As the optimism on the reopening of Singapore lifts the benchmark Straits Times Index (STI) to slightly above a 13.6x 12-month forward P/E, DBS analysts Yeo Kee Yan and Woon Bing Yong note that the index may be close to a near-term cap of 3,450 points.
While April tends to be a “benign month” for the market as stocks hold their prices ahead of ex-dividend dates, the analysts note that the current global factors may cause a cap on the index’s near-term upside.
Factors identified in the analysts’ report on March 28 include the inflation outlook, supply chain disruptions because of the Russia-Ukraine war and China’s zero-Covid strategy, and a general caution ahead of the size of the rate hike at the US Federal Reserve’s May Federal Open Market Committee (FOMC) meeting.
On this, the analysts have highlighted the following stocks as their picks to hedge against the inflationary environment.
These are: UOB and OCBC for banks; SATS, SIA Engineering, and Genting Singapore for aviation and tourism recovery; and AEM and UMS for semiconductor stocks; and Bumitama for crude palm oil (CPO) planters.
These counters were selected as they fit the following criteria: They are favourable sectors in the current inflationary environment, like banks, upstream commodity producers, and those riding on the aviation and tourism sectors’ recovery.
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Furthermore, these stocks ride on structural changes and the sustainability trend, are less likely to be affected by supply chain disruptions, and are in a net cash position.
Border reopening beneficiaries
On March 24, the Singapore government announced that it was significantly reducing international and domestic restrictions, a move which has coincided with the wider Asean reopening.
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Further to their inflationary picks, the analysts have also identified counters that will benefit from the recent relaxation of international and domestic measures.
They are: SATS, CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FEHT). Genting Singapore was also included for the gaming sector.
In addition, ComfortDelGro (CDG) and Kimly will benefit from the increase in the number of group sizes, the higher number of employees being allowed to return to the office, as well as the resumption of nightlife activities.
Finally, retail REITs such as Frasers Centrepoint Trust (FCT) and CapitaLand Integrated Commercial Trust (CICT), should also benefit from the reopening with their central mall exposure.
Suntec REIT could also see increased MICE (or meetings, incentives, conferences, and exhibitions) activity following the increase in the capacity limit for large events to 75%.
On the other hand, they warn that China’s zero-Covid policy amid the Omicron outbreak should result in more city lockdowns in the weeks ahead.
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What this means is that manufacturers like Valuetronics, Aztech, and Nanofilm are vulnerable, as their major factories are situated in China.
Furthermore, Covid-19 restrictions in the country may also impact footfall in malls and mobility, which affects China retail REITs Capitaland China Trust (CLCT) and BHG REIT. Other stocks that could experience a negative impact include port operator Hutchison Port Holdings Trust (HPHT) and jet fuel supplier China Aviation Oil (CAO).
As at 12.58pm, the STI is trading at 3425.82 points, up 12.13 points or 3.56% higher compared to its previous close.
