Phillip 2023 Singapore Strategy - Positioning For Disinflation
- Singapore was a standout outperformer in 2022. In US dollar terms, Singapore equities were up 4.8% in 2022, (2021: +7.7%). A huge 24 -25% points outperformance over US and Asia (Ex-Japan) equities. Banks' performance was resilient as major beneficiaries of rising interest rates and healthy asset quality.
- The sector outperformers this year were shipping with gains led by Yangzijiang (SGX:BS6) (+95%) and Sembcorp Marine (SGX:S51) (+68%). The upswing in oil and gas and container ship capital expenditure has driven up the order-books of shipyards.
- Conversely, 2022 was an awful year for REITs. Leading the decline were foreign asset base REITs Manulife US REIT (SGX:BTOU) (-55%), Prime US REIT (SGX:OXMU) (-51%) or data centres Digital Core REIT (SGX:DCRU) (-53%), Keppel DC REIT (SGX:AJBU) (-28%).
2023 Market Outlook
- The largest pressure point for all asset types in 2022 was larger-than-expected spike in interest rates. We started the year expecting only 0.75% rise by end-2022. Instead, the Fed went for 4.25%. This decimated global equity and bond markets. The Ukraine conflict exacerbated inflation with a surge in commodity prices. The inflation trade of 2022 was long US dollar and short equities and bonds.
- Our strategy for 2023 is the opposite. We expect inflation to fall sharply this year. Multiple indicators point to a steeper slowdown of inflation in the US. Goods inflation is sharply down, key services such as rents are turning around, freight rates are collapsing, and money supply is contracting. Core PCE (the Fed’s favourite inflation gauge) on an annualized basis is currently 2.6%, close to the Fed’s 2% target.
- A recession in the US is likely. The yield curve is significantly inverted and other economic indicators are slowing down. However, we expect any recession to be modest. This is because of strong employment and the absence of deflation shocks reminiscent of the mortgage debt or banking crisis of 2008. A huge deleveraging has taken place but is isolated with the US$2tr collapse in cryptocurrencies. We guess there is a limit to how much of your own (crypto) money you can print to get rich.
- During inflationary recessions, similar to the 1970s, nominal GDP or operating cash flows did not contract. They still can grow faster than interest rates due to negative real rates. Over 1970-82, when the US faced four recessions, nominal GDP growth averaged 10%. During these recessions, US corporate earnings contracted around 3% compared to the 20% for the three most recent recessions (2001, 2008/09, 2020).
The Phillip Absolute 10 – 2022 performance review
- Our Phillip Absolute 10 underperformed the STI in 2022. Changes we made during the year were:
- The largest drag to the portfolio was the disappointing performance of small caps such as Del Monte Pacific (SGX:D03), Asian Pay TV Trust (SGX:S7OU) and Q&M Dental (SGX:QC7). The risk-off sentiment caused a lack of interest in small-caps. Another drag was the REITs such as CapitaLand Ascott Trust (SGX:HMN) and Frasers Centrepoint Trust (SGX:J69U). The higher-than-expected interest rates de-rated all bond-like assets.
- Amongst the large caps, most outperformed except ComfortDelGro (SGX:C52). The spike in cost from overseas operations pulled down group earnings. The largest gainers were Keppel Corp (SGX:BN4), City Developments (SGX:C09) and SingTel (SGX:Z74). The underlying theme was a re-rating of the companies through disposals and better operating performance.
- Keppel Corp’s plans to buy back $500mil shares and disposal of non-core assets were major catalysts for the stock.
- After the major write-off in China, City Developments's performance recovered from rising property prices in Singapore, a large development pipeline and the re-opening of borders that will support its hospitality assets.
- SingTel re-rated from partial monetization of Bharti with further non-core divestments planned.
The Phillip Absolute 10 – 2023 Singapore Stocks Recommendation
- Our focus is on individual stock names to generate alpha in a balanced portfolio, using 10 stocks for a portfolio is highly concentrated, which are reviewed every quarter. To avoid excessive volatility in our model portfolio, we add lower beta yield names.
- The top 10 Singapore stock picks – The Phillip Absolute 10 in our 2023 model portfolio by category are:
- Dividend yields:
- CapitaLand Ascott Trust (SGX:HMN) dividend yield will be supported by the return of global travel, especially with the re-opening of China.
- Prime US REIT (SGX:OXMU) offers attractive valuations of 18% dividend yield and 50% discount to valuations.
- SGX (SGX:S68) is to hedge out huge swings in volatility. Its equity and derivatives business will thrive on volatility. Earnings will be supported by rising interest income from the S$14bn collateral it collects from customers.
- Dividend/Earnings growth:
- We expect DBS (SGX:D05) and OCBC (SGX:O39) to raise dividends from record earnings and excess capital.
- Del Monte Pacific (SGX:D03) pays an attractive yield with healthy earnings growth.
- HRnetGroup (SGX:CHZ) has huge net cash of S$313mil and an annual operating cash flow of S$70mil to support its annual dividends of S$45mil (divided yield 5%).
- City Developments (SGX:C09) will ride on the recovery in its hospitality business and recognition of development profits in Singapore.
- ComfortDelGro (SGX:C52)’s has exited the pandemic with an even stronger balance sheet and now enjoying the volume recovery in rail and taxi ridership with price increases.
- Keppel Corporation (SGX:BN4) is enjoying a re-rating with more divestments and monetization of non-core assets, in particular the marine portfolio.
- Dividend yields:
- Continue to read the 48-page report attached below for complete analysis and also the outlook and stock picks by sector.
Register for the quarterly webinar on Strategy & Stock Picks by Phillip Securities Research Team @ https://www.poems.com.sg/strategy-stock-picks/
Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2023-01-04 2023-01-04