Money manager Lion Global is betting Singapore banks will benefit from a resurgent economy and rising interest rates but warns that Malaysia may not push through much-needed reforms, the manager of its Singapore/Malaysia fund said today.

Lion, an arm of Oversea-Chinese Banking Corp’s (OCBC.SI) insurance unit Great Eastern (GELA.SI), is also bearish on palm oil stocks and has cut its exposure in recent months, fund manager Kelvin Wong told Thomson Reuters in an interview.

“Within the Singapore banking sector, we like DBS (DBSM.SI) for its undemanding valuations,” Wong said. 

He added that non-performing loans have peaked for Singapore banks, and lending and capital markets should continue to pick up in the second half, boosting profits. 

“DBS has the lowest loan-to-deposit ratio, and hence is the biggest beneficiary of a SIBOR increase. Eventual monetary tightening and the impact of higher interest rates is a catalyst that the market has yet to fully appreciate,” he said. 

 

Singapore's interbank offered rate, or Sibor, is now about 0.7% for three months, and a rise in lending rates will boost DBS more than OCBC and United Overseas Bank (UOBH.SI) as DBS' loan-to-book ratio was 71% at end-2009 versus slightly over 80% at its two rivals. 

 

Banks with surplus deposits typically park their extra money in the interbank market to earn interest. 

 

Lion, which manages $28 billion in assets, was on Thursday named the top-performing Singapore/Malaysia fund manager over three, five and 10 years by The Edge Singapore newspaper and Lipper, a unit of Thomson Reuters. 

 

According to Lipper, Lion’s fund returned an annualised 5.6% in Singapore dollar terms in the 10 years to end-2009. For 2009, it was the best performer among nine Singapore/Malaysia funds tracked by Lipper with a gain of 70.6%. 

 

The fund's top Singapore holdings include DBS, OCBC and Singapore Telecommunications (STEL.SI), while its favourite among smaller firms is CSE Global (CSES.SI), a systems integrator for industries such as oil and gas, telecoms and healthcare. 

 

“In the near term, we see strong growth in its major business segments. The balance sheet is healthy with robust cash flows and supported by reasonable valuations,” he said of CSE. 

     

On Malaysia, Wong said that while the ruling Barisan Nasional was unlikely to lose power anytime soon, Lion saw political risks in terms of the government adopting populist measures rather than push through economic reforms it has promised. 

 

“The outflow of funds by Malaysians is a trend which is worrisome,” he said, adding that a turnaround in fund flows will take place only when reform measures are put in place. 

 

Malaysia has suffered outflows of US$61 billion ($85 billion) in the past two years even as neighbouring Indonesia has seen investments surge. The government has pledged various reforms such as ending fuel subsidies and introducing a goods and services tax to address the fiscal deficit but recently put the proposals on hold. 

 

Wong added that he was underweight the palm oil sector, which includes Singapore firms such as Wilmar (WLIL.SI) and Malaysia’s Sime Darby (SIME.KL), as he expects crude palm oil (CPO) prices to be weak in the near term due to strong soybean harvests in Latin America. 

 

Looking ahead, Wong said he expects most regional stock markets, including Singapore and Malaysia, to trade higher this year in line with economic growth, but with increased volatility. 

 

“We expect 2010 to be a choppier year for equity markets, as seen in the first two months of the year.”