Published September 8, 2008
Combine high-yield and high-beta stocks
Lehman offers this strategy to investors seeking security but eyeing upturn gains
By EMILYN YAP

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FOR investors who want protection in today's volatile market, but also some exposure to catch a possible upturn, a portfolio combining high-yield and high-beta stocks as Lehman Brothers recommends may be what they need.

Stock gazing: With rising input costs and softening external demand, expectations of earnings growth also remain too optimistic which could lead to more downgrades
The portfolio is part of several market strategies suggested by the research house in a report dated last Friday, prepared by Singapore and South-east Asia equity research head Lim Jit Soon and his team.
Under the theme 'More Downside, Stay Defensive', the report points to more weakness in the local market for the rest of the year amid global economic headwinds and more earnings downgrades.
Lehman regional economist Rob Subbaraman cut his Singapore GDP forecast for 2008 to 3.2 per cent from 4.3 per cent. This latest estimate is lower than the government's forecast of 4-5 per cent.
With rising input costs and softening external demand, expectations of earnings growth also remain too optimistic, says the report. This could lead to more downgrades.
ST Engg, Keppel Corp and Suntec Reit are top picks from the conglomerates and Reits sectors.

'We believe the market will continue to consolidate at lower levels going into 2H08, and perhaps also into early 2009,' the report notes, adding that the Straits Times Index (STI) could reach 2,500 by year-end. The STI closed at 2,574.21 last Friday, more than 20 per cent down from a year ago.
In such an environment, Lehman recommends a portfolio which can 'behave like a convertible bond - protected on the downside with good dividend support, but have upside when market sentiment improves'.
This portfolio comprises eight counters - ST Engineering (ST Engg), Keppel Corp, Suntec Real Estate Investment Trust (Reit), United Overseas Bank (UOB), StarHub, Singapore Press Holdings (SPH), Singapore Exchange (SGX) and CapitaLand.
ST Engg, Keppel Corp and Suntec Reit are top picks from the conglomerates and Reits sectors, both favoured by Lehman for resilient earnings and high dividend yields.
The research house also finds strong defensive plays in UOB, StarHub and SPH, although it is neutral on banks, telcos and media companies as a whole.
'We believe there is value in complementing a high-yield defensive portfolio with higher-beta stocks that have been sold down sharply, but which could recover sharply when sentiment improves,' explains the report. For this purpose, SGX and CapitaLand are added to the portfolio.
Although CapitaLand is part of the suggested portfolio, Lehman recommends avoiding developers in general. The report notes that poor economic conditions and increased supply could undermine capital values and rents across the residential and office sectors.
Lehman also suggests that investors avoid the transport and technology sectors.