REITs expected to be a favourite with brokerages this year on the back of anticipated rate cuts
The Singapore market ended 2023 with minimal change, influenced by increasing interest rates and macro uncertainties that impacted overall sentiment. While it lagged behind robust US markets, it outperformed other regional markets that experienced substantial double-digit declines, solidifying the Straits Times Index’s (STI) reputation as a resilient safe haven.
The three local banks, which together make up nearly half the weightage of the Straits Times Index, are expected to report record FY2023 earnings next month but there are already jittery investors trying to get their foot out of the door ahead of the cycle of lowering interest rates.
“Singapore outperformed most Asean peers over the last two years, driven by its safe-haven currency amid extended inflation pressures and banks-related performance tilt in a rising rate environment,” says Citi Research’s team of analysts in their Nov 20 Singapore equity strategy report. “These factors are likely to see headwinds into FY2024,” the Citi analysts note, adding that any outperformance in the third consecutive year, would be a “black swan event”.
While the STI ultimately closed at a “muted” 0.3% lower in 2023 compared to the outperformance of 4% in 2022, the Citi team, which has a year-end target of 3,400 points, sees volatility ahead.
In a bid to wrestle with inflation, Singapore has kept the Singdollar (SGD) high. Doing so has helped boost market performance in FY2022 and FY2023. With inflationary pressures easing, there is less compunction to maintain this monetary policy. “Relative to most regional currencies, we forecast the SGD to perform among the lower half of the regional currencies versus the US dollar (USD). This could serve to drive investment flow to stronger currency outlook markets,” says the Citi team.
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Within Asean, the team expects Singapore to remain the slowest-growing economy this year as the country’s exposure to external market environments could be “particularly challenging” with expected slowdowns in the US and European economies in 1H2024.
However, various analysts deem the valuation of Singapore equities cheap relative to its history and Asia Pacific (Apac) peers at 11 times P/E and over 1 standard deviation (s.d.) below its mean. “This, however, appears well justified with US bond yields at nearly 2 s.d. above mean, justifying lower valuation multiples given higher discount rates,” says the Citi team.
OCBC Investment Research strategist Carmen Lee also sees the STI’s valuation undemanding compared to its 10-year historical averages. This has helped boost returns in the form of higher yields. As at Jan 10, the STI closed at 3,179.96, which translates to a dividend yield of around 5.7%, the highest among the regional markets. The yield is also higher than the 10-year average of 3.38%. “This is compelling for medium- to longer-term investors looking for a steady stream of dividend income,” says Lee.
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Furthermore, the relative stability of the market here is a positive attribute for investors with a regional perspective. “The STI’s reduced volatility versus its peers makes it ideal to add to a diversified portfolio to reduce price movements and volatility. Market uncertainty reinforces the need for increased investments in less volatile markets,” she adds.
In 2023, markets were moved by events such as the collapse of the Silicon Valley Bank in the US and the resurgence of war in the Middle East. Lee expects such volatility to remain this year. “[A] macroeconomic slowdown, several key elections and geopolitical tensions will set the stage for another volatile year in 2024,” she says.
She adds that Singapore is also likely to be affected if external demand weakens faster than market expectations, referring to the likelihood of slower growth in the US and Chinese economies next year.
Singapore companies may not be spared either, particularly those heavily reliant on external demand and likely to face a challenging environment of slower sales in 2024. On the other hand, companies that are focused on the domestic market and are cash-rich may be able to stand out and even register growth, Lee says.
The property sector, negatively affected by high rates, could enjoy a reprieve in 2024 as the US Fed has signalled that there will be three rate cuts then. “Lower rates could also benefit other sectors and stimulate consumption,” says Lee.
Maybank Securities analyst Thilan Wickramasinghe is also more cautious going into 2024. In his report dated Jan 5, Wickramasinghe has lowered his 12-month STI target to 3,290 points from 3,629 points previously as he downgraded target multiples to –2 s.d. below the long-term mean versus the earlier peg to mean valuations.
While he sees some earnings upside this year, he remains careful. “Until the dynamics of a robust fiscal impulse in the US and China’s sputtering growth reverses, Asean valuations — including Singapore’s — could see headway capped,” he notes.
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UOB Kay Hian’s Adrian Loh and the Singapore research team forecast the STI to reach 3,290 points by the end of 2024. Loh’s target is also based on an overall earnings growth of 2.4% y-o-y and target P/E and P/B of 12.5 times and 1.04 times respectively.
“Both target multiples are a 15% discount to the long-term average for the index — this is higher than our historical 10% discount as Singapore’s moderating earnings growth and potential risks to the regional and global economy are key overhangs,” he writes.
At current levels, with FY2024 P/E and P/B of 9.9 times and 1 time respectively, the STI’s valuation is not “stretched”. “These multiples are meaningful discounts to the STI’s long-term averages, and also inexpensive versus its peers in the region and vs its own 10th to 90th percentile range,” says Loh.
UOB Kay Hian expects the aviation, finance and healthcare sectors to be the ones that will degrade any positive earnings growth while the REITs sector may see earnings curtailed by high interest rates.
“We highlight that for STI component stocks, Bloomberg consensus forecasts 3.1% y-o-y EPS growth for 2024,” he says. Based on Bloomberg’s forecast, the year-end STI target would range from 3,680 points to 3,900 points, he adds.
