Earlier expectations of rate cuts have been moderated by stubbornly high US inflation. With rates expected to be higher for longer, where is the Singapore market heading and which stocks could do well?
Barely six months ago, market observers debated how many rate cuts the US Federal Reserve Board would make by the end of this year based on how inflation was expected to ease further.
However, the combined spending might of US consumers has thrown those expectations out of the window. With monthly inflation numbers coming higher than expected and employment numbers holding firm as the US economy chugs along, the case for the US Fed to start cutting rates has dimmed rapidly.
Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank, borrowed from the title of the classical spaghetti Western movie The Good, the Bad and the Ugly to sum up the situation. As “good” economic data persist, it is “bad” for market investors, giving rise to the threat of “ugly” price action in the form of “exceptionalism” of the US economy and its markets.
According to Vishnu, “US exceptionalism” is appreciated by those who laud the economic resilience of the world’s largest economy but not those facing the predicament of policy formulation. The delay in rate cuts, albeit temporarily, is becoming increasingly more precarious with time. With US interest rates held higher for longer, other economies, which are forced to follow suit, are paying a high price with higher financing and other business costs.
The most recent set of economic data has presented a mixed picture. “It is too early to call it a day; stock markets are expected to remain jittery,” says Björn Jesch, global CIO of DWS. “Many of the questions which are vital for capital markets are still open-ended. Have we already seen the whole impact of higher interest rates? Will inflation resume new strength?”
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Other economists maintain their optimism. “We see room for equity market gains to extend as cooling inflation brings bond yields lower and sustains central bank rate cut expectations for the rest of the year,” says Standard Chartered, which is keeping its “overweight” stance on equities.
With rates expected to be higher for longer, the overall Singapore stock market is expected to benefit due to the heavy weightage of the three local banks.
DBS Group Research has lifted its outlook for Singapore from “neutral” to “positive”. “Banks, which take up a combined weight of 50% on the Straits Time Index (STI), should enable the benchmark to be relatively more resilient against a May pullback compared to other regional bourses. Our year-end STI target stays at 3,450 points.” Over the past 12 months, the STI has gained 4.25% to close at 3,323.2 points on May 29.
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High yield, low valuation
Decisions on interest rates in the US have a clear bearing on Singapore, even though the local market has traded relatively sideways for more than a decade. Morgan Stanley says: “Rate cuts are coming or maybe not — wait, yes they are: In the last 12 months, market expectations for the number of policy rate cuts to be delivered by the US Fed has swung back and forth from four to two, to six to one. Global equity markets have whipsawed in unison but Singapore equities as a whole have held relatively steady.”
Economists with the US investment bank now expect the US Fed to cut three times by the end of the year, starting from September, and another four times in 2025. “While we are most certainly nearer to a rate cut cycle than we were six months ago, it appears markets are more uncertain on exactly when, and in the meantime, Singapore’s high dividends and defensive qualities will likely prove valuable,” reasons Morgan Stanley.
It points out that US 10-year bond yields too are staying higher above 4% for longer and according to historical patterns, this bodes well for Singapore equities, which tend to outperform other Asia Pacific ex-Japan equity markets when real and nominal US 10-year bond yields are high.
Singapore equities have a few key attributes in its favour, adds Morgan Stanley. First, following outflows, positioning in Singapore relative to other markets among active funds “appears light”, even though valuation multiples appear attractive relative to history as well as peers in the region.
In addition, Singapore stocks offer relatively high dividend yields of more than 5%, which is more attractive relative to what is likely to be a low-return environment in Asia ex-Japan over the next 12 months. “High and sustained growth in dividends, we believe, can meaningfully bolster portfolio relative total returns for investors, when Asia Pacific ex-Japan equities are projected to be broadly rangebound through June 2025,” says Morgan Stanley.
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Also, Singapore stocks, when measured using MSCI Singapore, are now changing hands at just 12 times earnings, well below that of other major developed markets as well as other Asean markets. Under its base case, Morgan Stanley has incorporated the “conservative” assumption that Singapore’s P/E multiple stays at 12 times while EPS continue to grow at an average pace of 8% per year in 2024–2026. This implies 8% potential upside and 13% total returns including dividends over the next 12 months.
Morgan Stanley observes that over the past few years, various Temasek-linked companies, which are also Singapore blue chips, have undergone extensive restructuring to focus on new growth areas with new business models.
