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Bleak external outlook but Singapore offers defensive shelter, says Maybank Securities

Samantha Chiew
Samantha Chiew8/18/2022 03:11 PM GMT+08  • 7 min read
Bleak external outlook but Singapore offers defensive shelter, says Maybank Securities
Raffles Medical Group should benefit from the Covid reopening, with foreign patient load and elective procedures on the increase. Photo: Raffles Medical Group
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While Singapore’s economy in the first half had enjoyed a “powerful” post-pandemic boost, this tailwind is expected to dissipate in the second half of the year. “We think global headwinds will start to dominate,” warns Maybank’s co-head for macro research Chua Hak Bin.

Maybank sees Singapore’s GDP growing by just 2.8% this year, slightly below the lower end of the 3% to 4% official forecast range announced by the Ministry of Trade and Industry on Aug 11. This forecast range is also narrower and lower than the earlier 3% to 5% range as the global environment has “deteriorated”, says Chua.

Challenges including inflationary pressures, the ongoing war between Russia and Ukraine, as well as higher interest rates weigh down on the global economy and are likely to persist well into the second half of the year, adds Chua, who was speaking at the recent webinar “Singapore: Navigating Growth and Inflation”.

In its bid to curb inflation, the US Federal Reserve Board (Fed) has hiked the Fed Funds Rate. These hikes have been described by Chua as “shocking” as they have raised borrowing costs to a level not seen in two decades and are likely to hit 4.5% next year, triggering a recession.

Chua says the 10-year three-month US treasury yield spread is still at positive levels at this point as the Fed continues to hike up rates (see Chart 1).

However, if the Fed does move rates closer to where the bond yields are currently, Chua expects a recession to materialise about 12 months later. If the Fed Funds Rate does cross 3.5%, he believes that a US recession is likely and the 10-year three-month yield will turn negative. Once the US is in a recession, Chua believes that Singapore may follow suit and enter a recession too. As that happens, the Singapore dollar is also expected to appreciate further as the government tries to control the effect of rising import costs.

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Defensive shelter

Thilan Wickramasinghe, head of research at Maybank Securities, notes that Singapore’s growth is unlikely to be spared due to returning inflation, rising interest rates, Russia-Ukraine geopolitics and China’s continued zero-Covid-19 strategy. Yet, the market has held up, largely outperforming regional and global peers, as Singapore is seen to provide some shelter from near-term global challenges while structural changes offer longerterm growth.

“Singapore’s value-heavy mix, which has underpinned underperformance in a low-interest rate environment in the aftermath of the Global Financial Crisis, should provide defensive shelter as rates and inflation rise,” says Wickramasinghe.

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Across most sectors, he expects rising prices to be passed through while low-gearing levels (43% of active listings are net cash) should offer some shielding from rising rates. These could cumulatively protect against major margin erosion in the shorter term.

In the longer term, he expects rising market relevance and a higher share of ESG investment to weigh on the market.

Meanwhile, earnings are expected to also grow by about 10% in 2022 and 15% in 2023, with limited downgrades seen in the wake of 1Q2022 results. At present, the STI forward P/E trades –1 standard deviation below the long-term mean.

“Medium term, Singapore should enjoy increased structural flows from rising M&As, corporate restructuring and increasing ESG weightings. This should enhance market relevance going forward, we believe,” says Wickramasinghe, while noting that increased capital relocations from North Asia, high vaccination rates, as well as “homecoming” and “neutral market” listings are some nearterm catalysts.

Stock picks

Wickramasinghe likes the sectors that offer defensive and clear earnings and dividend visibility: These are banks & financials, healthcare, industrials, property developers, hospitality REITs, tech manufacturing and telcos.

Some catalysts that would support continued re-ratings include relocation of capital flows from North Asia, Covid-19 resilience, overseas expansion, as well as “homecoming” and “neutral country” listings. Downside risks include persistent inflation, new Covid-19 variants and higher taxation.

