RHB Group Research analyst Shekhar Jaiswal is recommending investors have a mix of growth and defensive in their Singapore portfolio amid the current inflationary environment and the geopolitical uncertainties.
“For 2Q2022, Singapore’s equity market outlook will continue to depend on how well stocks and sectors deal with uncertainty over the inflation outlook; supply chain disruptions because of the Russia-Ukraine war and China’s zero Covid-19 strategy; and general caution ahead of the size of the rate hike at the May Federal Open Market Committee (FOMC) meeting,” Jaiswal writes in his report dated April 21.
Singapore banks to benefit from rising interest rates
With Singapore’s core inflation rising at its fastest pace in nearly a decade, Jaiswal sees the Singapore financials sector to benefit from the rising interest rate cycle as the US Fed seeks to combat the record high inflation.
“This is mainly because Singapore’s benchmark interest rates are closely correlated to movements in the Federal Funds Rate (FFR) and have risen since the start of this year,” the analyst says.
Singapore’s interest rates are likely to mirror the FFR up until 3.0% to 3.5%. The US Fed’s revised dot plot suggests an end-2022 FFR median forecast of 1.75% to 2% and an end-2023 median forecast of 2.75% to 3%, he writes.
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Jaiswal adds, “While excitement over the prospects of rising US interest rates sustained the rally in Singapore bank stocks into January to February, the Russia-Ukraine war has brought valuations back to more decent levels.”
To this end, the analyst believes that the Singapore banks can “grind higher” in the months ahead on the back of the rise in FFR as well as the positive impact from the reopening of borders.
“We have pencilled in four rate hikes in our FY2022 earnings, which are slightly ahead of the street forecasts for DBS and OCBC,” he writes.
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The analyst also expects Singapore Exchange (SGX) to report higher treasury income amid the rise in interest rates. The counter’s long-term growth prospects from its latest acquisitions and potential pipeline of new listings look positive as well, he adds.
However, the analyst remains “neutral” on SGX due to the lack of near-term re-rating catalysts, as well as modest near-term earnings growth and “unexciting” dividend yield. He has given SGX a target price of $10.
Jaiswal has kept “buy” on all three Singapore banks, DBS, OCBC and UOB with target prices of $42.70, $14.40 and $38.10. He has also identified DBS and UOB as his top picks.
2022 is a “year of opportunities and risks” for REITs
Despite the growing concerns that the rise in interest rates may affect Singapore REITs (S-REITs) negatively, Jaiswal sees 2022 as a “year of opportunities and risks” for the sector instead.
“Moving into 2022, S-REITs are well-positioned to weather interest rate hikes and should also reap operational benefits from the gradual easing of pandemic-related restrictions,” the analyst says.
The sector’s aggregate gearing is currently at 37%, well below the regulatory limit of 50%. Nearly 77% of S-REITs debts are also hedged, with a sector average interest cover of 5.2x and weighted average debt maturity of 2.8 years, he points out.
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Jasiwal writes, “We recommend that investors stay selective, and expect large-cap laggard plays and REITs with stock-specific catalysts to outperform.”
In his view, key catalysts to the sector include a recovery in earnings from the easing of restrictions, with sector distributions per unit (DPUs) expected to grow by 5% to 15%.
In addition, S-REITs still offer one of the highest yields globally, and the rise in Singapore’s status as an offshore wealth management hub is positive for the sector’s long-term outlook.
Finally, inorganic growth from acquisitions and mergers will also help boost the sector’s prospects, the analyst says.
On the other hand, key risks include stagflation as well as a hike in interest rates.
“A key market concern has been the impact of impending interest rate hikes. Note: A rising rate environment, as such, is not necessarily bad for the sector’s outlook if it is accompanied by economic growth – this is as earnings growth generally tend to outpace rate hikes. We also note that during the last US interest rate upcycle from January 2016 to August 2019, the FTSE Real Estate Investment Trust index delivered an absolute return of 31%, or an annualised 9% return,” he writes.
However, S-REITs are likely to underperform in the event when central banks are forced to raise interest rates to tame surges in inflation while economic growth stagnates.
“With regards to Covid-19, we believe we are at the tail-end of its risks, as high vaccination rates, shifts in stances towards treating Covid-19 as endemic, and increased adaptability from landlords/tenants place the sector in a better position,” he adds.
