There is no question that cash and bonds are giving stocks some serious competition for investor money. As we have articulated, for the first time in years, investors can now earn meaningful real returns (after adjusting for inflation) without being forced to take on excessive risks. For instance, US dollar fixed deposits and government-Treasury money market funds are offering yields well above 5% (see Table 1).
Longer-dated bonds, too, we believe, are attractive at this point in time, given prevailing uncertainties in the global economy and corporate earnings. In our article titled “Bonds, not stocks, provide near-term investment opportunities with positive real yields and little risks” in the issue dated Nov 27, 2023, we highlighted some investing options in low-cost exchange-traded funds (ETFs) for sovereign and high-grade corporate bonds, the majority of which are listed in the US.
Choices for Malaysia and Singapore investors who prefer to invest in their domestic currencies are significantly more limited, and most have very low liquidity. The next best alternative is probably high-yielding stocks, which typically have lower volatility, buffered by their stable dividend payments. Nevertheless, they will inevitably have higher risks than investing in government and highgrade corporate bonds. Therefore, investors would need to take this into account, in balancing the potential risks and rewards.
A key factor would be whether the dividends are sustainable, for instance, in the event of a global economic slowdown or recession. Dividend payments, unlike bond coupons, are discretionary. Obviously, a good starting point would be companies that are in net cash or have low gearing — we believe credit risks will rise in a higher-for-longer interest rates world — and comparatively defensive business and income streams. We filtered stocks listed on Bursa Malaysia and the Singapore Exchange S68 (SGX) based on these criteria (you can perform your own search, based on your set of criteria, on AbsolutelyStocks.com).
For SGX, we think the best bets for higher-than-market average yields are in its wide range of real estate investment trusts (REITs) and the three large domestic banks. REITs were sold down as interest rates were rising some level of gearing, rising interest expenses — as borrowings are gradually repriced — will erode margins and profits. Rising yields on cash and equivalent further make investing in REITs less appealing and the values of their future cash flows also drop with higher discount rates. With interest rates expected to be near their peak or having peaked, however, investor interest appears to be returning. Share prices have reversed higher of late, as valuations are now more attractive, following the sell-off.
Current dividend yields for the Singapore banks are also very attractive. Dividend payments from DBS, OCBC and UOB have all recovered from the drop during the pandemic and are, in fact, at record-high levels. While there are headwinds for the sector — including slower loans growth, rising credit risks and likely peak net interest margins (NIMs) — the banks are growing capital. And they are returning surplus capital to shareholders. For instance, DBS paid special dividends last year and raised its dividends in the last two straight quarters; and OCBC recently upped its target dividend payout ratio to 50%. Over the longer term, the banks are the engine that will continue to drive Singapore’s economic growth.
As we said before, investing in foreign assets exposes one to currency risks. So, any decision to do so should take into consideration your outlook for the relevant currencies. We are not going to predict currency values here (the foreign-exchange [forex] market is very complex), but we have our preferences.
We think minimal risk US Treasuries are fairly good investment options right now, offering real yields and as inflation continues to moderate. The US dollar has weakened against most currencies, including the ringgit and Singapore dollar, in recent weeks as expectations for peak US interest rate and imminent rate cuts grew. We think these expectations, for a quick and sharp Fed pivot, are premature and overdone. And higher-for-longer US interest rates will be supportive of the greenback, at least in the near and medium term. The US dollar is also not excessively overvalued from a longer-term historical perspective, considering its positive interest rate differentials and growth outlook against major developed economies (see Chart 1). It has appreciated against the ringgit over the past decade (see Chart 2).
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Singapore has a managed float exchange rate system, benchmarked against a basket of currencies. That said, the Singapore dollar has demonstrated clear long-term strength against both the US dollar and especially the ringgit (see Chart 3). The currency strength reflects its strong underlying fundamentals, including large trade surplus (in absolute terms and as a percentage of GDP) as well as foreign direct investment (FDI). As the de facto regional financial hub, Singapore attracts the lion’s share of FDI flows into Asean. As such, we expect the Singapore dollar will continue to gradually strengthen. If so, returns will be boosted by currency gains. This being the case, we added OCBC and DBS as well as Fraser Logistics & Commercial Trust and Mapletree Pan Asia Commercial Trust N2IU to our portfolio (see Table 2).
As for Malaysian high-yield stocks, we chose property developer UOA Development and Malayan Banking (Maybank) — we estimate sustainable dividend yields of 6% for both companies.
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UOA Development has a cash pile that has been growing steadily, from RM443 million in 2017 to RM2.3 billion at end-June 2023 (equivalent to about 95 sen per share).
The company paid a higher interim dividend of 20 sen per share for the current financial year ending December, double the 10 sen per share in 2022. Its shares are currently trading well below book value of RM2.25, at less than 0.8 times.
Maybank, the largest listed company on Bursa by market cap, has been fairly consistent in its dividend payments. Its payout ratio averaged 85% of net profits in the past five years. The bank paid an interim dividend of 29 sen per share in September, slightly higher than the 28 sen for the previous corresponding period. Dividends totalled 58 sen per share in 2022. Its shares are trading at reasonable 1.2 times book value.
The Malaysian Portfolio fell 0.7% last week. As mentioned above, we added four SGX-listed and two Bursa-listed high-yielding stocks to the portfolio. Following these transactions, our cash was pared down to RM102,040 and the portfolio is now 80.1% invested. All stocks were down, with the top losers being UOA Development (-1.8%), Mapletree Pan Asia Commercial Trust (-1.7%) and Insas (-1.1%). Total portfolio returns now stand at 156.9% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 21.0%, by a long, long way.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
