Against the backdrop of slowing global growth and “higher-for-longer” rates, investors can seek shelter in stocks with decent earnings or dividend cushions or both, says DBS Group Research analyst Yeo Kee Yan.
As at March 9, the US Federal Funds futures are pricing in a 69% chance for 50 basis points hike at the March Federal Open Market Committee meeting as well as a terminal rate of 5.75% by June or July this year. This is higher than DBS’s current economist forecasts for 5.25% terminal rate, says Yeo.
Amid this, the timeline for moderating net interest margin (NIM) concerns for banks UOB U11 and OCBC O39 may be pushed back, Yeo notes. Both stocks should also be underpinned by trading interest heading closer to their ex-dividend dates in April or May, he adds.
Other than banks, DBS seeks out five stocks that should fare better with higher earnings and dividend cushions. For non-REITs, Yeo prefers stocks with EPS growth of over 50% in FY2023, and near-term earnings visibility.
The analyst highlights DFI Retail D01 for its recovering health and beauty and restaurant business — with further boost coming from the reopening of North Asia markets — as well as Aztech Global 8AZ given its robust orderbook of $718.6 million and sufficient margin of safety with strong net margins.
For REITs, the analyst says those that exhibit FY2023 earnings per unit of over 20%, forward yield of over 7%, and aggregate gearing of lower than 40% should feature better. Three REITs that meet these criteria are CapitaLand India Trust CY6U , CapitaLand China Trust AU8U and Keppel Pacific Oak US REIT CMOU .
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Meanwhile, DBS is also continuing to find opportunities in stocks under its coverage that presents resilience. Yeo favours companies in the consumer staples sector and essential service providers, expecting robust demand for their goods and services.
“We prefer companies with the following criteria — net cash position or currently paring down its debt levels, positive earnings growth in FY2023, and decent dividend yields as support. Our picks include Hutchison Port Holdings Trust NS8U , Delfi P34 , Civmec P9D , ComfortDelGro C52 , and Sheng Siong OV8 ,” he says.
In its 4QFY2022 results review, Yeo notes that earnings of stocks under DBS’s coverage were revised up by 0.5% for FY2023 and flat for FY2024. Most delivered in-line earnings despite headwinds from inflation and economic slowdown, he adds.
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“The largely stable earnings across our coverage — with only selected few seeing significant downward revisions — paves the way for stocks to deliver decent EPS growth of 9.7% and yield of 4.7% this year,” says Yeo.
Meanwhile, DBS sees little near-term downside post correction in recent weeks and maintains its view for the Straits Times Index (STI) to find support around its current level. Yeo cites the latest MAS survey of private forecasters, which showed that the 2023 median GDP growth forecast held firm at 1.9%.
“At 3,230 as at March 10, STI trades very near trough valuation of 10.8x 12-month forward PE with FY2023 EPS growth of 11.6%. Base support level is 3,194,” says Yeo.
As at 10.20am, the STI was trading 8.77 points lower or 0.28% down at 3,123.6.
