High input costs and interest rates could hurt corporate earnings, especially for companies with high borrowings, says OCBC Investment Research head Carmen Lee.
Value or mature companies are less likely to have high debts, she adds. “In addition, with risk assets down for the year, this has a flow-through impact on consumer wealth and consumers are likely to rein in their spendings and demand, which in turn could also impact corporates’ performances and sales.”
In a July 20 note, Lee says inflation and recession are likely to continue to dominate for the current quarter. This could potentially impact the job market as well as demand for goods and services.
“While Singapore is somewhat shielded, it is not completely independent of these external events. Risk assets have continued to come under selling pressure, and several markets have seen double-digit declines year-to-date (ytd). Singapore has largely outperformed, and this is on the back of several core sectors which are less impacted by high raw material and input costs,” writes Lee.
However, while broader market indicators seem to indicate that both real estate stocks and REITs are down for the year, the big-cap companies within both sectors have done “surprisingly well”, writes Lee.
For example, CapitaLand Investment Ltd (CLI) is up 11.1% for the year, while UOL is up 2.4% for the year. In addition, with the current weakness in the market, the average yield on some of the top REITs has improved to about 5%. This is also about the same level of dividend yield for the finance sector, which is at about 4.9% currently, says Lee.
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Based on the Straits Times Index (STI), the earnings growth rate is projected at 9.5% for this year and 14.1% in 2023.
Lee says valuations are not expensive and at below 10-year historical averages. “Overall, we remain positive on the Singapore market. Some of our picks include Ascendas REIT (A-REIT), CapitaLand Integrated Commercial Trust (CICT), DBS Group Holdings Ltd, Frasers Centrepoint Trust (FCT), Mapletree Industrial Trust (MINT), Mapletree Logistics Trust (MLT), NetLink NBN Trust, Raffles Medical Group, SATS Ltd, SIA Engineering Company (SIAEC), Singapore Telecommunications (Singtel), ST Engineering, Thai Beverage (ThaiBev), United Overseas Bank (UOB), UOL Group and Venture Corp.”
Economic slowdown is happening
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Several key forecasters including the IMF and ADB have revised down their growth projections for 2022 and 2023. This was largely due to the Ukraine conflict, which has disrupted supplies and caused shortages in several key food items, writes Lee. “As operating costs go up, this could potentially derail corporate earnings growth.”
While 2021 earnings have improved strongly from the lows in 2020, going forward into 2023, the strong double-digit growth rates in 2021 are likely to be slashed to single-digit growth, says Lee.
Based on the MSCI World Index, the earnings growth rate is now projected at 7.0% for 2023 (compared to -28% in 2020 and 84% growth in 2021).
With elevated inflation, this will mean more short-term market volatility before the situation stabilises, writes Lee. “It is prudent to adopt a more defensive investment stance for now.”
Companies operating in a more stable business environment, with lower price volatility and with a more secure source of supplies and less dependency on certain limited raw materials or commodities are likely to fare better as lack of supply and supply disruptions remain, she adds.
Lee says: “Overall, we remain positive on the Singapore market, and we believe there are opportunities to stock pick. While forward expectations for the performances of most markets have been revised down recently, the same is not true in Singapore. In fact, expectations are holding, capturing the relatively more positive outlook for the Singapore market versus the rest of the key markets.”
