Earnings growth, its defensive nature and the prevalence of quality, value and dividend stocks should continue driving the Singapore stock market
The Singapore market has gotten off to a rather bullish start in 2023. Over the first two weeks of the new year, the Straits Times Index (STI) has gained about 32.28 points or 1.0% to close at 3283.6 on Jan 16.
With the Lunar New Year now approaching, analysts are busy forecasting what the rest of the year will be like for stocks and the stock market in general.
With all that has happened in 2022, UOB Kay Hian (UOBKH) believes the first half of 2023 will be a “more uncertain” year but expects Singapore to “outperform” nonetheless.
In its Jan 4 report, UOBKH notes that the STI in 2022 managed a total return of 6.6%, despite uncertainties that persisted throughout the year and a “bumpy” recovery for the global economy as it emerged from the Covid-19 pandemic with concerns over inflation and higher interest rates dominating the market’s attention.
UOBKH believes that the STI will continue to outperform this year, due to its defensive nature and the prevalence of quality, value and dividend stocks, as compared to its regional peers.
“Since there will no longer be a synchronous global cycle, country risk will return and our view is that Singapore presents a lower risk compared to other countries in the region,” says UOBKH, adding that the clear risk for the market is a global recession which, given Singapore’s open economy, would negatively affect it.
Nonetheless, UOBKH believes that the above risks will be somewhat offset by the relaxation of Covid-19 restrictions and reopening of cross-border movements, which will benefit domestic-oriented sectors including retail, F&B, transport and accommodation.
“We have already seen the positive effect of this on the aviation sector and with China now reopening its borders, Singapore’s tourism sector should be well-placed to benefit from this,” says UOBKH.
While improved fundamentals have allowed Asean markets to withstand financial market volatility in 2022, UOBKH warns that the year ahead remains uncertain and challenging amid looming risks with economic recessions in the US and Europe, tightening financial conditions, further straining of US and China relations and the Russia-Ukraine conflict. For an open economy like Singapore’s, the possibility of spillovers from these risk factors cannot be ignored.
Meanwhile, RHB Group Research is positive on Singapore, citing its “safe haven” status despite slower GDP growth and higher inflation going into 2023. According to RHB, a continued recovery in the services sector on the back of sustained travel demand and resilient domestic demand should offset the manufacturing slowdown. The manufacturing and exports sector however will only likely see a recovery in 2H2023.
This year, RHB expects Singapore companies to deliver double-digit EPS growth, led by the banks. While the STI’s current low P/E reflects investor concerns about the sustainability of the strong EPS growth forecast, as well as a potential recession, although RHB believes this is not the base case.
The STI now trades at 10.9x, or –2 standard deviations (SD), of its 12-month forward P/E. “At this moment, we believe earnings growth, rather than an improvement in valuation multiple, will drive the rise in the STI next year. While we are still constructive about the STI delivering positive returns for 2023, we maintain that the upward move for the index will be slow,” says RHB, as it forecasts the STI to reach 3,440 points at end-2023, based on 11.5x 2023 P/E.
Recessionary woes might dog the market but OCBC Treasury Research believes that a contraction of the Singapore economy won’t be a baseline scenario for 2023. However, there will be speed bumps along the way. According to the Ministry of Trade and Industry (MTI), the 0.5%–2.5% official growth forecast for 2023 implies a further slowdown from the around 3.5% growth anticipated for 2022.
This is due to external economics and geopolitical headwinds already brewing, with sharp slowdowns and recession worries in major economies, like the US and Eurozone, coupled with the lingering Russia-Ukraine war and its disruptions on the global supply chain, aggressive global monetary policy tightening amid elevated inflation, the decline in global semiconductor demand (exacerbated by the US-China tensions), and China’s ongoing struggle with Covid and a weak property market.
OCBC Treasury Research sees silver linings in the domestic and tourism recovery in Asean economies and continued recovery in air travel and international visitor arrivals to the region and Singapore, which benefits aviation- and tourism-related sectors.
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With that, the research house is forecasting 1%–3% growth (midpoint 2%) for 2023, although this hinges on two key assumptions: First, major central banks will pause on their rate hikes in 1H2023 as inflationary pressures start to ease amid the global growth slowdown, and second, China will further relax its zero-Covid-19 policy and shore up its property market through more proactive policy support which could provide some support to the regional economies.
“If there is a further escalation of these headwinds, then an outright sequential dip in the quarterly growth momentum cannot be ruled out,” says OCBC Treasury Research, adding that this however may not be a game-changer to deter major central banks from persisting with their hawkish monetary policy until inflation shows signs of normalisation. It also reckons that a further tightening by the Monetary Authority of Singapore (MAS) during the April policy review is possible, as the headline and core consumer price index (CPI) may not peak and subside until the second half of the year.
