The markets will go “sideways” over the next two to three months as the benchmark Straits Times Index (STI) moves between 3,350 points and 3,538 points, say DBS Group Research analysts Yeo Kee Yan and Foo Fang Boon.
This is due to investors taking profit on the index heavyweights, which are the three Singapore banks – DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 (UOB) – and Singapore Telecommunications Z74 (Singtel), as they go ex-dividend this month. The volatility in the STI may also be attributed to the uncertainties from this year’s US presidential election, as well as the expectation of a rate cut by the US Federal Reserve (US Fed) in September. The cut will cap any upside uncertainties for the heavyweight banks but underpin the performance of lighter weight-cut beneficiaries, Yeo and Foo note.
“The current spread between STI FY2024 and Monetary Authority of Singapore (MAS) 10-year (10Y) yield is at 2.36%, closer to an attractive 2.5% level,” the analysts write in their Aug 2 report.
“We see STI supported at 3,350 (10.7 times; - 2 standard deviations or s.d. FY2025 P/E),” they add. Their year-end target for the STI in 2024 remains at 3,538 points.
According to the analysts, August has historically been the weakest month for the STI, with the index ending lower 12 times in the month over the last 14 years. The average decline noted in the month of August in the same period is at 3.35% m-o-m.
In August over the last 14 years, 11 stocks with a combined weight of 70% suffered from a m-o-m decline of over 3.5%, the analysts add. These stocks are: Seatrium, CapitaLand Investment (CLI), Keppel, Singtel, UOB, Hongkong Land, DBS, OCBC, SIA, DFI Retail and UOL.
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The REITs, on the other hand, have been relatively more resilient with an average m-o-m dip of just 1% for the seven component stocks.
Within the index, the most resilient counters were Venture Corporation V03 , Yangzijiang Shipbuilding, CapitaLand Integrated Commercial Trust C38U (CICT), Frasers Centrepoint Trust J69U (FCT) and Sats.
With that, the analysts are recommending investors invest in three of these stocks, as they are more likely to be resilient in the event of an August pullback.
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Their stock picks for this occasion are: Venture, FCT, Sats, Sembcorp and ComfortDelGro C52 .
“We screen for stocks that meet at least three of the following criteria: favourable August seasonal trend, positive earnings outlook, rate cut beneficiaries [and] ‘buy’ recommendation with at least 10% upside to [their] target prices,” say the analysts.
Looking back, July, on the other hand, has been a seasonally good month for the STI. The index briefly breached the 3,500 point mark before pulling back in the last two weeks to 3,444 months or 3.3% m-o-m as at July 29.
Index heavyweights such as the banks and Singtel led the gains ahead of their 2QFY2024 ended June 30 results and trading ex-dividends in August. Singtel was the top performer in July as it heads towards its ex-dividend date (7.9 cents on Aug 1). The announcement of the Intouch restructuring was also a “potential sentiment booster”.
The REITs, CapitaLand Ascendas REIT A17U (CLAR), CICT and Mapletree Industrial Trust ME8U (MINT) also outperformed on the hope that the rate cut cycle may start as soon as September.
Sats saw double-digit gains m-o-m on earnings recovery optimism while Seatrium also saw growth after the group issued a positive earnings alert.
Jardine Cycle & Carriage, DFI Retail, Sembcorp and Genting were underperformers in July.
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Beneficiaries of a September rate cut
REITs will benefit from a September rate cut, with DBS’s sector analyst preferring CLAR, Mapletree Logistics Trust M44U (MLT), MINT, CDL Hospitality Trusts J85 (CDLHT) to ride on the potential cut. Mapletree Pan Asia Commercial Trust N2IU (MPACT), Keppel REIT (KREIT) and Lendlease Global Commercial REIT JYEU (LREIT) will benefit from the easing of the financial covenants proposed by the Monetary Authority of Singapore (MAS) on July 24.
Companies with relatively higher gearing are also beneficiaries. Here, the analysts’ top pick is Sats for its strong earnings recovery outlook.
Interest rate cut by US Fed in September a ‘near certainty’, says PhillipCapital
PhillipCapital analyst Paul Chew believes that an interest rate cut by the US Fed in September is a “near certainty”.
“Our initial reservation was it would be too political to cut with presidential elections around the corner. But the Fed chairman said a rate cut ‘could be on the table’ in September,” Chew writes in his Aug 5 report. The markets are pricing in three interest rate cuts in 2024, Chew adds.
As such, Chew is “overweight” on the REITs sector as the world enters into a monetary easing cycle.
On the other hand, he believes valuations are “turning expensive” for the three Singapore banks following their recent share price rallies and as rate cuts place pressure on margins.
“We also worry about a looming provisioning cycle in Hong Kong. Hang Seng Bank non-performing loans ratio is at a 25-year high. We view the bank with the lowest exposure to Hong Kong is UOB,” says Chew.
“China remains the weak spot for Singapore companies with real estate and consumer exposure,” he adds.
In his report, the analyst names the construction, marine, transport and defence sectors as the ones with growth in Singapore. On the other hand, semiconductor stocks are likely to face a de-rating as tech stocks get pummelled in the US.
In July, Chew notes Singapore equities enjoyed a broad-based rally during the month, as it saw the best monthly performance this year. The best performing sectors in July were marine, transport and REITs while the consumer sector was the weakest.
After the latest spate of financial results, Chew observes that most REITs are still reporting lower dividends due to rising interest rate expenses.
“We think the headwind from interest expenses will peak this year. The interest rate hedges will unwind and most of the debt will be repriced to current market rates,” he writes.
“REITs become attractive in a falling rate environment because interest rate expenses start to fall, property valuations rise as cap rates decline and their yields turn more attractive than other fixed income alternatives. Bank results have so far met expectations with wealth management fees driving earnings,” he adds.
In the brokerage’s Phillip Absolute 10 model portfolio, Singtel was the biggest gainer with a 12% rally in July. The only decline within the portfolio was Cromwell European REIT, which fell by 0.7% m-o-m. The model portfolio rose by 2.9% m-o-m in July, underperforming the market by 60 basis points.
“We have added more dividend yield into the portfolio. Interest rate cuts are not just a signal of easing monetary conditions but slowing global growth. Our portfolio will turn more defensive in such an environment,” says Chew.
