Heading into a year of great uncertainty for the global market, OCBC Investment Research strategist Carmen Lee says that it would be “prudent” for investors to have some exposure to the unexciting but stable Singapore market.
In her strategy report dated Jan 18, Lee says that although lacking “excitement” is a common charge levied on the Singapore market, there is still value to be found especially in a macroenvironment of persistently elevated inflation and high interest rates.
According to her, Singapore is “stable, not boring”, and will serve as a good diversifier since it offers a stable group of core value stocks which will help to reduce the overall volatility of any equity portfolios.
Last year, the Straits Times Index (STI) ended the year with a gain of 4.1%. With a dividend yield of 4.1%, this means that the total return for the year was 8.2%. “This is remarkable especially in view of the massive losses for equities and bonds globally in 2022. Additionally, global equities saw huge fluctuations within the year. Based on the MSCI World Index, global equities shed almost 29.0% from 2022’s high to 2022’s low, before recovering with a gain of 12.4% from the 2022 low to close the year still in negative territory,” says Lee.
She notes that the STI saw a narrower trading range, shedding 14% from its 2022 high before adding 9.5% from its 2022 low to close the year in positive territory.
Says Lee: “Continuing last year’s strong performance, the STI started the year on a slightly positive note, largely buoyed by optimism surrounding China’s reopening which is widely expected to benefit this region.”
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“With the reopening and the return of Chinese tourists, this will help to boost revenues for tourism-related industries, including hotels, F&B outlets, leisure, gaming, entertainment, retail and other consumer-related products and services. Airlines and transport companies are also likely to benefit from the higher inflow of visitors to the country,” she adds.
She believes that while headwinds remain, tailwinds are beginning to emerge. Year-to-date, the STI is up 3.42% as of Jan 26. With the cautious global outlook ahead, the P/E valuation for the STI is now at almost a 2-year low despite some tailwinds from China’s re-opening, notes Lee.
Current valuations are at 11.1x price-to-earnings ratio (P/E), 1.1x price-to-book value (P/Bv) and with an estimated dividend yield of 5.1% for the STI. “These are undemanding and we believe it has also priced in some pessimism about the global outlook in 2023,” she adds.
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With these valuations, Lee sees core Singapore blue chip stocks offering stable earnings growth in 2023. Some of her Singapore “focus ideas” include CapitaLand Ascendas REIT (CLAR), CapitaLand Ascott Trust (CLAS), ComfortDelGro (CDG), DBS Group Holdings, Frasers Logistics & Commercial Trust (FLCT), Frasers Centrepoint Trust (FCT), Keppel Corp, Mapletree Industrial Trust (MIT), Netlink NBN Trust, Singapore Technologies Engineering (ST Engineering), Singapore Telecommunications (SingTel), Thai Beverage (ThaiBev), United Overseas Bank (UOB), UOL Group and Venture Corp.
However, Lee also believes that part of the reopening optimism has already been priced in for stocks. For example, CLAS, which owns hotels, serviced residences and other hospitality assets, hit a recent low of 87 cents in October 2022. Since then, it has recovered about 25% to close at $1.08 as of Jan 25.
Similarly, Singapore Airlines (SIA) has also posted a strong recovery from the recent low in October 2022, when it fell to a low of $4.99. Recent reopening optimism has buoyed sentiment for the stock, which closed at $5.98 on Jan 25.
Meanwhile, she is of the view that Singapore’s earnings cuts in 2023 will be modest, if any, compared to other markets, largely due to the support from the improvement in earnings from the banking sector.
As at 12.56pm, the STI was trading 14.47 points or 0.43% up at 3,367.24.