UOBKH is forecasting an aggregate 6% EPS growth in 2023 for the Singapore market with the aviation, financials and telecommunications sectors leading the way, followed by some of the other sectors that are beneficiaries of the reopening of the economy from the Covid-19 pandemic, such as the consumer and gaming sectors.
However, the research house expects the healthcare, land transport, plantation, property and plantation sectors to show earnings declines in 2023. Specifically, UOBKH notes that the property sector’s EPS decline is due to City Developments’ one-off gain from the sale of its Millenium Hilton in Seoul which will be recognised when it reports its FY2022.
Some top large-cap picks from UOBKH include CapitaLand Ascott Trust, CapitaLand Investment, DBS Group Holdings, Genting Singapore, Keppel Corporation, Mapletree Logistics Trust, Sembcorp Industries, Singapore Telecommunications (Singtel), SIA Engineering, Thai Beverage, Venture Corporation and Wilmar International.
As for the plantation sector, the UOBKH has a “market weight” rating, while expecting it to be less volatile this year compared to last year. The global vegetable oil market is expected to move from undersupply to a supply and demand balance in 1H2023.
“In 2023, prices are set to stay elevated despite higher production as demand is expected to post higher growth due to Indonesia’s higher biodiesel blending. We expect global palm oil demand to grow by 7.2% versus supply growth of 3.8% for 2023. Thus, the stock-to-usage ratio is expected to remain stable at 14.8%, which remains supportive of CPO prices,” says UOBKH.
The research house also notes that the plantation sector’s share price performance is highly correlated with the CPO price trend. And since CPO prices are predicted to stay within the current trading band of RM3,500–RM4,500 ($1,066–1,372) per tonne, it will be tough for the sector to outperform the market.
“However, after two consecutive years of strong earnings and good cash flow, most of the plantation companies have pared down their debts and are amassing cash with the potential to maintain or increase their dividend payouts,” says UOBKH, while preferring Wilmar within the plantation sector.
RHB too agrees, albeit with a more bullish outlook. “The lifting of Covid-19 restrictions will help broaden the earnings recovery to sectors more affected by the pandemic, and the STI has a heavier composition of banks, which can sustain earnings growth in an environment where higher inflation and interest rates would otherwise cut into corporate profit margins,” says RHB.
RHB’s top-down EPS growth estimates for 2023 and 2024 are 12% and 8%, respectively. “We believe investors will continue to be attracted to Singapore given its strong and defensive index earnings growth compared to its regional peers,” says RHB.
Drivers of long-term earnings, valuation
Some of the investment themes it has identified for 2023 include buying banking stocks as a proxy to elevated interest rates and defensive earnings growth characteristics; buying shares of firms with resilient and defensive earnings and dividends; selective exposure to China’s economic reopening; and buying industrial REITs.
For Maybank Securities, the dislocation brought about by invasion, interest rates and inflation drove volatility and torpedoed valuations. But underneath these headlines, there were notable positive developments that will drive long-term earnings and valuations higher.
These largely fell into three categories: enablement through technology, reorganisation amid deglobalisation and constructive policy shifts.
Some potential that Maybank has pointed out include the scaling of artificial intelligence (AI) and big data, which could enable banks to enjoy the dual tailwinds of broadening revenues while avoiding costs. This may also blur the differentiation between banks and platform players leading to the broadening of addressable markets for the sector.
In telecoms, the deployment of 5G technologies increases upside risks to the average revenue per user (ARPU) and volumes, while also having beneficial impacts across industries by driving efficiencies and reducing costs.
“With the increasing demand for friend-shoring and establishing supply chain security, the capacity additions in Singapore technology manufacturing could become a critical competitive advantage, in our view,” says Maybank.
Separately, it believes that the reorganisation of healthcare could support the growth of primary care networks in terms of volumes and margins. Meanwhile, Singapore real estate could likely remain supported with the populations expected to surpass pre-Covid-19 levels (through increased inflows), large levels of liquidity in the banking system and unsold housing inventories hovering at cycle lows.
With that, Maybank has picked out some stocks that have the strongest gearing towards these emerging developments and those that can deliver potential upside surprises to return on equity (ROE). In the long term, the research house believes that AEM Holdings, Bumitama Agri, ComfortDelGro, DBS, First Resources, Frasers Centrepoint Trust (FCT), Raffles Medical, Sembcorp Industries, Singtel, ST Engineering, UMS Holdings and Venture Corp, could be key beneficiaries from these trends.
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