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Slow grind awaits Singapore markets despite second wind from lockdown easing

Ng Qi Siang
Ng Qi Siang • 6 min read
Slow grind awaits Singapore markets despite second wind from lockdown easing
Singapore markets are down 4.7% for 3Q2020 and 23.4% down for the year 2020.
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To the casual observer, life in Singapore seems to have regained some semblance of normalcy since the harrowing two months of circuit breaker measures. Once empty streets are once more bustling with cars while shops and restaurants have reopened for business once again. The spectre of Covid-19, which continues to ravage the global economy, appears to be nothing more than a distant nightmare.

According to CGS-CIMB analysts Lim Siew Khee and Jeremy Ng, retail sentiment remained buoyant as of August, with inflows across the board, with the pair naming financials, telcos and consumer cyclicals as their favourite sectors. Non-domestic oil exports (NODX), says CGS-CIMB analysts Lim Siew Khee and Jeremy Ng, has grown 7.7% y-o-y in August, exceeding their initial 3.4% expectation. This NODX recovery, they argue, was aided by electronics, non-monetary gold, specialised machinery and food preparation sectors.

Excluding biomedical industries, industrial production in August rose 15.3% y-o-y, underpinned by a 44.2% spike in manufacturing y-o-y as a result of a pickup in global economic activity and stockpiling following the US’s ban on suppliers to Chinese tech giant Huawei. Primary home sales also rose by 11.8% y-o-y and 16.3% m-o-m, with half coming from Rest of Central Region (RCR) projects and another 40% from suburban projects.

But PhillipCapital’s head of research Paul Chew highlights that 3Q2020 has been anything but easy for Singapore markets, which was down 4.7% for 3Q and 23.4% down for the year. Worse, he says, the Straits Times Index underperformed regional peers as only a third of its component stocks reported gains this quarter. A bifurcated market has emerged - aside from consumer staples, healthcare (gloves) and electronics, most sectors were badly hit by Covid-19.

“The Singapore economy has bottomed as its lockdown eases. However, after the initial lift-off, recovery has been on an upward grind,” Chew writes in a broker’s report on Oct 2. As restrictions in international travel are expected to remain, earnings for multiple sectors like aviation, gaming, hospitality, healthcare, telecommunications and retail are likely to see depressed earnings without tourism. About 20% of FSSTI stocks are exposed to these sectors.

Banks are likely to be hard hit due to a triple whammy of low interest margins, spikes in credit provisioning and weak dividends, says Chew. “Banks gained some price momentum for their attractive yields, but share prices were later kneecapped by limitation of their dividends this year to 60% of last year’s level,” he writes. In total, at least two-thirds of the FSSTI will see weakened earnings this year.

Technical analysis appears to bear this out - Lim and Ng reporting a growing bearish momentum on the FSSTI since a bearish break below the uptrend line in July. The index declined 2.6% in September, with a recent bearish breakout below the 2,480-2,500 critical support area hinting that the next leg of stock sell-offs seems ready to bring the STI’s target to the 2,310 support area. “In case of any near-term rebound, the 20- and 60-day moving average at the 2,500 to 2,540 area would likely limit the upside,” the pair report.

But investors should count their blessings - in contrast to the rest of the developed world and the region, Singapore’s Covid-19 community spread is in the low single digits with a weekly average of 1. Low interest rates have also seen the dividend yields on the Singapore market stand out as investors embark on a desperate search for yield. Despite fears of a contested US election, Chew is bullish on the prospects of a Biden win, which he sees as positive for Asian assets and currencies and a possible prelude to less belligerence in US foreign and trade policy.

“With interest rates so depressed, equities are the most viable investment option. Rates for 12-month Singapore dollar time deposits hover at 0.15% - 0.25%,” remarks Chew. With forecast dividend yield for the STI now at 4%, the gap between deposit rates and dividend yields suggest one of the cheapest equity markets since the Global Financial Crisis. This is likely to persist for the foreseeable future.

Chew believes however that corporate dividends can only grow after the second epoch-defining recession in two decades. “Only 45% of corporate earnings are paid as dividends. The remaining 55% is retained for growth, historically at 8% which is the STI’s return on equity,” he writes. The STI’s 23.4% retreat in 2020 serves as another margin of safety for investors, promising a dividend rebound once the Covid-19 headwinds have subsided.

Sectors largely traded range-bound with outperformance from utilities and maritime, say Lim and Ng, while consumer services and telcos underperformed. August continued to see a net outflow of funds, they observe, with institutional investors loading up on REITS and, less commonly, consumer cyclicals and resources. Despite foot traffic having still some ways to go in recovering to pre-Covid-19 level, retail sentiment remains buoyant, with the two analysts recommending financials, telcos and consumer cyclicals as preferred assets.

“FSSTI outperformers for Sept were, SCI (removal of SMM overhang, cheaper than regional peers), YZJSGD (new orders), and PLIFE, while DFI (overbought previously), ST and SATS (grounding of travel) underperformed. In the mid-large cap space, HPHT led gainers due to high current dividend yield and better prospective business conditions, while SMM (post-rights) and Riverstone (placement out by insider) rounded up the underperformers,” they write.

Chew expects an uneven recovery going forward, underweighting businesses dependent on cross-border travel and favouring and transportation, property, electronics and REITs. “As the economy reopens in Singapore, the immediate beneficiary should be land transport. More group gatherings are expected to lead to more travel for business, classes, work, leisure and worship,” he says. A rise in remote working arrangements has seen a boost in cloud, edge and mobile computing demand as firms swiftly adapt their organisations to adapt to this new style of work.

Real estate has surprisingly seens a slight rise in new unit sales this year as developers show greater optimism on product pricing. In the REIT space, Chew thinks that the 8% yields offered by Singapore-listed US REITs show the most profits. These counters enjoy long leases, quality tenants and Class A buildings, he observes, pointing out that office tenants have been most immune to the spectre of unemployment in the US.

As of 3.20pm, the FSSTI is trading 8.21 points down at 2492.53. Its price-to-earnings (P/E) ratio is 18.85 while price-to-book (P/B) ratio is 0.8615. Earnings per share (EPS) is currently $132.68.

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