Stay defensive and look for value opportunities among Singapore Exchange (SGX) names, says RHB Group Research analyst Shekhar Jaiswal in a Singapore strategy note.
“Given the rising global macroeconomic risks, equity markets are likely to continue being volatile. Investors should maintain a defensive stance in 4Q2022 as we believe companies with resilient earnings, as well as the ability to pass on costs and maintain strong cash flow should outperform in the current environment,” writes Jaiswal in an Oct 26 note.
Jaiwal recommends investors to buy banks, build exposure to selective economic reopening plays and rotate into selective industrial and office REITs.
His top picks include Kimly, Sheng Siong, DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC), Wilmar International, Raffles Medical Group, HRnetGroup, ST Engineering, Centurion and City Developments (CDL).
Jaiswal writes: “Net interest margins (NIM) expansion on the back of aggressive rate hikes by the US Fed will be the key bright spot for Singapore banks. This should provide some reprieve even as weakening investor sentiment is beginning to dampen loan demand. Non-interest income is expected to remain soft in 2HFY2022, with fees from loans and trade flows reflecting the moderation in credit growth, while volatile capital markets would impact wealth management income. We expect asset quality to hold up as we believe most borrowers are having better balance sheets compared to two years ago.”
He adds: “Centurion Corp should benefit from increased demand for worker accommodations as construction activities have now resumed. HRnetGroup should be able to ride on growth in hiring volumes and salaries. Raffles Medical should benefit from the return of elective procedures and pent-up demand from medical tourism.”
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Among the REITs, Jaiswal prefers AIMS APAC REIT, CapitaLand Ascendas REIT, ESR-LOGOS REIT and Suntec REIT. “Industrial demand remains strong, mitigating supply concerns. We expect industrial rental rates to continue rising, while occupancy rates are expected to remain relatively flattish… We expect overall office rental rates to rise up to 5% in 2022 and occupancy levels to remain stable. Despite the positive rental outlook and external factors supporting Singapore’s office market, office REITs have been trading at a discount to book value.”
Finally, Jaiswal picks Singtel from the telecommunications sector and ComfortDelGro from the transport names. “ComfortDelGro should see sustained earnings recovery amid the normalisation of Singapore rail and taxi businesses operations, while the resumption of international travel should drive a recovery in roaming revenue and sale of starter packs for Singtel.”
Covid-19 not a disruption
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The recent surge in Covid-19 cases should not disrupt businesses, livelihoods and tourist inflows into Singapore, says Jaiswal. “Prospects for Singapore's manufacturing sector have dimmed, as growth in Singapore’s major trading partners is anticipated to decelerate to below-trend levels.”
Jaiswal expects the services sector to pick up some slack in manufacturing, as strong household balance sheets and wage incomes lead to continued growth in the domestic-oriented and travel-related sectors. “However, the pace of discretionary spending could moderate over the course of 2023.”
While there is still a risk of the major advanced economies entering into a recession in 2023, Jaiswal expects Singapore to witness a “below-trend but positive GDP growth” of 3.0% y-o-y. While inflation could stay elevated in the near term, it is projected to ease more in 2023.”
Analysts are estimating 2023 Straits Times Index (STI) earnings per share (EPS) growth at 13% y-o-y, says Jaiswal. “This compares with our coverage universe's FY2023 EPS growth of 16% y-o-y. However, note that our estimate excludes the manufacturing sector.”
Companies in the manufacturing sector are expected to witness significantly slower or negative earnings growth in 2023, he adds. “With expectations of a slowdown in 4Q2022 GDP growth and the elevated risk of a further slowdown in economic growth in 2023, there remain downside risks to earnings growth next year.”
Jaiswal thinks STI’s valuation is “inexpensive”, but the uncertain outlook means upside will be limited. “The STI now trades below 10.3x 12-month forward P/E as investors question the sustainability of ongoing positive earnings revisions and 2023 EPS growth. While we still expect the STI to outperform most regional markets, any upward move will be a slow grind.”
Jaiswal’s end-2022 STI target of 3,200 points, down from 3,380 points, is based on 11.75x 2022 P/E (down from 12.5x 2022 P/E). This reflects the rising risks of a favourable operating environment ahead, he adds.
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‘Plain vanilla slowdown’
Jaiswal expects a “plain vanilla slowdown” followed by a recovery in global growth, powered by a recovery in the US by the summer of 2023. “The balance of risks, which is not our base case, remains unchanged, i.e. a shallow and short recession, followed by a recovery, in the US.”
The early signs of a US recession will show itself in the trade and Purchasing Managers’ Index (PMI) data in Asia ex-Japan, since this region is the factory of the world, says Jaiswal. “In addition, we would notice weaknesses in the credit markets, in mid- to large-cap companies starting to pick up. All we are seeing is a broad slowdown in real exports and imports in Asia ex-Japan, with North Asia feeling the brunt of the slowdown due to weakness in the technology sector, and logistics issues in China along with geopolitical risks in the Straits of Taiwan.”
Southeast Asia’s real exports and imports are slowing, but mirroring more of an orderly slowdown, not a collapse, he adds. “Credit markets in Asia ex-Japan are not showing signs of stress. In the US and Emerging Market (EM) credit markets, we do not see much signs of stress or defaults either.”
Hence, Jaiswal’s 4Q2022 global asset allocation is overweight on bonds, market weight on equities and underweight on cash.
As at 12.39pm, units of the STI ETF are trading 29 points higher, or 0.96% up, at 3,055 points.
