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The barbell strategy might prove heavy-going in Singapore

Jovi Ho
Jovi Ho • 6 min read
The barbell strategy might prove heavy-going in Singapore
Research analysts from RHB Group, Morgan Stanley and CGS-CIMB share their SGX stock picks for the latter half of the year.
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Maintaining the barbell approach recommended by analysts is proving heavy this year.

Singapore investors not only have to contend with new waves of Covid-19 in July, as warned by health minister Ong Ye Kung, but also consider a host of worries abroad.

RHB Group Research analyst Shekhar Jaiswal lists them in his May 9 note: supply chain disruptions caused by the Russia-Ukraine war, China’s zero-Covid-19 policy, uncertainty over the rate of rise in inflation and the resultant expectations of rapid rises in interest rates for the rest of 2022.

That said, he still recommends “a mix of growth and defensive stocks” that form the metaphorical barbell.

Broadly speaking, Jaiswal is overweight on REITs, along with the consumer, financial, industrial, transport, manufacturing and tech sectors on the Singapore Exchange (SGX).

He is neutral on plantations, healthcare, real estate and telecom and media.

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Jaiswal has added Venture Corp to his top picks after a strong 1QFY2022 ended March 31 that bested expectations, with earnings up 29% y-o-y to $84 million and revenue up 30% y-o-y to $889 million.

He expects Venture to finish the current FY2022 with earnings up 11% over FY2021, a pick-up versus the 5% seen from FY2021 over FY2020.

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Venture joins Frencken as Jaiswal’s “most preferred” picks within the manufacturing and tech sector on the SGX.

Other top picks include Genting Singapore, Thai Beverage, DBS Group Holdings, Bumitama Agri, Raffles Medical, HRnet Group, City Developments, Ascendas REIT, ESR-REIT, Prime US REIT, Singapore Telecommunications (Singtel) and ComfortDelGro; all of which carry “buy” calls by Jaiswal.

Among Jaiswal’s picks, ThaiBev boasts the highest upside at 41.8%, while Bumitama Agri has the lowest P/E at 6.2x this year.

On the other hand, Jaiswal has removed United Overseas Bank (UOB) from his picks following his updated call of “neutral” from “buy” and lowered target price of $32.70 from $38.10.

This follows UOB’s 1QFY2022 earnings that missed expectations “mainly on lower non-interest income”.

“Although trading and investment income are expected to rebound in 2QFY2022, our FY2022F-24F earnings were cut by 5%-6% to take into account the 1QFY2022 mark-to-market trading loss and more conservative assumptions on non-II, given the more challenging environment for wealth management,” writes Jaiswal, who believes UOB’s share price will consolidate in the near term, “given its YTD outperformance and more subdued FY2022F earnings growth”.

Shelter in the storm

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Meanwhile, Morgan Stanley Research analysts Wilson Ng and Derek Chang see Singapore equities as “a safe haven amid choppy global markets”.

“Singapore equities appear to be a safe haven amid global headwinds of decelerating growth, rising interest rates and high inflation,” write Ng and Chang in a May 12 note. “Economic conditions look relatively robust, with a strengthening currency supporting capital inflows to the market. Rising interest rates work in favour of the banks, which make up close to half of the index, and we recommend adding more exposure to banks.”

For starters, they replace CapitaLand Investment with DBS. “With rising interest rates, we believe banks are better positioned to reliably achieve growth in earnings and dividends that exceed inflation rates, relative to property stocks. Banks are also positively levered to the reopening theme — arguably as much as the real estate sector — and with their growing earnings, could serve as a more viable shelter against inflation.”

Historically, the share price performance of banks shows a positive correlation with GDP growth, interest rates and Singdollar appreciation, while showing little correlation with inflation, they add.

Ng and Chang’s revised “focus list” of five top picks are now DBS, UOB, Sea, Keppel Corp and Sembcorp Industries.

Finally, Morgan Stanley’s economics team for Asia expects headline inflation in Singapore to rise from around 2% in 2021 to approximately 5% in 2022, before moderating in 2023.

“A sharp rise in global commodity prices amid renewed supply chain disruptions earlier this year led Singapore’s headline CPI to rise 5.4% y-o-y in March,” writes Ng and Chang.

“Elevated commodity prices and a tight domestic labour market are likely to mean higher inflation levels persist through the rest of the year before supply constraints are eased.”

Navigating through murky waters

CGS-CIMB Research analysts Lock Mun Yee and Lim Siew Khee advocate a near-term defensive position in REITs and high dividend yield stocks.

Firstly, Lock and Lim highlight Lendlease Global Commercial REIT for its “resilient income” backed by increased suburban retail exposure and the long lease structure of its Milan property, while shopping mall 313@Somerset, sited along the prime tourist belt Orchard Road, is benefiting from Singapore’s reopening.

Lock and Lim have a target price of $1.05 on Lendlease. The stock is trading at an “attractive” 6.1% FY2022F yield.

The analysts are similarly optimistic about Sembcorp Industries with a target price of $2.96. “Sembcorp Industries (SCI) is a beneficiary of strong power prices in India, on the back of an earlier-than-expected summer, and Singapore, with high oil prices. Sembcorp Cogen (SCI’s power arm) posted a turnaround in FY2021 with a net profit of $31.3 million. We expect this trend to continue in 1HFY2022F.”

Lock and Lim also like Singtel for its earnings recovery story, thanks to the resumption of roaming revenue and higher contributions from the associates, including India’s Bharti.

“Digital banking, further asset monetisation and expansion into higher growth business areas may catalyse share price, in our view. Singtel offers FY2022–24F yields of 3.3%–5.1% per year,” say the analysts, who have a $3.30 target price on this stock.

Despite rising external risks, the domestic economy has continued to hum along, write Lock and Lim. “We like construction plays as a reopening laggard, as this sector has benefited from the easing of the labour crunch due to the reopening of travel borders. We believe building materials players (BRC Asia, Pan United) have room for earnings surprises this year. We also see potential upside surprises for recovery names (ThaiBev, ComfortDelGro, SingPost) given the significant relaxation of Covid-19 measures.”

Unlike Morgan Stanley’s two picks, however, Lock and Lim of CGS-CIMB prefer OCBC to DBS and UOB. “We like OCBC as it offers an attractive risk/reward profile at 1.04x P/BV.”

“Going into 2HFY2022F, our preferred picks are Yangzijiang Shipbuilding for yield, backed by high net cash positions. We also favour CapitaLand Integrated Commercial Trust as a reopening play,” they add.

“Key downside risks remain slower consumption growth owing to purchasing power erosion and supply chain blockages that may need more time to sort out given China’s zero-Covid-19 strategy."

Read the full cover story:


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Photo: Bloomberg

Infographics: Refinitiv, CEIC, Morgan Stanley Research

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