For more stories about where money flows, click here for Capital Section

Wickramasinghe’s top picks in Singapore are DBS Group Holdings, Oversea Chinese Banking Corporation (OCBC), CDL Hospitality Trusts (CDLHT), ComfortDelGro (CDG), CapitaLand Investment (CLI), Singapore Telecommunications (Singtel), ST Engineering, Raffles Medical Group and Venture Corporation.

Wickramasinghe is positive about the banks and broader financial sector as the lenders have de-rated thus far this year on fears of slowing regional growth affecting loan demand. “We believe loans could see recovery as reopening drives capacity additions and responses to supply chain bottlenecks,” he says.

More importantly, a hawkish Fed and regional central banks battling inflation should drive higher benchmark rates supporting net interest margins (NIM). He believes that 2022 provisioning coverage should come in at 97% and asset quality should remain benign, credit charges are expected to remain low, even under a recessionary backdrop. This should hence support strong dividend certainty.

In the consumer sector, reopening remains a key theme as tourism resumes. “This should continue to drive footfall/earnings growth in 2022, while any average selling prices (ASP) increases should also help to offset some margin pressure given the higher energy/commodities/ labour costs,” says Wickramasinghe. Retail sales, which traditionally enjoy a strong lift from tourists, were up 14.8% y-o-y in June.

Singapore’s gaming sector too is expected to benefit from the reopening but with the lack of China tourists and intensifying regional competition, Wickramasinghe is keeping “neutral” on the gaming sector.

The healthcare sector is another positive, following the Singapore government’s announcement to restructure the local healthcare ecosystem to lighten the burden on public hospitals and make healthcare expenditure more sustainable. Covid-19-related activities are also expected to taper off progressively as Singapore moves towards an endemic.

With tourism resuming, medical tourism should also see a recovery with foreign patient load and elective procedures increasing, thereby benefitting Raffles Medical Group.

The industrial sector is expected to see some growth too. The resumption of aviation services would fuel the demand for return-to-service checks and restore scheduled maintenance for aircraft, which would cascade to an uptick in aircraft maintenance, repair and overhaul (MRO) revenue for ST Engineering sometime in 2023.

Industrial conglomerates are poised to ride the renewable energy boom as ESG considerations in the market grow and demand for cleaner energy sources accelerates. Sembcorp Industries plans to grow its net profit contribution from its sustainable solutions portfolio from 40% in 2020 to 70% by 2025. Keppel Corp is also on track to unlock capital to be redeployed in renewables, clean energy and decarbonisation solutions.

On the offshore and marine (O&M) front, rig day rates and utilisation rates remain relatively strong. With rig demand remaining robust and supply continuing to erode as older rigs are removed, it appears that the trend towards better industry fundamentals continues apace.

On the other hand, recent property cooling measures from Dec 16, 2021, onwards have dampened the market sentiment and placed brakes on rising property prices and hence caused demand to fall from higher acquisition costs. But the downside is cushioned by low unsold inventory and a limited launch pipeline in 2022 and 2023.

The property REITs are attention-worthy too as sector metrics are improving with resilient occupancies and recovering rent. “Our rental growth forecasts are led by a 13% two-year CAGR for offices, and 6% for retail assets. Industrial rents have bottomed and should climb at 2%–5% per annum. RevPARs could jump 13%–17% YoY in 2022–2023, with upside risk from China’s reopenings,” says Wickramasinghe.

As for technology manufacturers, Wickramasinghe prefers upstream names (those with semiconductor equipment exposure) to downstream names (contract manufacturers with exposure to a variety of end-markets) as he believes the former are beneficiaries, or at least better sheltered from chip shortages. He also has a broadly positive outlook on the sector.

This year could see the telco space finally improve, as FY2021 and FY2022 earnings have come in within expectations, thanks to stable mobile service revenue among the incumbents’ telcos, good 5G takeup rates and resumption of roaming revenue.

Photo: Raffles Medical Group

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