Despite a weak year-to-date market performance, the Singapore market is still defensive and could see a rerating closer to the end of the year following support by the services sector’s resilience, a likely pause in interest rate hikes, a manufacturing and exports sector revival and outperformance of the Singapore dollar, says RHB Bank Singapore analyst Shekhar Jaiswal.
“While the gradual rise in Chinese tourist arrivals will bode well for tourism-linked sectors, investors should stay anchored to higher-quality companies or REITs that offer secular earnings growth and defensive dividends,” says Jaiswal.
RHB believes that the sharp downgrades to the Straits Times Index’s (STI) 2024 earnings growth predictions along with near-term uncertainty surrounding global inflation, interest rates as well as outlook for economic growth have shaken investors’ confidence.
Jaiswal notes that among the Asean countries that RHB covers, Singapore has the weakest forecast for GDP growth. The possibility is high that the worsening GDP growth projection will also result in significantly slower forward corporate earnings growth, he adds.
RHB forecast 18% market cap weighted y-o-y EPS growth in 2023 for stocks under its coverage. The key sectors that will contribute to positive earnings growth are banks, telecom, industrials, consumer goods, and land transport. Excluding the exceptionally high 2023 EPS growth for Dairy Farm, the market cap-weighted EPS growth in 2023 for stocks under its coverage would drop to 9.3% y-o-y.
While Jaiswal is expecting more sectors to deliver positive EPS in 2024, the overall EPS growth for its coverage universe is expected to drop to about 5.5% amidst a sharp deceleration in earnings growth for the banking sector, which has a large weight in the STI and in RHB’s coverage universe.
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Given the reduction in profit growth, RHB has also tempered its projection for the STI for the second half of 2023. Using a top-down approach and a target P/E multiple of 11.5x applied to 2024 EPS, Jaiswal predicts that the STI will hit 3,340 points by the year's end, down from 3,440 points earlier.
This reflects an increase of about 3% over the 3,254 point close on July 18. The target P/E lies between -1 standard deviation and -2 standard deviation of its forward P/E mean since Jan 2008. “We believe this is fair, given the moderating earnings growth into 2024. Our top-down EPS growth projections for 2023 and 2024 are 10% and 6% respectively, down from 11% and 9% in the prior projections. Our target P/E, which is significantly below its historical average, reflects the risks associated with an uncertain macroeconomic outlook, in our opinion,” Jaiswal says.
Key investment themes
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RHB maintains that REITs as a sector could outperform amid expectations of the US interest rate cycle to potentially peak in the latter part of 2023. The firm estimates a market cap-weighted DPS growth of -1.4% y-o-y in 2023 and 0.5% y-o-y growth in 2024 for REITs under its coverage.
“While the aggregate return for REITs under our coverage has been dismal, based on year-to-date performance, we are seeing renewed investor interest in industrial and office REITs – the two sub-sectors that we have a positive view on.
“We expect the industrial REIT demand to remain strong, mitigating supply concerns. Industrial rental rates should continue to rise, while occupancy is expected to remain relatively flat. The sector remains a defensive safe haven, and one that offers earnings stability and stable asset values amidst ongoing interest rate hikes,” Jaiswal adds.
Among the sub-sectors, the analyst likes logistics, high-tech and good quality business parks, as these sectors continue to benefit from the changing market dynamics brought about by Covid-19 and the government’s longer-term push to transform Singapore into a smart nation.
RHB expects overall office rental rates to continue to rise albeit at a much slower pace of up to 2% in 2023, with some volatility expected in market occupancy amid ongoing technology sector layoffs. The analyst remains relatively positive on the long-term outlook for Singapore office demand, as the country remains one of the highest globally in terms of employee return-to-work.
Meanwhile, Jaiswal also highlights the resilience of the services sector, with travel-related services continuing to be a bright area. The return of Chinese tourist arrivals should have a positive impact on other domestic-oriented service categories such as retail, food and beverages, healthcare, land transportation and telecommunications.
Within RHB’s coverage universe, ComfortDelGro C52 , Singtel Z74 and Thai Beverage Y92 should benefit from the return of Chinese tourists in the Asean region, Jaiswal notes.
Raffles Medical BSL could also benefit from a higher influx of medical tourists in Singapore, while its China hospital operations could benefit from the gradual return of expats back to China. ST Engineering S63 — which is the world’s largest airframe maintenance, repair and overhaul service provider with a strong presence in China — could also see benefits from the revival in Chinese aviation traffic.
Moving forward, Jaiswal predicts that defensive sectors and styles will continue to outperform in the second half of 2023.
