DBS Group Research analysts Yeo Kee Yan and Janice Chua are anticipating more “sideways gyrations” for the benchmark Straits Times Index (STI) as the Fed continues to be bent on arresting inflation by raising rates, even if it comes at the expense of sub-par growth.
To the analysts, the better-than-expected results season for the 2QFY2022 and positive forward earnings revision have “likely put a low” at 3,080 points for the STI in June.
The STI now trades at close to an attractive valuation of 11.7x (-1.5 standard deviation or s.d.) 12-month forward P/E, with its resistance level currently at 3,303 and support is at 3,200 and 3,150, the analysts note.
The market now sees the Fed Funds Rate peaking at 3.75% in 1QFY2023 and ending 2023 at 3.5%. “With higher-for-longer rates, investors may want to par down on stocks with high debt,” Yeo and Chua advise.
In their report, the analysts have identified non-REIT stocks with a relatively higher net debt/equity of at least 0.8x, which are Wilmar, Dairy Farm International (DFI), Starhub, and Singapore Technologies Engineering (ST Engineering).
Singapore REITs (S-REITs) with a higher proportion of debt expiring over the next two years will also be more susceptible to higher refinancing costs, according to the analysts. Three affected REITs with a weak earnings per unit (EPU) growth outlook are Sasseur REIT, OUE Commercial REIT (OUECT), and Elite Commercial REIT.
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At the same time, corporate earnings outlook is not out of the woods yet say Yeo and Chua, despite the benign 2QFY2022 results season. “We see an upside earnings risk for REITs and sectors that benefit from reopening; a downside earnings risk for the real estate and plantation sectors; and balanced risk for banks, technology, consumer staples, and telcos,” write the analysts.
Sheng Siong is seen as an inflation beneficiary, while banks benefit from rising rates, with OCBC as the analysts’ preferred pick. Travel demand drives an earnings upside risk for the hospitality (CDL Hospitality Trusts), retail (Frasers Centrepoint Trust or FCT, Lendlease REIT), transportation (Singapore Airlines, ComfortDelGro), consumer discretionary (Genting Singapore), and healthcare (Raffles Medical) sectors, Yeo and Chua note.
Downside risks include the lower cost per order (CPO) price trend, ,which poses a risk for pure planters. Meanwhile, China’s zero-Covid-19 stance will affect DFI, the analysts note.
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Meanwhile, the further easing of domestic Covid-19 measures and resumption of construction at Changi Terminal 5 underscore Singapore’s determination to entrench itself as a regional hub, observe Chua and Yeo. September boasts a strong line-up of shopping, sports, and meetings, incentives, conferences and exhibitions (MICE) events such as Comex IT, F&B Expo, Great Singapore Sale and F1, which lift consumer discretionary spending and reiterate the reopening theme.
The pick-up in activities this month benefits UOL with its strategically located Pan Pacific and PARKROYAL hotels, and REITs with centrally located malls, like Suntec REIT, Lendlease REIT, and Starhill Global.
In addition, the analysts foresee that footfall and tenant sales might also improve on the back of MICE events, benefitting REITs with centrally located malls like Suntec’s City, Lendlease’s 313@Somerset, and Starhill Global’s Wisma Atria and Ngee City.
“Moreover, their over 50% exposure to Singapore as well as defensive components of their portfolio will tide them through, should macro headwinds persist, given Suntec’s 78% assets under management (AUM) in more stable office properties, Lendlease’s 47% exposure to suburban retail, and Starhill Global’s 53% gross rents backed by master/anchor leases with periodic rental reviews,” say the analysts.
At this juncture, the analysts note how there are early signs of inflation peaking in Singapore, with Singapore’s core inflation rising to a 14-year high at 4.8% (consensus 4.7%), on higher food and energy prices.
The Monetary Authority of Singapore (MAS) may consider another policy tightening move on higher inflation print, though Prime Minister Lee Hsien Loong warned the central bank “not to overdo things.”
“We note that the consumer price index (CPI) is a lagging indicator, while policymakers also note that inflation is likely to peak in the next two to four months and have left official estimates unchanged,’ say Yeo and Chua.
