Singapore’s economy is expected to close 2023 with a modest growth of 1.1%. But economists anticipate a slight uptick in the new year, driven by increased demand for electronics and a recovery in China.
Maybank economists Chua Hak Bin and Brian Lee Shun Rong have pencilled in a growth of 2.2% for 2024, thanks to a recovery of the manufacturing sector, which has been a drag on the economy for over a year.
They see “green shoots” sprouting in exports and manufacturing amid a brightening global outlook as US customers use up excess inventories and launch new products, leading to the start of a new cycle of upgrades. On the other hand, the services part of the economy is seen to subside as the post-pandemic recovery bounce normalises.
According to the Maybank economists, two broad “transitions” underpin the changes this coming year. The first is a political transition, where Lawrence Wong is seen to take over the top job from Prime Minister Lee Hsien Loong.
The second is a “green transition” as Singapore gets ready to deploy a “massive capital” pool of more than $100 billion over the next century to prepare for climate change and achieve its net-zero emissions target by 2050.
Meanwhile, inflation is seen to remain “sticky” in the near term, extending the pain felt by both businesses and consumers alike. While the US Federal Reserve is expected to cut its rates sometime in 2024, Singapore is bracing for another bout of price hikes ranging from utility bills to taxi fares to postage rates — with the next 1% GST hike to 9% taking effect in the new year.
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Furthermore, wage cost pressures amid a tight labour market will limit the fall in inflation while prices will also be supported by steady consumer demand. Nonetheless, core inflation, according to the Maybank economists, will average at 2.8% this coming year, a significant easing from the 4.2% estimated for this year.
Key risks include a renewed climb in inflation caused by the persistent shortage of labour or new shocks to commodities prices from geopolitical events such as the Israel-Hamas war.
Higher inflation might just lead to a global recession this coming year, triggered by the US Federal Reserve Board raising its rates further as it prioritises fighting inflation over everything else. If so, this will derail the recovery of global trade.
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“Higher interest rates for an extended period will dampen the recovery of the financial sector and impact highly indebted companies. A deeper China downturn could also raise the risk of a global recession,” the Maybank economists say.
Meanwhile, CGS-CIMB Research’s team of analysts have pointed out that for all the woes of 2023, the Singapore stock market has held relatively steady. It has lived up to its “safe haven” status, showing better resilience versus other Asean bourses. In its Dec 12 note, the brokerage projects the Straits Times Index (STI) to end 2024 at 3,392 points, which is pegged to 11x FY2024 earnings and gives a yield of 5.4%.
UOB Kay Hian’s estimate is not too different, with the STI expected to end 2024 at 3,290 points, an increase of around 6% from current levels. This target, according to the brokerage in its Dec 4 note, is based on 2.4% y-o-y earnings growth and target P/E and P/B of 12.5x and 1.04x respectively. Both target multiples are a 15% discount to the long-term average for the STI, which is a bigger discount versus the 10% historical average, to take into account Singapore’s moderating earnings growth and potential risks.
In any case, the STI at current levels is not trading at “stretched” valuations by any measure, especially if its projected yield of 5.8% is taken into consideration.
Play the laggards
UOB Kay Hian’s strategy is to “play the laggards” — defined as those stocks that have dropped significantly from their 52-week highs. Unsurprisingly, REITs, hit hard by higher than longer rates, make up 9 out of the 20 top stocks picked via this filter.
In 1H2024, UOB Kay Hian sees a few stocks that could rebound. The first “very compelling” case is Venture Corp, which the brokerage upgraded to “buy” in early November following a 30.6% drop from its 52-week-high. The blue-chip manufacturer is now trading at just 12.6x FY2024 earnings or 9.2x ex-cash, which is around 0.5 s.d. (standard deviations) below its long-term mean. In addition, its yield, underpinned by the big cash hoard, is at 6.2%.
Another “laggard” stock favoured by UOB Kay Hian is Seatrium, which is 32.5% off its 52-week high as at Dec 1. The company, which is the combination of Sembcorp Marine and the offshore and marine unit of Keppel Corp, is likely to see earnings turn around this coming year, with more new orders from the oil & gas industry and, more significantly, from the renewables energy industry.
