With the momentum of Singapore market earnings upgrades waning over the past few quarters, banks could similarly be losing some momentum, say CLSA analysts, who suggest a rotation to REITs and tech in their 2H2023 Singapore strategy outlook.

Market earnings expectation changes have remained muted over the past months, say analysts Neel Sinha, Yew Kiang Wong and Horng Han Low, with upgrades from a net interest margin (NIM) upcycle that has “filtered through” the market in the past two quarters.

As a result, expectations for the other key sectors are not seeing any material changes through the 1Q2023 reporting season. The analysts note that the consensus for index earnings growth in 2023 and 2024 is an estimated 20% and 4%, with similar expectations for the stocks within CLSA’s coverage.

The Singapore market’s 12-month forward dividend yield of 5.2% and 5.4% for 2023 and 2024, which is 1 standard deviation (s.d.) above the 10-year mean. In a relatively strong Singdollar environment compared to regional currencies and with US Fed Fund Rate (FFR) expectations moderating over several quarters, they believe this should continue to be a “draw” for investors.

According to the analysts, the plateauing FFR also means that among the key sectors in Singapore, the NIM upcycle for banks is flattening out “sooner than expected”. “As a result, banks lowered their NIM guidance to largely flat or slightly lower for the full year as asset yields flatten, but funding costs still have some upward creep to go,” they explain.

Although banks’ NIM growth momentum is declining, they note that rebound in wealth fees provides an offset in a sector that is very “well owned”, adding that 2023 is still poised to be a new record profit year.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/rhb-upbeat-raffles-medicals-contract-win-providing-medical-services?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>RHB ‘upbeat’ on Raffles Medical’s contract win for providing medical services at Connect@Changi</a>

Meanwhile, with fund-raising risks from REITs fading, the analysts believe that 2H2023 will be an “opportune time” for investors to shift some weighting from banks to REITs. They have moved from an underweight to an overweight stance on S-REITs, with the interest rate hike cycle nearing its end.

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The analysts say that although the risk of raising dilutive equity to recapitalise balance sheets remains for highly-leveraged and office-centric REITs, the overall risk for the S-Reits basket is subsiding as operational metrics remain firm.

In addition, tech and internet stocks, which have been in the “doldrums” for the past 12 to 18 months should see some recovery, driven by newfound “profitability target mantras” of recent quarters, say the analysts.

They explain: “In the past few quarters, a number of the relatively young internet and tech stocks in the region shifted focus from growth to profitability and achieving self-sustaining cash flow, given macro slowdown factors and an unfriendly funding environment.”

Measures taken have involved cutbacks on sales, marketing and general and administrative expenses, slowdowns in expansion and increases in take-rates.

In Singapore, Grab looks to be on track to achieve its adjusted ebitda breakeven target by year-end, while Sea Limited has already achieved this target several quarters ahead of schedule. As such, both companies are “high-conviction buys” for the CLSA analysts.

As banks’ momentum wanes, investor interest could return to S-REITs and tech stocks: CLSA

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