The outsized US Federal Reserve (Fed) rate cut of 50 bps on Sept 18 should continue to support the market’s earnings for 2HFY2024, says Maybank Securities analyst Thilan Wickramasinghe.
“Widening dividend yields, improving margins and stronger capital markets and transaction activities could draw a line under REIT [and] tech manufacturing downgrades,” he writes in his Sept 24 report.
In 2QFY2024, downgrades to earnings per share (EPS) estimates rose to 25% of Maybank’s overall coverage, up from 17% in the previous quarter. The downgrades were mostly concentrated on REITs and tech manufacturing, the analyst notes.
“Further Fed cuts are tailwinds for REITs from widening dividend spreads, while also catalysing capital recycling,” he says. The lower interest rates also benefit the industrials and tech manufacturing as falling funding costs lead to higher profit margins, he adds.
At the same time, Wickramasinghe sees an upcycle in the offshore and marine (O&M) sector, rising demand for data centres due to artificial intelligence (AI), sustainability investments and seasonally stronger inbound tourism in 2H2024 should see upgrades for the gaming, industrials, internet and telecommunications (telco) sectors. Small- and mid-caps should benefit as well, he notes.
For two consecutive quarters, market earnings momentum has been positive, with y-o-y growths of 7.2% and 11.4% y-o-y in 2QFY2024 and 1QFY2024, respectively. According to Wickramasinghe, industrials, transport, consumer and financials have contributed the most to this growth.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
In the analyst’s view, growth in the offshore and marine sector driven by supportive fossil fuel prices and capacity building in green energy is poised to boost multi-year order book growth for small- and mid-caps, while growing demand for data centres driven by AI should benefit telcos. Given the upcoming holidays, Wickramasinghe expects a seasonally stronger performance for the gaming sector.
Meanwhile, the lower rates may see an impact on banks’ net interest margins (NIMs), but the decline should be slow due to hedging ahead of cuts and loan growth reactivation, he says.
Further to the report, Wickramasinghe notes that Singapore’s yield friendly market and resurgence of sectors such as offshore and marine, data centres and increasing sustainability investments are likely to support investment rotations. Wickramasinghe suggests that the Monetary Authority of Singapore’s (MAS) continued tight policy is likely to keep the Singapore dollar (SGD) supported, boosting market appeal.
See also: UOBKH calls Centurion Corp a stock for ‘growth-minded investors’
The scale and cost benefits of past AI investments are likely to appear in margins going forward and a positive conclusion of the Johor-Singapore special economic zone (JS-SEZ) by the end of this year is a strong upside catalyst, in Wickramasinghe’s opinion.
Other themes that could drive the Singapore market in the medium-term include rising yield spreads as corporates increase payouts and capital management met with falling government bond yields; the restructuring of companies and government-linked companies (GLCs); decarbonisation and productivity enhancements from AI.
With this in mind, the analyst has increased his 12-month target Straits Times Index (STI) to 3,890 points, from 3,583 points previously. His target, which is based on the 50:50 weighting of bottom-up fundamentals and target price-to-earning ratio over price-to-book ratio (PE/PB) methodology remains unchanged. However, his target multiples are raised to the companies’ long-term mean as opposed to the earlier -1 standard deviation peg.
Wickramasinghe has identified his top picks as CDL Hospitality Trusts J85 (CDLHT), CapitaLand Investment (CLI), CSE Global 544 , DBS Group Holdings, Far East Hospitality Trust Q5T (FEHT), Genting Singapore G13 , Marco Polo, Sea, Singapore Telecommunications Z74 (Singtel) and Starhub.
As at 4.07pm, the STI is trading 43.69 points lower or 1.21% down at 3,579.05 points.
