After a false start in 2021, economic reopening is deemed inevitable as Singapore becomes better equipped in dealing with the Covid-19 pandemic. We view the surge in Omicron cases as a temporary setback to the eventual reopening of the economy.
In 2022, we also expect quantitative tightening to be on the agenda as the US central bank begins shrinking its balance sheet and raising rates. The Singapore Government is also moving ahead with a planned goods and service tax (GST) hike this year. We discuss whether this will lead to consumption spending stalling.
Omicron speed bump
We expect Singapore to further ease border restrictions this year through the roll-out of more Vaccinated Travel Lanes (VTLs). Preliminary studies indicate that while the Omicron variant is more transmissible, hospital and mortality data have been less severe than previous Covid-19 variants.
Studies from the National Centre for Infectious Diseases have shown that people with Omicron infections have a lower viral load than if they had been infected by the Delta variant. We expect governments around the world to further ease border restrictions this year as countries adapt to the virus.
Balance sheet normalisation
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The minutes of the December Federal Open Markets Committee (FOMC) meeting indicated a more hawkish stance on the committee’s thinking, seemingly opening the door to a March rate hike and an earlier start to balance sheet normalisation.
This is happening as the US central bank becomes increasingly concerned about inflation. The US Federal Reserve dot plot (Figure 1), which the central bank uses to signal its outlook for the path of interest rates, shows officials expecting to raise the fed funds rate three times this year and three times next year, based on median projections.
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The implications of a March rate hike, in our view, might signal urgency relative to the implied lift-off in June. The assumed urgency in a March hike could lead to speculation about a faster pace of rate hikes than what has been priced into the market. We believe that should inflation and labour market data remain strong through March and the US Federal Reserve hike rates at that meeting, the market could price in four rate hikes by the end of this year.
In that scenario, equities could see some pressure in the near term while fixed income securities of longer duration should see higher demand with expectation of a faster pace of rate hikes.
Higher real yields will support banking stocks in the near term but we remain bullish on equities over the long term. Historically, when we review the performance of the S&P500 during previous rate hike cycles (1995, 1999, 2004 and 2017), the index had gone higher during these cycles. We, therefore, remain bullish on equities as we believe that investors will be willing to look past short-term issues, such as Covid-19 and supply-chain disruptions and focus on the recovery in earnings instead.
Despite concerns of global economic growth tapering this year amid central banks tightening monetary policy this year, we believe the move will help to stabilise inflation rates and lead to more sustainable GDP growth.
The US central bank is not alone in normalising monetary policy this year, it joins five (Bank of England, Reserve Bank of Australia, Reserve Bank of New Zealand, Bank of Canada and Sveriges Riksbank) of the other G10 central banks in shrinking its balance sheet.
Neutral impact of GST increases
Despite concerns over an impending GST increase in 2022 on consumption, we believe the effect of the GST increase on consumption expenditure will be neutral. When we study the effects of Singapore’s private consumption expenditure (Figure 2) during the years in which GST was raised, consumption expenditure rose during those periods.
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With the Ministry of Trade and Industry expecting full-year 2022 GDP growth of between 3–5%, we expect consumption expenditure to remain robust and continue its recovery in 2022 as movement control ease further, which should mitigate the effects of the GST increase.
Sector recommendations
We are positive about the banking, aviation, hospitality and construction sector as earnings continue to rebound from the global recovery. We expect the banking sector to continue to outperform this year on the back of the faster pace of rate hikes expected. The aviation, hospitality and construction sector should also see earnings continue to recover this year on the back of the further easing of border restrictions globally. We have a “buy” rating on Oversea-Chinese Banking Corp, with a target price of $14.22, which is currently the laggard in the industry. In the hospitality sector, we are bullish on Ascott Residence Trust with a target price of $1.19. In the construction sector, we have a “buy” rating on BRC Asia, a market leader in the industry, with a target price of $1.84. On the other hand, we are negative on REITs and the property sector as rising rates will put a dampener on the sector.
Rule of 40 in stock picking
The basic premise behind the Rule of 40 is that one year’s revenue growth rate plus ebitda margin should exceed 40% as a high-level gauge of performance for software companies.
The Rule of 40 emphasises the importance of finding companies that are able to manage the balance between growth and profitability to create longterm value. The growth and profitability of a company are usually at odds with each other. To drive growth, the company would need to incur expenses. Finding the right mix or balance between the two can be tricky.
The Rule of 40 tries to balance and provide a trade-off between them. Investors are usually willing to tolerate low profits or even losses as long as a company is demonstrating strong growth.
The Rule of 40 has been widely adopted by practitioners, venture capitalists and investors to evaluate software companies. These companies tend to spend heavily on sales, marketing and research and development to spur their revenue growth. The Rule of 40 helps you to sift out companies that are not yet profitable but offer strong revenue growth prospects. Today, many investors use it to assess any fast-growing digital-economy company.
Terence Chua is a senior research analyst with Phillip Securities Research
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