1H23 Singapore Market Strategy - A Safe Harbour In A Stormy Sea
- While the China reopening story may see a short-term bullish reaction in the market, we believe that recessionary risks persist nonetheless.
- For 2023, we foreacast 6% EPS growth for large-cap stocks under our coverage, and from a top-down basis, our 2023 year-end target of 3,520 for the STI implies 8% upside from current levels. Importantly, the index’s valuations are not stretched at present, trading at 2023F P/E and P/B of 10.7x and 1.0x respectively, and paying a yield of 4.5%.
A more uncertain 2023 after a firm 2022.
- While improved fundamentals have allowed ASEAN markets to withstand the financial market volatility in 2022, the year ahead is expected to remain uncertain and challenging amid looming risks with economic recessions in the US and Europe, tightening financial conditions, further straining of US-China relations and the Russia-Ukraine conflict, among others. In particular, for an open economy like Singapore’s, the possibility of spillovers from these risk factors cannot be ignored.
Singapore has recovered well.
- The above risks are somewhat offset by the ongoing recovery in domestic activities, the relaxation of COVID-19 pandemic restrictions and reopening of cross border movements, which will benefit domestic-oriented sectors such as retail, food & beverage, transport and accommodation, among others. We have already seen the positive effect of this on the aviation sector and with China now reopening its borders, Singapore’s tourism sector should be well-placed to benefit from this.
- We believe that the Singapore market will outperform due to the prevalence of quality, value and dividend stocks relative to its regional peers. Since there will no longer be a synchronous global cycle, country risk will return and our view is that Singapore presents a lower risk vs other countries in the region, especially given the defensive nature of a number of its listed companies. The clear risk for the market is a global recession which, given Singapore’s open economy, would negatively affect it.
Staying constructive for 1H23.
- While the post-COVID-19 global economic recovery has been bumpy, with concerns such as inflation and higher interest rates dominating the market’s attention, the Straits Times Index (STI) nevertheless managed a total return of 6.6% in 2022. In our view, this outperformance should continue due to the defensive nature of the STI given the prevalence of quality, value and dividend stocks relative to its regional peers.
- Since there will no longer be a synchronous global cycle, country risk will return and our view is that Singapore presents a lower risk vs other countries in the region.
Forecasting 6% earnings growth in 2023.
- The four key sectors that will contribute to the positive earnings growth in 2023 are the aviation, financials, telecommunications and “others” sectors , with aviation coming off a low base in 2022.
- We expect the healthcare, land transport, property and plantation sectors to be four key sectors that will degrade the positive earnings growth, with the latter sector to be negatively impacted by weaker CPO prices.
- Note that the property sector’s EPS decline is due to City Developments (SGX:C09)’s extraordinary gain from the sale of its Millenium Hilton in Seoul that will be recognised in 2022.
We forecast the STI to reach 3,520 by end-2023
- We forecast the STI to reach 3,520 by end-23 using a top-down methodology, implying about 8% upside from current levels. Our 2023 STI target is based on 6% earnings growth for 2023, and target P/E and P/B multiples of 12.9x and 1.3x respectively, both of which are at about a 15% discount to the index’s long-term average. We believe this is fair given moderating earnings growth and potential recessionary risks to the economy and thus our forecasts.
- 2023 valuations for the STI appear inexpensive, with the STI trading at a forecast 2023 P/E and P/B of 10.8x and 1.0x respectively, and paying a yield of 4.9%. We highlight that these multiples are meaningful discounts to the STI’s long-term averages.
A tough year for Singapore in 2023.
- UOB GEMR forecasts Singapore GDP growth of 0.7% y-o-y in 2023 after the reasonably solid 3.5% growth in 2022. Near-term non-oil domestic export data and PMIs have been weak with the export and manufacturing sectors negatively impacted by slowing demand from China and the US.
Singapore Stock Picks 2023
- Our top large-cap Singapore stock picks are:
- CapitaLand Ascott Trust (SGX:HMN),
- CapitaLand Investment (SGX:9CI),
- DBS (SGX:D05),
- Genting Singapore (SGX:G13),
- Keppel Corp (SGX:BN4),
- Mapletree Logistics Trust (SGX:M44U),
- Sembcorp Industries (SGX:U96),
- SingTel (SGX:Z74),
- SIA Engineering (SGX:S59),
- Venture Corp (SGX:V03) and
- Wilmar International (SGX:F34).
- Continue to read the 19-page report attached below for complete analysis.
Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2023-01-04 2023-01-04