RHB Group Research analyst Shekhar Jaiswal has a positive outlook for Singapore equities in 2HFY2022 as the economic reopening, the country’s safe haven status and its currency should help the Straits Times Index (STI) to outperform most regional markets.
In his Singapore equity strategy report, Jaiswal says he still remains constructive on STI delivering positive returns in 2022. However, he believes an upward move for the index will be a slow grind as investors assess the impact of rising inflation, rising interest rates, and slowing economic growth.
RHB’s end-2022 STI target of 3,380 points is based on a 12.5x 2022F P/E, which lies between the average forward P/E since Jan 2008 and its -1SD.
The firm’s themes in 2HFY2022 include buying banks as a proxy to rising interest rates; continuing exposure to economic reopening and living with Covid-19 plays; buying stocks of companies that offer defensive earnings outlook; as well as buying REITs that are defensive and will benefit from the economic reopening.
The rising interest rates in an environment with low recession risk and a robust labour market should continue to be advantageous for banks, says Jaiswal. The main area of optimism for Singapore banks will be the growth of net interest margin (NIM) as a result of the US Federal Reserve’s aggressive rate hikes.
“Banks are actively repricing loans and are likely to see an improvement in NIM. Even while waning investor confidence is starting to reduce credit demand, this should offer some relief,” he adds.
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Based on guidance provided by banks, every 25bps rise in interest rates would lift FY22 NIM by 7bps-8bps for DBS, 4bps-5bps for OCBC Bank and 3bps-4bps for United Overseas Bank (UOB). This would translate to an earnings uplift of 5% for DBS, and 3% for OCBC and UOB, notes Jaiswal.
While RHB is keeping an eye on the prospects of a recession, it remains optimistic on Singapore banks due to the undemanding valuations after a disappointing share price performance in 1HFY2022. RHB has an “overweight” rating on Singapore banks with DBS and OCBC as top picks.
Under the reopening theme, RHB sees the country’s reduction in travel restrictions as an opportunity to build optimism on sectors that have been hit hardest by the pandemic such as aviation and tourism-related services.
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Within RHB’s coverage, ComfortDelGro, Genting Singapore, Kimly and Singapore Telecommunications should be the key beneficiaries of the theme. Other beneficiaries include HRnetgroup, Raffles Medical and Thai Beverage.
Although the likelihood of a recession in 2HFY2022 is low, high material, energy and labour costs as well as rising rents are anticipated to be challenges for Singapore's businesses.
Having searched for companies that can offer stable profitability in the face of decreasing growth and increasing inflation, RHB’s stock picks for this theme includes City Developments, Sheng Siong and ST Engineering.
Meanwhile, amid rising macroeconomic risks and inflationary pressures, RHB expects S-REITs to register positive DPU growth in 2022. Although volatility is expected to increase, Jaiswal believes selective REITs are currently trading at attractive valuation, offering good long-term entry levels.
For the second half of the year, RHB anticipates investors to shift back into defensive industrial REITs versus reopening play sectors REITs such as hospitality and retail, which outperformed in 1HFY2022. RHB prefers industrial and office REITs, with top picks including Ascendas REIT, Suntec REIT and ESR-LOGOS REIT.
As at 11.58am, the STI is down 8.23 points or 0.26% lower at 3,183.89 points.
