DBS Group Research equity analysts Yeo Kee Yan and Janice Chua say that the market faces a “correction” this month according to historical trends, following the rebound seen in July.
The Straits Times Index (STI) had a 3.35% month-on-month (m-o-m) rebound in July, in line with Yeo and Chua’s expectations. However, August has consistently been down m-o-m for
the STI in non-crisis years since 2010 with an average decline of 3.92% and a median decline of 3.2%. This is true regardless of US mid-term election years, including 2022, which tends to create a benign environment for US markets in the three months leading to it, say the analysts.
“We believe this August will be no exception, given uncertainties about global growth slowdown, inflation, and rising rates. We see the STI range bound over the next one to two months between resistances 3220/3260 and support at 3090, 3040, and 2985,” they add.
Results from 2QFY2022 have also “affirmed” their preferences for reopening beneficiaries. Stocks that have released strong earnings for the quarter were Singapore Airlines (SIA), amid the rapid turnaround in passenger traffic/volume and as yields strengthened, Frasers Centrepoint Trust (FCT), as tenant sales reached 110% and shopper traffic rose to a new high of 79% versus pre-Covid levels, and Keppel REIT on the strong double digit rental reversions by Singapore assets.
“Meanwhile, Genting Singapore’s (GENS) results release in August should be watched. Marina Bay Sands (MBS) reported better-than-consensus numbers recently, which dispels concerns that recovery for the Singapore gaming sector will be moderate due to the lack of Chinese tourists,” write Yeo and Chua.
“We believe that outsized earnings, foreign exchange (forex) hedges, and improved contribution from the Singapore market will more than offset the impact of a stronger SGD for reopening beneficiaries such as SIA, Ascott Residence Trust (ART), CDL Hospitality Trusts (CDLHT), and ComfortDelGro. The SGD continued to strengthen against global peers EUR, JPY and GBP after the Monetary Authority of Singapore (MAS) made another tightening move in mid-July, the fourth since October last year,” they say.
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The DBS analysts say the MAS’ tightening on stable gross domestic product (GDP) growth was a “surprise”, as MAS re-centred the midpoint of the Singapore dollar nominal effective exchange rate (S$NEER) policy higher in another off-cycle move to curb imported inflation, revising its forecast for core inflation to reach 3 to 4%, up from 2.5 to 3.5%, for 2022.
DBS’s currency strategist sees USD/SGD staying below 1.40 this year. A stable SGD helps fund outflow and establish Singapore as a “regional haven”, but make exports more expensive and subject companies to translation losses. Yeo and Chua add that SGD strength can lead to translation losses for companies with non-SGD revenue but report earnings in SGD.
Aside from reopening beneficiaries that are benefitting from pent-up travel demand, the analysts also prefer companies and sectors that “exhibit resilience” in their business models as concerns about the global growth slowdown continue to weigh on markets even as rates stay elevated.
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The DBS analysts’ picks are Sembcorp Industries as a green transformation and utility play, consumer staple Sheng Siong that has seen organic growth from a higher store count, Singtel for its structural growth with its 5G adoption that is less reliant on economic conditions, ST Engineering as the company rides on crucial global needs of digitalisation, urbanisation, sustainability and security and Venture Corp for its robust customer base and ability to command higher margins.
Yeo and Chua also note that the STI has been supported by the recovery in banks’ share prices as they recovered from recent selling pressures, continuing to remain beneficiaries when rates rise. Meanwhile, consumer staples were dragged by Bumitama and First Resources’ underperformance as crude palm oil (CPO) prices fell. After earnings downgrades by DBS analysts in the information technology sector, performance was mixed — iFast and Nanofilm were laggards, while Aztech beat estimates.
Positively, the return of a large-scale National Day Parade underscores the Singapore government’s Covid-endemic commitment, with more meetings, incentives, conferences and exhibitions (MICE) events expected to come.
The analysts expect strong demand for outbound tourism for holidays, with most countries easing their Covid-19 restrictions, as well as for the returning influx of inbound travellers. Singapore hotels’ revenue per available room (RevPAR) reached $183.31 in June, the highest reading since the start of the pandemic. Yeo and Chua believe that RevPAR is likely to return to pre-Covid levels by 2023, instead of the earlier assumed 2024.
Singapore recorded around 1.5 million tourist arrivals in 1H2022 and is expected to receive 4-6 million visitors for the full year. The analysts also note that tourists are also staying longer, with the average length of stay at 7.1 days compared to pre-pandemic levels of 3.4 days.
Looking to the US, the analysts say the American consumer price index (CPI) will be watched closely as a signal of inflation peaking, and whether the Federal Reserve (Fed) will respond with another “jumbo hike” in September’s meeting.
As at 11.35am, the STI is trading 7.54 points higher or 0.23% up at 3,426.69 points.
