RHB Group Research analyst Shekhar Jaiswal is “overweight” on the consumer, financials, healthcare, industrials, industrial Singapore REITs (S-REITs) and transport sectors, and neutral on food products, real estate and non-industrial S-REITs.
In his market outlook dated Jan 5, Jaiswal says that Singapore’s defensive earnings growth, low valuations and benefits from the reopening of China’s borders should continue to attract investors.
“The Straits Times Index (STI) should deliver double-digit earnings per share (EPS) growth, thanks to strong growth from the banks. While the STI’s low price-to-earnings ratio (P/E) could be reflecting investor concerns about the sustainability of EPS growth amidst a potential recession, it is not the base case,” says the analyst.
“The positive effects of higher tourist flows from China’s reopening on the tourism, services, and retail sectors should offset some effects of the global slowdown on the Singapore economy,” he adds.
Jaiswal maintains that Singapore equities will end higher this year, even as global recession risk and central banks’ policies keep markets volatile in the short term. He says he is bullish on growth in 2023 with a “positive surprise” from Singapore’s 4Q2022 gross domestic product (GDP) data.
He notes that according to official advance estimates, Singapore’s 4Q2022 GDP expanded 2.2% y-o-y which was higher than the consensus estimate of 2.1% y-o-y. Singapore’s full-year GDP grew by 3.8% y-o-y in 2022, slightly outpacing Jaiswal’s 3.7% y-o-y growth estimate, given 3Q2022’s GDP revision to 4.2% y-o-y from 4.1% y-o-y.
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“We have kept our 2023 GDP growth forecast at 3.0% y-o-y as we expect growth to decelerate into 1H2023 before stabilising in 2H2023. Our 2023 GDP growth forecast is more bullish than the consensus 1.8% growth in 2023 and the government’s forecasts of 0.5% to 2.5% growth,” says the analyst.
China’s reopening will be a long-term positive for Singapore, with direct beneficiaries of China’s domestic reopening, as well as companies that will benefit from the return of business when China relaxes border restrictions standing to gain. China accounted for 18% of Singapore’s non-oil domestic exports (NODX) and 19% of tourist arrivals before the pandemic, and as such, its reopening should boost exports and tourism here, he notes.
However, Jaiswal also believes China’s rapid exit from its zero-Covid policy could lead to weaker growth momentum in the near term. “The surge in Covid-19 infections could cause temporary labour shortages and increased supply chain disruptions. At the same time, if Chinese consumers rapidly increase consumption of goods and services, it could lead to significantly high global inflation — which would push global commodity prices higher. Therefore, we believe investors should continue to maintain a defensive portfolio in the near term,” he explains.
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Equity strategy
Jaiswal’s investment themes for the early part of 2023 include buying banking stocks as a proxy to elevated interest rates and defensive earnings growth characteristics, buying shares of firms with resilient and defensive earnings and dividends, selective exposure to China's economic reopening and buying industrial REITs.
For the banking sector, he estimates return on equity (ROE) to improve to 14.2% in FY2023 from 12.3% in FY2022 on a healthy 21% y-o-y growth in net profit. Although deposit competition has intensified and loan growth is expected to moderate, Jaiswal says tailwinds from hikes in the Federal Funds Rate (FFR) in 2H2022 and 1H2023 should lift net interest income (NII) further in the coming year.
Although loan portfolios have been well seasoned over the past two years, he has “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. “Non-interest income 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,” says Jaiswal.
The target prices (TPs) for his top picks, DBS and OCBC, are $41.10 and $15.00 respectively.
In the near-to-medium term, Jaiswal also believes that greater global macroeconomic uncertainty will promote “local idiosyncratic factors”, while market, sector and company performances will 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,” he says.
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“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 (quality and momentum) and sectors (staples, health care and utilities) will persist in early 2023,” adds Jaiswal.
His stock picks for this subject, City Developments (CDL), Sheng Siong, ST Engineering and Wilmar International, have respective TPs of $9.75, $1.78, $4.15 and $5.40.
With China announcing a relaxation of its zero-Covid policy from Jan 8, the analyst believes the only uncertainty would be over the pace of its re-opening and how smooth this process will be. With Chinese tourists accounting for approximately 19% of all tourist arrivals in Singapore before the pandemic, the positive effects of increased tourist flows on the tourism, services, and retail sectors are likely to offset some of the effects of the global slowdown on Singapore's economy, says Jaiswal.
“Furthermore, the impact of a full reopening in China, possibly in 2H2023, could propel Singapore’s economy even further towards the end of next year. The potential beneficiaries of the China reopening may be beneficiaries of China’s domestic reopening and companies that will gain from the return of business once China relaxes border restrictions,” he adds.
Jaiswal sees Dairy Farm — which has a TP of $2.71 — as one of the key beneficiaries of China’s domestic reopening, while CDL Hospitality Trusts (CDLHT), ComfortDelGro (CDG), Raffles Medical, Singtel and Thai Beverage (ThaiBev) — with TPs of $1.15, $1.80, $1.65, $3.30 and 91 cents respectively — should benefit from the return of Chinese tourists.
Finally, as the global economy comes to an end of the interest rate cycle, Jaiswal says his bullish expectations of GDP growth and a strong rebound in economic activity, especially in 2H2023, compels him to think that investors should 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.”
He estimates and aggregates dividend per share (DPS) growth at 0.9% y-o-y for all REITs under RHB’s coverage. However, he notes that this growth will be uneven throughout the year and also uneven across the sectors, which should be reflected in the performance of the stocks.
Jaiswal says defensive REITs, or those that offer resilient DPS growth and have strong balance sheets, should deliver an outperformance in 1H2023. Meanwhile, REITs that will benefit from strong economic growth and the relaxation of China’s zero-Covid policy should chalk an outperformance in 2H2023.
As industrial demand remains strong, mitigating supply concerns, he expects industrial rental rates to continue rising, while occupancy rates are expected to remain relatively flattish. Among the sub-sectors, Jaiswal likes logistics, hi-tech, and good-quality business parks, as they continue to benefit from changing market dynamics brought about by Covid-19 and Singapore’s longer-term push to transform itself into a smart nation. If our macroeconomic forecast pans out as expected, we believe there could be opportunities to rotate into hospitality and retail REITs in 2H2023, he adds.
His preferred exposures in the S-REITs sector, AIMS APAC REIT, CapitaLand Ascendas REIT (CLAR) and ESR-LOGOS REIT, have TPs of $1.48, $3.15 and 46 cents respectively.