Among the S-REITs sector, the analyst has identified the industrial and office S-REITs are his preferred sectors.
“While office and retail REITs are likely to see short-term outperformance on tactical rotations from the optimism of an economic recovery, we continue to prefer industrial REITs for earnings resilience,” he says.
“While there are some green shoots for hospitality REITs, we still believe we are at least six to 12 months away from a meaningful increase in numbers. Current valuations are also not very cheap. Overall, we recommend that investors adopt a barbell strategy with industrial REITs for stable yields, as well as a mix of office and retail REITs to ride on near-term growth,” he adds.
Reopening themes
As the Singapore government has taken steps to drastically reduce its Covid-19 related restrictions, Jaiswal is recommending investors accumulate counters in sectors that have been the hardest hit by the pandemic.
Within the brokerage’s coverage, Singapore Technologies Engineering (ST Engineering) is one of Jaiswal’s recommendations as an aviation play that could benefit from the reopening.
The reopening of borders will also benefit counters from the hospitality and tourism sector such as CDL Hospitality Trusts (CDL HT), as well as the gaming sector’s Genting Singapore.
Jaiswal has kept “neutral” on CDL HT with a target price of $1.25, and “buy” on Genting Singapore with a target price of 95 cents.
Other counters such as Raffles Medical could see a lower demand for Covid-19, but this is likely to be more than offset by a return of medical tourism and the resumption of elective procedures.
Likewise, the telcos should enjoy better average revenues per user (ARPUs) from roaming and prepaid subscriptions. Jaiswal has identified Singapore Telecommunications (Singtel) as his preferred exposure to the telco sectors.
The analyst has kept “buy” on both Raffles Medical and Singtel with target prices of $1.55 and $3.37 respectively.
In addition, counters such as transport operator ComfortDelGro and coffeeshop operator Kimly, are also set to benefit from the increase in the number of employees being allowed to return o the office. A resumption of nightlife activities will also drive increased mobility and benefit both counters.
“ComfortDelGro is a key conviction pick for within the reopening plays. Suntec REIT could also see increased MICE or meetings, incentives, conferences and exhibitions activity in Singapore following the increase in the capacity limit for large events to 75%. HRnetGroup should be able to ride on growth in hiring volumes and salaries,” says Jaiswal.
The analyst has kept “buy” on ComfortDelGro, Kimly, Suntec REIT and HRnetGroup with target prices of $1.77, 46 cents, $1.77 and $1.01 respectively.
The analyst’s top picks on reopening plays are: ComfortDelGro, ST Engineering and Genting Singapore for transport and recovery, HRnetGroup for improving labour market, and finally, Bumitama Agri (BAL) and Wilmar International for oil palm planters.
According to him, these counters, which include DBS and UOB from the banking sector, are those that are less likely to be affected by supply chain disruptions. They also have strong net cash positions, and have a price earnings growth (PEG) ratio of less than 1.
STI to deliver positive performance in 2022
Looking ahead, Jaiswal has pegged a target of 3,460 points for the benchmark Straits Times Index (STI) for end-2022.
The estimate offers an upside of 3.7% from April 14’s close of 3,334 points. It is also based on a 12.5x end-2022 P/E, which lies between the average forward P/E since January 2008 and its -1 standard deviation point.
In addition, the analyst expects the STI’s earnings per share (EPS) to grow by 15% y-o-y in 2022.
As such, the analyst believes his target P/E, which is below its historical average, seems “justified” as Singapore approaches normalcy for earnings growth over the next two years.
Despite his positive outlook on the STI, an upward move for the index – which has since delivered 6.8% returns year-to-date (y-t-d) – will be a “slow grind”.
This is due to the uncertainty over the inflation outlook; supply chain disruptions because of the Russia-Ukraine war and China’s zero Covid-19 strategy as well as a general caution ahead of the size of the rate hike at the May Federal Open Market Committee (FOMC) meeting.
“While the STI’s 12.8x forward P/E is a tad below its historical average and the second lowest amongst the Asean equity indices, its P/E has finally caught up with that of the rest of Asia. STI’s forward P/E is now trading at parity with the rest of Asia. STI’s blended forward yield of 4.3% is still the highest in Asia,” says Jaiswal.
As at 10.48am, the STI is trading 17.97 points lower or 0.53% down at 3,343.14 points.
