Singapore’s economy is seen to slow from the wider global woes of inflation and geopolitical risks. Yet, Singapore stocks are seen to continue earnings growth as the companies here ride on growth momentum of exports and strong recovery in services. Consequently, RHB Group Research maintains its earlier call that the Straits Times Index (STI) will end this year higher over 2021, albeit via “slow grind”.
“We expect inflation to moderate by year-end and debt level for our coverage universe to remain manageable. STI’s forward P/E is below its historical average, while its forward yield is still amongst the highest in Asia,” writes RHB’s Shekhar Jaiswal in his Aug 10 report.
RHB’s economist Barnabas Gan had earlier trimmed his Singapore GDP forecast for 2022 to 3.2% from 3.5% — a level that is slightly lower than the consensus forecast of 3.8%, as well as within the lower half of the current official estimates of between 3% and 5%.
As indicated by industrial production numbers, Singapore’s manufacturing sector is likely to grow at a slower rate of 5.5% this year, versus an earlier expectation of 7.5%. On the other hand, the services sector is seen to grow at a slightly faster pace of 3.3%, versus 3.2% earlier, thanks to the easing of domestic and border restrictions, says RHB.
Retail sales — another key plank of the economy — is seen to grow 10% this year, with a boost from the resumption of spending from tourists. This forecast is a slight moderation from the 11% growth chalked up last year, but which has got to be seen in the context of the growth coming from the low base of 2020. Retail spending will also be supported by a healthier labour market, which is back at the pre-Covid-19 levels.
Jaiswal adds that traditionally, the earnings growth of the STI has a positive correlation with Singapore’s GDP growth expectation. “Given the expectations of moderation in economic growth, it will be safe to assume that EPS growth will also moderate,” he says, adding that over the last six months, RHB has trimmed the earnings growth forecast of the Singapore listed stocks under its coverage from 16% to 13%.
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Even so, Jaiswal is keeping his positive view. Inflation — which has hit uncomfortable levels — is seen to moderate by year end, as indicated by the quarter decline of oil prices from the recent peak. Meanwhile, the Monetary Authority of Singapore (MAS) is actively wrestling with inflation by strengthening the Singdollar so that imports will be less costly in local currency terms.
Other central banks, like the US Federal Reserve (Fed), are dealing with inflation by hiking rates — triggering a corresponding jump here as well. While market sentiment has been hurt by higher rates, RHB does not see this as a big concern. “Thanks to sufficient liquidity built up during post-Covid-19 recovery, we assess the impact of higher interest rates on corporate earnings to be manageable. Despite growing macroeconomic concerns, the economic situation in Singapore should provide assurance to investors of positive growth in 2022,” says Jaiswal.
The RHB team has thus distilled their stock picks into a few broad themes. First, with the US Fed raising rates in an “aggressive” manner, Singaporean banks — already trading at undemanding valuations — are seen to be key beneficiaries as their net interest margin will enjoy further lift. “This should provide some reprieve even as weakening investor sentiment is beginning to dampen loan demand. We expect asset quality to hold up as we believe most borrowers are having better balance sheets compared to two years ago,” says Jaiswal, who prefers DBS Group Holdings and Oversea-Chinese Banking Corp among the local banks.
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Another investment theme is to bet on companies with continuing exposure to economic reopening and living with Covid-19 plays. One example is Raffles Medical Group, which will benefit from the resurgence of elective treatments and pent-up demand from medical tourism. “We think that because healthcare is a necessary service, it will be able to absorb most of the cost inflation. Given the modest gearing levels, we do not anticipate a significant impact from an increase in interest rates,” says Jaiswal.
Others like Genting Singapore are a more direct post-pandemic play, with the return of tourists. Thai Beverage, is also a beneficiary as more consumers across the region spend more time outside. If consumers feel the pinch from higher costs of living, then the likes of Sheng Siong Group, known for its wide range of mass market groceries, will be the stock to watch.
RHB also likes S-REITs as a sector, as each different industry type possessing their respective positive attributes. For example, industrial REITs such as Ascendas REIT and ESR-LOGOS REIT are the ones favoured. “We expect industrial rents to continue to rise while occupancy is expected to remain relatively flattish,” says Jaiswal, who likes assets in the sub-sectors of logistics, high tech, business parks, as these those that will “benefit from changing market dynamics brought about by Covid-19 and the government’s longer-term push to transform Singapore into a smart nation.”
Suntec REIT and Keppel REIT are the office REITs that RHB likes, given expectations that overall office rents will go up by 8% this year even as occupancy levels remain stable. RHB notes that despite the positive rental outlook and external factors supporting Singapore’s office market, office S-REITs have been trading at a discount to book value — a sharp contrast to transactions in the market. “We believe this is mainly due to investor concerns on the impact arising from interest rates and uncertainty over long-term office demand outlook from work-from-home (WFH) trends. We remain relatively more bullish compared to the market on long-term office demand outlook,” says Jaiswal.
Other large cap counters favoured by RHB include City Developments (which is riding on rising property prices), Singapore Telecommunications (which is slated to enjoy a recovery in mobile roaming revenue) and Singapore Technologies Engineering, which faces some pressure from rising rates because of its high gearing but is well-positioned for defensive growth and continues to generate generous cash flow.
