Market watchers are heading into 2022 with a mixture of optimism and wariness. Over the last couple of years, the stock market and the real economy have not moved together in the same direction. Even as economic growth contracted because of the Covid-19 pandemic, stocks continued to rise, thanks to central banks keeping interest rates super low and issuing stimulus cheques.
However, the easy money has been made. Investors this year must brace for more volatility, given the ever-higher valuation of hot stocks and worry over interest rate hikes. Just look at how the Nasdaq on Jan 21 suffered its worst week since March 2020 when it was spooked by the growing spread of the Covid-19 virus before the unexpected retail-led rally reversed the tide. Younger market investors are also being confused by an unfamiliar macro-economic environment: inflation.
So what should investors look out for? Which are the sectors that might do well? And which are the ones to avoid?
In its widely-followed fengshui guide, Hong Kong-based brokerage CLSA notes that this coming year of the “Water Tiger” — where “water” refers to one of the five elements in fengshui — will be one where one is “navigating a river of uncertainties and extremes”. Sectors that might do well are those in so-called “water-related” industries. These include trade, shipping and travel that “will finally get flowing again”.
On the other hand, financials will be among those coming under pressure, perhaps due to tightening liquidity or rising materials prices. “Fire is also lacking, so expect internet and tech to lose some shine. On the other hand, wood-related sectors, such as education, clothing and healthcare, may be freed from some of their constraints,” adds CLSA.
Instead of banking on fengshui, Pascal Blanqué, group chief investment officer of Amundi Asset Management, approaches the market outlook for 2022 from a psychological angle. He notes how inflation was the “big surprise” last year, with the average US inflation forecast at the beginning of 2021 for the end of 2021 to be just 2%.
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As it turned out, US inflation hit 7% in December 2021, its highest level since 1982. Blanqué reasons psychology could be a key reason why investors underestimate inflation. “Today, few people have memories of the great inflation period in the 1970s (less than 25% of the US population is aged 55 years and above).”
“This may explain why the recollection of the past decade of secular stagnation could have led people to believe that the inflation pick-up expected in the post-Covid reopening phase of the economy was going to be short-lived, while it was not,” he adds. Given this backdrop, Blanqué favours equities over bonds, especially stocks of companies that enjoy better pricing power as this could mitigate lower margins.
Bank of Singapore (BoS) analysts are optimistic that the bull market remains “broadly intact” even with higher rates and stubborn inflationary pressures. “Historically, bull markets do not end at the beginning of rate hike cycles, and positive trends in global economic growth and earnings continue to be positive fundamental drivers for the market,” they note.
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BoS points out that global equities’ P/E ratios are broadly trading at 1 to 2 standard deviations above their long-term historical average. Yet, when put into the context of negative real interest rates and a positive earnings outlook, they don’t see equities valuations as being demanding.
However, just like how CLSA warns of “extremes”, BoS “strongly cautions” short-term corrections within this bull market will not be unusual. “As the Fed pivots its focus towards addressing inflationary concerns, we believe it is key for investors to brace for the risk of near term volatility as the market grapples with uncertainties related to rising yields, quantitative tightening and fiscal drag,” notes BoS.
The analysts further warn that growth sectors, especially early-stage technology and new economy companies, will be susceptible to heightened volatility as yields rise. “Due to the exposure they provide to long-term growth opportunities, we continue to hold core exposure in these sectors but highlight that it is an opportune time to re-assess position sizes and stress test portfolio against high volatility scenarios,” notes BoS.
Furthermore, unlike in the early stages of the bull market, when the rising tide of liquidity lifted all boats, being in the mature stage of this market cycle will likely result in even more disparity in how the various stocks do, and therefore, “investment selection will become key”.
As such, BoS sees a “compelling case” for so-called “real economy” stocks in the cyclical and value space, where their earnings and cash flow fundamentals are sought by investors as resilient traits against inflation pressures. Specific sectors favoured by BoS include financials, industrials, real estate and energy, as the economy continues to reopen and interest rates rise gradually.
RHB’s Shekhar Jaiswal advises investors to accumulate Singapore stocks that are direct beneficiaries of the eventual reopening of the economy despite macroeconomic risks. He agrees that the emergence of the Omicron variant will create volatility. Jaiswal likes exposure to banks, consumer, healthcare, industrial, telecom, transport sectors and industrial REITs.
Meanwhile, given STI’s correction following news of the Omicron variant’s spread, Jaiswal is finding the Singapore bellwether index’s valuation compelling. At 12.7 times FY2022 earnings, the Straits Times Index (STI) is valued below its historical average. The STI is also among the cheapest in Asean, although it has the highest yield in Asia at 4.4%. He expects the STI to hit 3,440 points at the end of the year. However, in the absence of better clarity, he warns that the gains for the STI will not be a sharp surge but a “slow grind”.
The UOB Kay Hian research team is slightly more bullish. They have a target of 3,500 points based on 20% earnings growth projections this year, equivalent to just under 14 times earnings and one time book value respectively.
In the following pages, The Edge Singapore looks at a list of 10 Singapore stocks that could be of interest this year, taking into account the views of various experts and our own reporting of the various companies.
- DBS Group Holdings: Higher interest rates, China buy and slew of digital assets bode well
- Delfi: Aiming for new sweet spots and next generation of sweet tooth for growth
- Digital Core REIT: Income stability, visibility and a deep growth pipeline
- Grand Venture Technology: Going on an M&A spree to lay foundation for growth
- Kimly: WFH norm brings unique F&B stock closer to heartlanders
- ParkwayLife REIT: Weathering 2022 with locked-in income, capital management
- Q&M Dental Group: Outlook bright with expansion and a spin-off
- Singapore Airlines: Ready to fly higher as borders gradually open up
- Singapore Telecommunications: Regional ambitions spill beyond telecom sector into digital banking
- ThaiBev: Much to cheer about with spin-off still very much in its plans
