RHB Group Research analyst Shekhar Jaiswal is staying positive on Singapore equities in 2023, which he says continues to be a “safe haven” despite slowing gross domestic product (GDP) growth and high inflation next year.
According to Jaiswal, RHB is bullish on growth next year, after a “year of resilience and outperformance” for Singapore in 2022. For 2023, he expects corporate earnings growth to remain strong, supported by banks.
Jasiwal believes the lifting of Covid-19 restrictions will help broaden the earnings recovery to sectors more affected by the pandemic. Since the benchmark Straits Times Index (STI) has a heavier composition of banks, this means it would be able to sustain earnings growth in an environment where higher inflation and interest rates would otherwise cut into corporate profit margins.
“As Asian equities fell in 2022, Singapore has provided relatively defensive returns. The
STI was one of the region's best performers in 2022, rising 4.2% y-o-y in US dollar (USD) terms as the city-state’s economy recovered from the effects of the pandemic and borders reopened, welcoming businesses and tourists alike,” says the analyst.
Outperformance within the STI came from the utilities and industrials sectors, due to a sharp rise in commodity prices, financial services, as a result of a rise in interest rates, as well as the telecommunications, consumer and transport sectors, due to a revenue boost from the reopening of regional borders, explains Jaiswal.
On the other hand, rising interest rates hurt REITs, while the Russian-Ukraine conflict, US-China geopolitical tensions and a deteriorating macroeconomic environment hurt the manufacturing and technology sectors. That said, the analyst believes that manufacturing and exports are likely to see a recovery in the second half of 2023.
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His top-down earnings per share (EPS) growth estimates for 2023 and 2024 are 12% and 8%. The 2023 EPS growth for stocks under his coverage is 19%, excluding the manufacturing and technology sectors. The STI now trades at 10.9x 12-month forward price-to-earnings ratio (P/E) or 2 standard deviations (s.d.) below the mean. The analyst’s end-2023 STI target of 3,440pts is based on an FY2023 P/E of 11.5x.
Although Jaiswal believes investors will continue to be attracted to Singapore given its strong and defensive index earnings growth compared to its regional peers given the STI’s inexpensive valuation, he notes that investors could be concerned about the sustainability of the EPS growth forecast for 2023. “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,” he says.
2023 investment themes
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The first of the analyst’s four investment themes for 2023 is to buy bank stocks as a
proxy to elevated interest rates and defensive earnings growth characteristics. He estimates the banking sector’s return on equity (ROE) will improve to 13.6% in FY2023 from 12.0% in FY2022, on a healthy 20% y-o-y growth in net profit. Although deposit competition has intensified and loan growth is expected to moderate, tailwinds from hikes in the Federal Funds Rate (FFR) in 2H2022 and 1H2023 should lift non-interest income (NII) higher in the coming year.
Says Jaiswal: “Loan portfolios are well seasoned over the past two years, but still, we have conservatively pencilled in a higher credit cost of 19 basis points (bps) for FY2023, compared to 14bps in FY2022, given the rapid rise in interest rates. NII is expected to rise by a healthy 8%, led mainly by higher core fee income from loans and trade flows as well as a recovery in demand for wealth products.”
With common equity tier 1 (CET1) ratios at 13% to 14%, banks are well positioned to weather the external headwinds, and he expects a y-o-y rise in dividends.
DBS and OCBC are Jaiswal’s top picks, which he says are still trading at modest valuation levels, and are well supported by their respective 2023 dividend yields of 4.8% and 5.3%. His recommendation for Singapore banks is “overweight”.
Second for 2023, the analyst says exposure to firms with resilient and defensive earnings and dividends will be key in a near-to-medium term future in which greater global macroeconomic uncertainty promotes locally “idiosyncratic” factors.
“Market, sector and company performances diverge as returns are driven by local financing costs and the relative resilience of profits. We believe investors should prioritise surviving through these uncertain times. Companies with strong financial sheets, pricing power, captive customer bases, recurrent demand and the capacity to pass through increasing costs should be key considerations when choosing stocks,” says Jaiswal.
“We support a fundamentally defensive stance that emphasises investing in companies that have sturdy earnings or dividend profiles. We believe the relative outperformance of defensive styles, such as quality and momentum, and sectors, such as staples, health care and utilities, will persist in early-2022,” he adds.
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Jaiswal’s stock picks for this theme are City Developments Limited (CDL), Sheng Siong Group (SSG), ST Engineering and Wilmar International.
Next to feature is “selective” exposure to China's imminent economic reopening, with uncertainty remaining over the pace of its reopening. “The potential beneficiaries of the China reopening will come to those companies which are either beneficiaries of China’s domestic reopening as well as companies that will gain from the return of business once China relaxes border restrictions,” he says.
Within RHB’s coverage, Jaiswal sees DFI Retail Group as one of the key beneficiaries of China’s domestic reopening, while CDL Hospitality Trusts (CDLHT), ComfortDelGro, Raffles Medical, SingTel and Thai Beverage should benefit from the return of Chinese tourists.
Finally, Jaiswal says that industrial REITs could benefit from the pausing of the rising interest rate cycle. “We believe the coming to an end of the interest rate upcycle, our bullish expectations of GDP growth in 2023, and the belief in a strong rebound in economic activity, especially in 2H2023, should make investors revisit the S-REITs sector, which delivered a dismal performance in 2022.”
“The clarity of our views on above-consensus economic growth in 2023 will be determined by how economic events unfold in the first half of the year. We estimate and aggregate dividend per share (DPS) growth of 0.9% y-o-y for all REITs covered by us,” he adds.
However, Jaiswal notes that this growth will be uneven throughout the year and also uneven across the sectors, and should be reflected in the performance of stock prices. He believes defensive REITs, such as those that offer resilient DPS growth and have a strong balance sheet, will deliver outperformance in 1H2023, while REITs that will benefit from strong economic growth and the relaxation of China’s zero-Covid policy will deliver outperformance in 2H2023.
Significantly, he points out that industrial demand remains strong, mitigating supply concerns. “We expect industrial rental rates to continue rising, while occupancy rates are expected to remain relatively flattish. Among the sub-sectors, we like logistics, hi-tech, and good-quality business parks, as they continue to benefit from changing market dynamics brought about by COVID-19 and the Government’s longer-term push to transform,” says Jaiswal.
His preferred exposure in the S-REITs sector is AIMS APAC REIT, CapitaLand Ascendas REIT and ESR-LOGOS REIT, while there could also be opportunities to rotate into hospitality and retail REITs in 2H2023 if his macroeconomic forecast pans out as expected.
Global outlook
Beyond Singapore, Jaiswal says RHB’s 2023 global asset allocation is overweight equities, market weight fixed income, and underweight cash compared to its 4Q2022 global asset allocation of overweight fixed income, market weight equities and underweight cash. “We believe that some US equities markets are at the early stages of a bull market. We have been USD bulls since December 2020. Peak USD strength is behind us and we believe the greenback will depreciate against Asian currencies from 2Q2023 to 4Q2023,” he says.
For global markets in 2023, the analyst says the three main themes investors will focus on are the outlook for US growth, the path of the USD and China’s reopening. He continues to advocate buying India on dips and selling China on rallies, as its reopening remains fraught with uncertainty, and also believes Southeast Asia will remain resilient in 2023.
RHB’s Global Economics and Market Strategy team’s top pick in global equity markets is the US and specifically, the Dow Jones Industrial Average (DJIA) Index. Jaiswal expects the DJIA Index to print a total return of around 10% to 15% in 2023.
