PhillipCapital’s head of research Paul Chew is recommending that investors remain cautious on Singapore equities, citing a lack of growth.
Singapore’s equity market was up by a “meagre” 0.4% in the 3Q2023 amid a high-interest rate environment, notes Chew in his Oct 2 report. “Expectations that interest rates will remain elevated for longer triggered a repricing of bond yields and risk assets,” he points out.
“Banks recouped most of their losses in the prior quarter after raising interim dividends by 40%. The best performers were commodity-related names. The largest drags were weakness in electronics and poor sentiment on China’s recovery,” he adds.
Buy stocks with good dividend yields as well as stocks in non-cyclical sectors
As such, Chew is recommending investors remain “anchored” in stocks that deliver dividend yields as well as counters in non-cyclical sectors.
Singapore banks, in particular, are favoured for their resilient dividend yields, especially in an environment of elevated interest rates. The analyst says he sees a rate cut by the US Federal Reserve only in the 4Q2024 in his base case scenario.
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“Slower growth and a tapering of stubborn rental inflation will provide the Fed with comfort that inflation heading towards its targeted 2%. This is possible by mid-2024,” says Chew.
Meanwhile, the analyst does not expect to see any dividend growth for Singapore REITs (S-REITs).
“Their business model is challenged in a negative carry environment,” he writes, noting that REITS have become a relative rather than an absolute return bet, due to slowing growth and peaking interest rates.
As for his view on tech stocks, Chew notes that there is “a window” to trade due to the short inventory restocking cycle, but doubts there will be any “meaningful rebound” as end consumption for electronics remains weak.
Dim global outlook
Looking ahead, Chew is expecting the US economy to remain slower in 2024.
“To short-circuit the upcoming drag will require another round of stimulus. But we don’t think there will be more because the politics of austerity has returned after two sovereign downgrades and threats of government shutdowns,” Chew writes. “The US economy has been propped up by an additional US$1 trillion ($1.3 trillion) of fiscal deficit spending, bank bailouts and surging credit card debt.”
“How deep the US economic slowdown is depends on whether a bad debt cycle emerges,” notes the analyst.
According to Chew, there are multiple upcoming headwinds for the US and global economies, the first of which is the end of excess savings from the pandemic stimulus, which peaked at US$2.1 trillion in August 2021. These savings were drawn at approximately US$80 billion per month as American consumers undersaved on their disposable income, and will run out by this year.
Secondly, the cost of living adjustments has allowed social security spending to jump 8.7% or US$147 billion in 2023, but will decline next year.
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Thirdly, the time has come for students in the US to start repaying their US$1 trillion credit card debt from Oct this year, which is an almost US$180 billion drag on consumer spending.
Fourthly, real interest rates are at their highest levels in 15 years. The analyst writes: “ In the current cycle, we think the Federal Reserve will be slower to ease, to ensure inflation is completely squashed.
Lastly, the growth in China, which accounts for around a third of net growth in global economies, has been especially disappointing with the collapse in housing sales, which will exacerbate the current cyclical weakness in exports. New home sales in China peaked at around 15 million per year in mid-2021 and are now trending at 9 million.
“A more sustainable figure is 7 million [home sales] based on 8.5 million from marriages and 3 million new household formations,” notes Chew. At the end of exports to China, German exports to the country are in their eighth month of decline, he adds.
Eyes on Singapore
Closer to home, Chew also sees that the country is facing a slowdown, with exports, retail sales, and employment all trending down.
Pockets that are enjoying strength are in tourism, hospitality and marine.
The analyst observes: “With the global economy expected to dip further in 2024, any recovery will be at end-2024.”
On a positive note, structurally, Singapore is on a strong footing with record foreign direct investments and rising foreign reserves and remains the only triple-A-rated country in Asia.
Chew, however, remains cautious, particularly on Singapore equities.
“A lack of growth keeps us anchored in dividend yields and non-cyclicals. “We favour banks for their resilient dividend yields, especially in an environment of elevated interest rates,” writes the analyst at PhilipCapital.
He continues: “Our base case is a rate cut by the Fed, only in 4Q2024. Slower growth and a tapering of stubborn rental inflation will provide the Fed with comfort that inflation heading towards it targeted 2%. This is possible by mid-2024.”
Portfolio actions
Following the analyst’s observations, PhilipCapital has removed Singapore Exchange S68 (SGX) from its model portfolio, Phillip Absolute 10.
“Despite healthy earnings from interest income, sluggish trading volumes have reined in its share price,” explains Chew.
Similarly, City Developments Limited C09 (CDL) has also been removed from the portfolio, as high-end property sales will be difficult to turn around.
Conversely, Chew has added Singapore Technologies (ST Engineering), as he sees “resilience” in defence spending. ST Engineering’s record order book and the pick-up in aircraft maintenance spending is also a plus in his book.
The team has also added Singapore Telecommunications (Singtel) to its Phillip Absolute 10 portfolio. This is due to the gradual recovery of mobile prices for most of its regional associates led by India, as well as its plans to monetise around $6 billion of its assets, including real estate, data centres and associate stakes.
