions pay a minimum commission of US$35 or 0.45 per cent, whichever is the higher.

Online costs US$25 or 0.3 per cent of the trading principal, whichever is the higher.

In addition, when investors sell stock, they must pay a transaction fee of 0.00221 per cent to the US Securities and Exchange Commission. It is computed based on the gross contract value (before inclusion of brokerage fees).

These fees are charged each time you buy and sell stock.

If investors use OCBC, they also need to pay a foreign share custody fee of $2 per counter per month. But this may be exempt under certain conditions, including if they make at least six transactions per quarter.