The team at JP Morgan has rated Singapore stocks “underweight” as slowing external demand amid a peaking interest rate environment would not bode well, especially for the banks. “We believe the road ahead is bumpy for banks. Global interest rates are peaking and consensus expectations are gearing towards policy rate cuts in 2H2024 (JP Morgan expects 100 bps rate cuts by end of 2024).”
Sunshine after the rain
Not all analysts predict doom and gloom though. DBS Group Research analysts Yeo Kee Yan and Foo Fang Boon expect Singapore to outperform in a slow growth environment in 2024. “The global soft-landing has set up a stable backdrop for Singapore’s small open economy. While global GDP is set to moderate due to declining growth in the US, a recession will likely be avoided. A stable contribution from China is equally important, with a soft rebound and GDP growth of +4.5% expected in 2024,” they write in their Jan 4 report.
They expect the slowing growth expected by banks to offset the recovery in other sectors such as technology, consumer staples and several industrial names. The analysts have predicted an end-2024 target of 3,485 points, which is the highest among the brokerages here. Their target is “conservatively pegged” between 10.8 times and 11.5 times FY2024 P/E or –2 s.d. and –1.5 s.d. respectively. “We see limited downside; an attractive 5.4% FY2024 benchmark yield and multi-year-low PE and P/BV valuations offset low-single-digit earnings per share (EPS) growth,” they write.
RHB Bank Singapore analyst Shekhar Jaiswal sees the STI outperforming this year due to earnings growth as opposed to an improvement in valuation multiple. “If our positive view of the economic outlook materialises, we could see some positive revisions to the 2024 STI EPS,” says the analyst in his Dec 20, 2023, report.
Looking ahead, Jaiswal expects the STI’s EPS to grow by some 4.5%, noting that the moderation in earnings growth for the index is mainly due to lower earnings expected in the banking sector, which has a large weight in the index.
In his Jan 5 report, the analyst reiterates his view that all sectors — except banks — will deliver positive EPS this year. That said, he is expecting the overall EPS growth for the stocks within RHB’s coverage to drop to 8% amid a “sharp deceleration” in the earnings of banks.
“The Street had turned extremely cautious on the 2024 earnings outlook with the overall y-o-y earnings growth expectation declining to 2% versus 15% growth expectations at the start of 2022. Much of this, we believe, is due to lower earnings for banks,” says Jaiswal.
“Despite the downgrade in the STI’s 2024 EPS growth estimates, the Street has continued to upgrade 2024 earnings estimates for the following sectors: Transport, utilities, and industrials. Financials saw a slight upgrade to earnings after banks reported better-than-expected results in 3Q2023. Upgrades to 2025 earnings estimates are largely in the transport, utilities and REIT sectors,” says Jaiswal, whose year-end STI target estimate is 3,380 points, based on 11.25 times P/E multiple applied to the index’s FY2025 EPS.
PhillipCapital’s Paul Chew is optimistic about Singapore equities and bonds as the world enters into a monetary easing cycle. “The Fed is not only prepared to cut rates three times in 2024 but also cut them pre-emptively. Given its recognition of a time lag in the transmission of higher interest rates to economic activity, it is willing to cut even before it senses a meaningful economic slowdown or inflation hits its 2% target. With a Fed ready to act, any economic slowdown will be backstopped by easier financial conditions,” says Chew. “Singapore is likely to go back to trend growth of 1%–2%. A modest recovery in exports, foreign direct investments, tourism and population growth will drive this growth.”
In their strategy report dated Dec 11, 2023, CGS-CIMB Research analysts Lock Mun Yee, Lim Siew Khee and the Singapore research team note that Singapore remains one of the more resilient markets in Asean due to its “safe haven” status, strong SGD and high dividend yield.
As the Singapore market is expected to deliver a total return of around 10% including a dividend yield of 6%, the team is positive on high-yield plays, which will “continue to garner mindshare with investors.
“Our dividend yield screen shows the three Singapore banks — UOB, OCBC, DBS — could potentially pay 6.7%–8% yields in FY2024. Other big-cap names that fit our criteria of [over] 6.5% yield or have upside catalyst includes ComfortDelGro C52 (CDG) and Netlink NBN Trust,” states the CGS-CIMB team, whose year-end STI target is 3,392 points, pegged at 11 times FY2024 P/E and translates to a target dividend yield of 5.4%.
The analysts at Morgan Stanley Research see Singapore as a safe haven for investors, thanks to the country’s resilience, which is a “hallmark characteristic” of its equity markets.
“Thanks to a larger index weighting skew toward banks, Singapore tends to outperform Apac ex-Japan when US 10Y government bond yields are high — which is likely to persist in the year ahead,” the team writes in its Nov 13, 2023, report. “In addition, Singapore typically outperforms during emerging markets (EM) bear markets, and is the preferred market within our Asia equity strategy team’s recommended portfolio allocation for its lower beta.”
Amid subdued global markets, Singapore could benefit from the capital flows that are expected to pivot more defensively in 2024. “Grappling with risks of higher-for-longer interest rates and China falling into a potential debt-deflation loop, investors are likely to tread cautiously in 2024. Global markets appear to be already priced for a soft landing and equity markets across the US, Europe, and Apac ex-Japan offer a subdued 4%–6% capital return potential over the next 12 months,” says the team.