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The list of stocks favoured by UOB Kay Hian includes Thai Beverage Y92 and Food Empire in the consumer sector; Oversea-Chinese Banking Corp (OCBC) for local banks; ComfortDelGro C52 for land transport; Far East Hospitality Trust Q5T and Mapletree Industrial Trust ME8U for REITs; and Seatrium and Sembcorp Industries U96 among shipyards and industrial companies.
Other stocks include Sats, SIA Engineering, Genting Singapore G13 , Raffles Medical, Bumitama Agri P8Z -Resources, First Resources EB5 , Wilmar International F34 and CapitaLand Investments.
High-yield plays
CGS-CIMB believes high-yield plays will still be in favour by local investors. Of the 10% in total return expected by investors, 6% of that will come from dividends. Based on CGS-CIMB’s screening of counters projected to give a yield of more than 6.5%, the list includes United Overseas Bank U11 , OCBC and DBS Group Holdings, which are likely to yield 6.7% to 8%. Netlink NBN Trust, which is the monopoly owner of the nationwide fibre optic network, is seen to yield 6.5%.
ComfortDelGro is only seen to give a yield of 5.9% but CGS-CIMB likes the stock as margin expansion from bus operations in London will help drive earnings in the coming year. Smaller companies with good yield potential include steel supplier BRC Asia BEC and finance company Yangzijiang Financial Holding YF8 , both of which are likely to return “in excess” of 6.5%.
Beyond 2024
Similar to Maybank, CGS-CIMB alluded to the political transition scheduled to take place this coming year. Even before Wong takes his place as PM, he has actively taken the lead in projects with a longer-term view, such as the Forward Singapore (Forward SG) exercise launched in June 2022, which has identified various challenges and “pillars” to focus on covering both social and economic aspects.
“We believe building a better Singapore by addressing a wide-ranging spectrum of socio-economic issues would strengthen its standing in the medium to long term,” says CGS-CIMB.
Some of the key areas include ensuring public housing remains affordable. Also, to make the country’s economy more sustainable, energy transition into renewable sources will also be another focus. another key focus area is AI, as seen in the recent week-long festival, with the government announcing plans to triple its AI workforce target to 15,000 as part of a revised National AI 2.0 strategy in the next three to five years, says CGS-CIMB.
“With the transition to the 4G leadership to occur with policy continuity and stability, we think the balance between near-term priorities and long-term issues should enable Singapore to build a strong foundation. Hence, we believe corporate earnings should continue to expand positively in an environment of moderated inflation and interest rates,” the brokerage says.
CGS-CIMB has shortlisted some stocks deemed to be well-positioned to benefit from structural tailwinds. For the ongoing energy transition, Sembcorp Industries is an easy pick, with its active bid to increase its renewable energy portfolio.
On Dec 12, the company announced it won a JTC tender to install solar energy panels on vacant land and rooftops on Jurong Island with a total contracted capacity of 117MWp (80MW). This will bring Sembcorp’s total renewable capacity to 12.7GW, including a further 473MW of acquisitions pending completion.
Two other stocks have a clear path to step up their earnings as they are executing their expansion plans. Airport gateway services provider Sats in September 2022 launched the transformative acquisition of Worldwide Flight Services (WFS), which delayed its full recovery from the pandemic and turned Sats from a historical net cash position into one of net debt.
Although Sats’ stock price suffered, CGS-CIMB believes that with the increase in the scale of operations of its cargo business, the group will generate some $100 million in ebitda from revenue synergies through cross-selling and up-selling of services.
The way CGS-CIMB sees it, consistent new contract wins and new strategic partnerships with Kuenhe+Nagel indicate signs of a turning around in its business.
Resort operator Genting Singapore has launched its ambitious $6.8 billion plan to refresh and revitalise its offerings and grow its proportion of non-gaming revenues. New attractions include a new Waterfront hotel which will add about 700 rooms and provide “premium” services with higher-end suites that should drive higher room rates and attract more tourists.
