As the Russia-Ukraine conflict drags on, Maybank Securities analyst Thilan Wickramasinghe sees risks of the prolonged conflict dragging Europe into a recession.
As Singapore’s GDP has a sizeable 7.7% exposed to the European Union, a slowdown on the continent could have negative impact on revenues, costs and returns for Singapore’s corporates, says the analyst.
The rising risks of Europe seeing a recession given its high dependence on Russian energy supplies could have a domino effect on Singapore’s economy and corporates in terms of downsides to sales, he reiterates.
“Our screening shows selective stocks in sectors such as banks, property, industrial and hospitality REITs, transport and tech have material European revenue sources,” he writes in his March 14 report.
Europe has become a core market for REITs such as Ascott Residence Trust (ART), CDL Hospitality REIT (CDLHT), Ascendas REIT (A-REIT), Keppel DC REIT (KDC REIT) and Frasers Logistics and Commercial Trust (FLCT) due to their expansion overseas.
Property developers such as City Developments Limited (CDL), CapitaLand Investment (CLI) and UOL have around 5% to 15% of fixed assets in Europe, while transportation names including Singapore Airlines (SIA) and ComfortDelGro (CDG) have a “sizeable EU exposure,” notes Wickramasinghe.
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In the tech sector, Frencken has the highest share of revenues from Europe at 41% while AEM and Aztech have “notable shares”.
“Separately, the banks have 14%-18% of loan books classified as ‘rest of the world’. This largely comprises of developed economies, where we believe Europe is a sizable contributor from a wealth management, corporate finance, and trade finance perspective,” adds the analyst.
At the same time, Singapore’s mid-caps have a larger exposure to Europe at 25% of their market cap, compared to 20% for large caps and 14% for small and microcaps, he points out.
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Singapore’s mid-caps are classified as companies with market caps of within $1 billion to $5 billion.
On the ongoing uncertainties in the market, Wickramasinghe has recommended a barbell portfolio approach that balances “defensiveness with structural growth”.
“The geopolitical uncertainty from the Russia-Ukraine conflict, China’s policy on common prosperity, plus economic uncertainty from a European slowdown increases the need for earnings certainty and competitive motes: CapitaLand Integrated Commercial Trust (CICT), Bumitama Agri (BAL), Singapore Exchange (SGX), Singapore Telecommunications (Singtel) and Wilmar International,” says the analyst.
“Concurrently, accelerating Covid reopening and exposure towards long term themes such as environmental, social and governance (ESG) principles, digitalization and emerging markets (EM) consumption should support structural growth,” he adds, putting forward recommendations such as CDG, CLI, DBS Group Holdings, Frencken and United Overseas Bank (UOB).
Photo: Bloomberg