“Keppel is transforming into an asset manager, Singapore Telecommunications Z74 (Singtel) has been monetising assets and growing its data centre business as part of a strategic reset, and DBS Group Holdings has been acquiring overseas operations and had considered spinning off its remittances business,” notes Morgan Stanley.
“Restructuring among non-Temasek companies have also been evident — and we will also likely see more — as companies evolve to adapt to a changing environment and generational shifts in leadership,” Morgan Stanley adds.
The likes of Keppel, following restructuring, have delivered sizeable gains for its shareholders. More recently, Singtel’s renewed focus on lifting its dividends with gains from its active asset recycling strategy has seen upgrades in price targets by analysts almost across the board.
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Focus list
Morgan Stanley has identified five Singapore-focused stocks for its “focus list”: DBS, Oversea-Chinese Banking Corp, Singtel, Sembcorp Industries U96 and Genting Singapore G13 .
Morgan Stanley remains “constructive” on banks here as within the universe of Singapore stocks, they offer the best dividend profiles and are well positioned in an environment of persistently high interest rates. Year to date, all three banks have outperformed the MSCI Singapore, propelled by lofty rates and proven by substantial earnings beats as seen in their 1QFY2024 ended March results.
“Even if interest rates start to fall, banks’ performance could still hold up, as they had historically. Especially given attractive starting points of valuation multiples, banks seem well placed to weather scenarios where the interest rate outlook is higher or lower than our base-case expectation of gradually falling fates from September,” adds Morgan Stanley.
DBS, Singapore’s largest bank and the largest stock by market cap, which offers the highest dividend yield among quality blue chips, is one of the five stocks on the “focus list”. This is followed by OCBC, which is making a $1.4 billion offer to privatise its 88%-owned insurance subsidiary Great Eastern Holdings G07 . It is also mulling over the redevelopment of its headquarters into a larger building with a floor area of some 2 million sq ft. Analyst Nick Lord has an “equal weight” call on both DBS and OCBC with target prices of $34.20 and $13.78 respectively.
DBS’s analysts, meanwhile, prefer United Overseas Bank U11 (UOB), given its clear prospects from a strong Asean growth story. In late April, DBS upgraded its call on UOB from “hold” to “buy” along with a higher target price of $34.50 from $30.30. DBS is also positive on technology names such as Venture Corp and UMS Holdings 558 , whose businesses are picking up from an industry-wide slowdown while maintaining their net cash balances.
Another Morgan Stanley pick, Singtel, is seen as a beneficiary of the growing popularity of artificial intelligence (AI) and the demand for the wider infrastructure required to support this growth. To meet the growing demand for AI-driven computing power, Singtel is investing to grow its regional portfolio of data centres and tapping on external funding from the likes of KKR to speed up the growth.
On its part, the telco is on an active asset and capital recycling programme to unlock more value that can be returned to shareholders via higher dividends estimated at 6% or more. Singtel, in short, is “positively aligned to the thematics of AI and corporate restructuring” says Morgan Stanley, whose analyst Da Wei Lee rates this stock “overweight” along with a $3.05 target price.
Sembcorp Industries’ share price has gained some 500% since it cut off loss-making subsidiary Sembcorp Marine back in June 2020. Free to focus on meeting rising demand for energy, Sembcorp Industries is deemed by Morgan Stanley to offer sustainable earnings quality and resilience to higher interest rates despite its relatively lower dividend yield. Sembcorp Industries will continue to benefit from a tight electricity market in Singapore, especially given the growing demand from data centres, says Morgan Stanley, whose analyst Mayank Maheshwari rates this counter “overweight” with a target price of $7.20.
Both DBS and Morgan Stanley select Genting Singapore, the operator of Resorts World Sentosa, as the large-cap pick under the consumer discretionary plus travel recovery theme, as it offers high yield and low risk. Tourists are arriving not just in bigger numbers. They are spending more on average too. Las Vegas Sands, which operates the other integrated resort Marina Bay Sands, reported higher gaming revenues in 1QFY2024.
Similarly, Genting Singapore reported earnings of $247.4 million in 1QFY2024, nearly double that recorded in 1QFY2023. Revenue was up 62% y-o-y to $784.4 million. The company is commencing a $6.8 billion expansion and upgrading programme, which will presumably capture more business down the road.
“Genting Singapore’s expanding hotel room inventory could capture more inbound travellers,” says Morgan Stanley, whose analyst Praveen Choudhary rates “overweight” with a $1.05 target price. Similarly, Jason Sum of DBS rates this stock “buy” with a target price of $1.15.
