“Singapore's equity market rose 3.4% in 2QFY2024, the best performance in six quarters,” says Paul Chew, head of research at PhillipCapital.
In his report dated July 1, the analyst notes several sectors that have delivered “stellar” performances in 2QFY2024 which includes the commendable quarter registered by banks following attractive dividend yields and recovery in fee income, driving share prices.
He also highlights Yangzijiang Shipbuilding’s (YZJ) 2QFY2024 performance which saw a 75% increase in container freight rates over three months.
That said, Seatrium saw a decrease in share prices following new investigations related to Brazil, Chew writes. This was despite several contract wins which include two floating production storage and offloading contracts valued at $11 billion.
He adds that REITs continue to remain a major laggard due to rising interest expenses.
Slowing economic momentum in the US
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In the US, economic momentum is experiencing a downturn, with consumer spending such as auto sales and electronics turning sluggish.
“US government deficits are cooling off and savings rates need to creep up from exceptionally low levels,” says the analyst.
Chew notes that with Trump leading US Presidential elections, his potential use of tariffs for political leverage could put Asean at risk due to its “surging” trade surplus with the US.
Following this, Chew’s base case on interest rates is one rate cut in December.
“We have a Federal Reserve ready to cut rates. Its recent economic projections show that core personal consumption expenditure (PCE) inflation is not expected to hit its 2% target until 2026,” he adds.
Despite this, the analyst notes that the Fed expects a projected interest rate of 3% by 2026, which is 2.25% points lower than current levels. Core PCE inflation is currently below its projection of 2.8%, standing at 2.6%.
Singapore equity outlook
“We believe the Singapore economy is also lacklustre and drifting sideways,” writes Chew.
He notes that Singapore exports, industrial production, loans and retail are trending sideways, returning to pre-pandemic levels.
Meanwhile, the domestic sectors with momentum for the year are tourism, building materials, shipping, and oil and gas, with the latter delivering record order books boosted by renewables.
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The analyst adds that 2024 saw “horrendous” residential sales, with new home sales decreasing by 48% y-o-y.
He adds: “A delay in approvals for new launches has raised the risk for developers. It likely contributed to a recent land sale with no bidders.”
PhillipCapital’s model portfolio
In 2QFY2024, PhillipCapital’s model portfolio saw a 1% increase, underperforming the Singapore market's 3.4% gain.
Presently, Chew notes that REITs are becoming a “more attractive relative bet”.
Following the entrance of the second year of rate hikes and headwinds of increasing interest expenses expected to end this year, REITs are experiencing an outpace of rental growth over interest expenses, in the analyst’s view.
“The first cut in interest rates will also signal its peak, providing clarity for real estate investors and sparking more transaction activity,” he adds.
Chew likes Cromwell European REIT (CEREIT), maintaining his “buy” call with a target price of EUR 1.91 ($2.78), due to the European Central Bank loosening its monetary policy.
Another stock the analyst favours is CapitaLand Investment (CLI), which is set to benefit from increased real estate transaction activity and improve the performance of the six REITs it manages.
Additionally, Chew continues to like banks for their attractive 6% dividend yield.
Conversely, the analyst expects another set of “weak” 2QFY2024 results for semiconductors. Despite this, he believes that an inventory replenishment cycle can drive recovery within the sector in the later half of 2024.
“We believe a better way to gain exposure to semiconductors is through their US counterparts. The listed SGX semiconductor company customers are equipment makers that have a virtual monopoly in their respective equipment sectors,” says Chew.
The analyst has also removed Thai Beverage Y92 (ThaiBev) from his portfolio following a decrease in its share price resulting from plans to raise alcohol taxes in Vietnam.
Chew’s “buy” call on ThaiBev remains unchanged due to attractive valuations at 11 times P/E and consumption recovery in Thailand.
“We do see a rebound in beer and alcohol consumption, but the stock's de-rating persists,” he concludes.
As at 12.21pm, the STI is trading at 16.06 points higher or 0.48% up at 3,354.63 points.
