While China’s great reopening could hit more bumps compared to Hong Kong, the move is inevitable and will benefit Singapore, say DBS Group Research analysts Yeo Kee Yan and Janice Chua.
Some names on the Singapore Exchange (SGX) are set to “ride a second wind” from China’s reopening, say Yeo and Chua in a Jan 3 note. “The refocus on employment, income growth and consumer spending benefits companies with Hong Kong and China assets, such as malls, F&B and developers. The anticipated influx of Chinese tourists from 2H2023 is a powerful second wind for Singapore’s services sector to sustain the momentum of the current recovery.”
Broadly, DBS analysts are positive on Singapore’s banks, retail REITs, hospitality REITs, tech, transport and consumer names. On the flip side, DBS analysts are negative on plantation stocks and office REITs owing to falling crude palm oil prices and financial companies cutting back their space in the CBD, respectively.
China’s reopening
The anticipated full reopening of Hong Kong-China borders in January benefits Mapletree Pan Asia Commercial Trust (MPACT) and DFI Retail, say Yeo and Chua, while China’s top focus to boost domestic consumption going forward is positive for CapitaLand China Trust (CLCT) and Sasseur REIT, given that consumer sentiment and retail sales were the most negatively impacted from these policies.
At home, the return of Chinese tourists will benefit Singapore Airlines (SIA), SIA Engineering and Genting Singapore, which outperformed the broader market in 2022 as other countries reopened, note Yeo and Chua.
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Owners of Chinese assets and operations will also benefit from improvements in operations and positive asset revaluations, they add. Some names include CapitaLand Investment, Mapletree Logistics Trust (MLT), Hutchison Port Holdings Trust (HPHT), Hongkong Land, Aztech and Nanofilm.
US Fed pivot
With the Fed funds rate at 4.5%, the current interest rate hike cycle is 90% over, say Yeo and Chua. “DBS Economist Research sees rates peaking at 5% in 1Q2023 and holding steady through 2023. The Fed funds futures currently prices in a similar terminal rate with a 2x 25 basis points (bps) cut by end-2023.”
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Interest rate-sensitive sectors, such as REITs and technology, were rate hike casualties in 2022. “With the end of the current rate hike cycle in sight, we expect a more benign environment for last year’s rate hike casualties and seek out opportunities among this group,” say the DBS analysts.
On top of CLCT and MPACT, other beneficiaries of this theme include CapitaLand Ascott Trust (CLAS), which will also benefit from Japan’s reopening.
Meanwhile, suburban retail names Frasers Centrepoint Trust (FCT), Lendlease Global Commercial REIT (LREIT) and CapitaLand Integrated Commercial Trust (CICT) are resilient even if a recession strikes, say the DBS analysts.
Industrial names, too, offer better distribution per unit (DPU) resilience with upside surprises, say Yeo and Chua. These names include CapitaLand Ascendas REIT (CLAR), Frasers Logistics & Commercial Trust (FLT) and CapitaLand India Trust (CLINT).
“These nine REITs have an average interest coverage ratio (ICR) of 5.2x and gearing of 36.6%, well within the threshold set by the Monetary Authority of Singapore,” note the analysts. S-REITs with ICR ratios of below 2.5x must keep gearing at below 45%.
Their average percentage of debt expiring going forward is just 19%, note Yeo and Chua, with a high 74% hedged to fixed rates. “FLT was the best all-rounder among the financial matrices.”
With the global economy slowing down, DBS’s economists expect the drag from Singapore's manufacturing and electronics cluster to continue. “We are more selective on technology names. Consumer electronics demand weakness remains a concern even as supply chains should normalise as China shifts away from its zero-Covid-19 policy. Our picks are UMS and Venture Corp,” write Yeo and Chua.
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Economic slowdown
In a year of global slowdown and uncertainty, Yeo and Chua seek out companies with resilient earnings and fundamentals. “Even as the Greater China reopening is a positive driver in 2023, we remain mindful that the developed economies of the US will slow down dramatically while Europe faces recession risk. Rates are also expected to remain elevated with the Fed funds rate seen holding at 5% through 2023.”
DBS forecasts GDP growth of 0.3% for the US in 2023, and -0.4% for Europe over the same period.
Yeo and Chua like companies that can sustain revenue growth in an economic slowdown, protect margins amid cost increases and keep gearing low. “Beyond operations, we also highlight stocks with potentially resilient share prices. In this regard, ThaiBev, Raffles Medical and LendLease REIT are beneficiaries of China’s reopening. 2023 could also be a year for meaningful earnings turnaround for SIA Engineering and City Developments, coupled with potential value to be unlocked through corporate actions. Lastly, share prices of UOB and ComfortDelGro should be supported by stable earnings and the potential for higher dividends in 2023.”
STI end-2023 target: 3,600
Equity markets spent the most of last year pricing in escalating inflation, rapidly rising and higher for longer interest rates, war and worries about a looming recession, say the DBS analysts.
“It was only in the final weeks of 2022 that stock markets in Asia including Singapore reacted to positive developments from China’s zero-Covid-19 shift, an end in sight to the Fed rate hike cycle and more stable regional currencies outlook,” they add.
The benchmark Straits Times Index (STI) currently trades near 11.3x FY2023 P/E despite a healthy 12.4% earnings growth outlook, note Yeo and Chua. “We see a more benign year ahead with 2023 year-end target of 3,600 despite uncertainties over a slower growth, higher inflation environment.”
The target suggests that markets are already pricing in a possible recession from an earnings perspective, they add. “There is room for upward rerating if Singapore does avoid a recession, with corporate earnings largely intact in the year ahead.”
As at 10.43am, units in the STI are trading 2.06 points higher, or 0.06% up, at 3,247.86 points.
