Singapore Equity 2023 Investment Themes - RHB Invest 2023-01-05: Positives From GDP Surprise, China Reopening

Singapore Equity 2023 Investment Themes - Positives From GDP Surprise, China Reopening

Singapore Equity Strategy - RHB Investment Research | SGinvestors.ioAIMS APAC REIT (SGX:O5RU) CAPITALAND ASCENDAS REIT (SGX:A17U) ESR-LOGOS REIT (SGX:J91U)
  • Singapore’s defensive earnings growth, low valuations and benefits from the reopening of China’s borders should continue to attract investors. The Straits Times Index (STI) should deliver double-digit EPS growth, thanks to strong growth from the banks.
  • While the STI’s low P/E could be reflecting investor concerns about the sustainability of EPS growth amidst a potential recession, it is not the base case.
  • The positive effects of higher tourist flows from China’s reopening on the tourism, services, and retail sectors should offset some effects of the global slowdown on the Singapore economy.
  • We maintain that Singapore equities will end higher this year, even as global recession risk and central banks’ policies keep markets volatile in the short term.

Positive surprise from 4Q22 GDP data, we are bullish on growth in 2023.

  • According to official advance estimates, Singapore’s 4Q22 GDP expanded 2.2% y-o-y which – although in line with our forecast – was higher than the consensus estimate of 2.1% y-o-y. Singapore’s full-year GDP grew by 3.8% y-o-y in 2022, slightly outpacing our +3.7% y-o-y estimate, given 3Q22’s GDP revision to 4.2% y-o-y (from 4.1% y-o-y).
  • We have kept our 2023 GDP growth forecast at 3.0% y-o-y as we expect growth to decelerate into 1H23 before stabilising in 2H23. Our 2023 GDP growth forecast is more bullish than consensus (1.8% growth in 2023) and the Government’s forecasts of 0.5-2.5% growth.

China’s rapid reopening could create near-term risks.

  • China’s rapid exit from its zero-COVID policy could lead to weaker growth momentum in the near term. The surge in COVID-19 infections could cause temporary labour shortages and increased supply chain disruptions. At the same time, if Chinese consumers rapidly increase consumption of goods and services, it could lead to significantly high global inflation – which would push global commodity prices higher. Therefore, we believe investors should continue to maintain a defensive portfolio in the near term.

Nevertheless, China’s reopening is a long-term positive for Singapore.

  • The potential beneficiaries of the reopening of China would be players that are either beneficiaries of China’s domestic reopening, as well as companies that will gain from the return of business once China relaxes border restrictions.
  • China accounted for 18% of Singapore’s non-oil domestic exports (NODX) and 19% of tourist arrivals before the pandemic. As such, its reopening should boost exports and tourism here.

SG Investment themes for the early part of 2023 include:

  1. Buying banking stocks as a proxy to elevated interest rates and defensive earnings growth characteristics;
  2. buying shares of firms with resilient and defensive earnings and dividends;
  3. selective exposure to China's economic reopening; and
  4. buying industrial REITs.

Banks – earnings growth and defensive characteristics

  • We estimate the banking sector’s ROE to improve to 14.2% in FY23F from 12.3% in FY22F, on a healthy 21% y-o-y growth in net profit. Although deposit competition has intensified and loan growth is expected to moderate, tailwinds from hikes in the Federal Funds Rate (FFR) in 2H22 and 1H23 should lift NII further in the coming year. Although loan portfolios are well-seasoned over the past two years, we have conservatively pencilled in a higher credit cost of 19bps for FY23F (FY22F: 14bps) given the rapid rise in interest rates.
  • Non-II is expected to rise by a healthy 8%, led mainly by higher core fee income from loans and trade flows as well as a recovery in demand for wealth products. With CET-1 ratios at 13-14%, banks are well-positioned to weather the external headwinds. We expect a y-o-y rise in dividends.
  • DBS (SGX:D05) and OCBC (SGX:O39) are our Top Picks, while our recommendation for SG Banks is OVERWEIGHT. DBS and OCBC are still trading at modest valuation levels, and are well supported by their respective 2023F dividend yields of 4.8% and 5.3%.

Exposure to resilient and defensive sectors

  • In the near-to-medium term, greater global macroeconomic uncertainty promotes local idiosyncratic factors. Market, sector and company performances diverge as returns are driven by local financing costs and the relative resilience of profits. We believe investors should prioritise surviving through these uncertain times.
  • Companies with strong financial sheets, pricing power, captive customer bases, recurrent demand, and the capacity to pass through increasing costs should be key considerations when choosing stocks. We support a fundamentally defensive stance that emphasises investing in companies that have sturdy earnings or dividend profiles. We believe the relative outperformance of defensive styles (quality and momentum) and sectors (staples, health care and utilities) will persist in early 2023.
  • Our stock picks for this subject are City Developments (SGX:C09), Sheng Siong (SGX:OV8), ST Engineering (SGX:S63) and Wilmar International (SGX:F34).

Exposure to economic reopening of China

  • With China announcing a relaxation of its zero-COVID policy from 8 Jan 2023, the only uncertainty would be over the pace of its re-opening and how smooth this process will be. With Chinese tourists accounting for approximately 19% of all tourist arrivals in Singapore before the pandemic (i.e. in 2019), the positive effects of increased tourist flows on the tourism, services, and retail sectors are likely to offset some of the effects of the global slowdown on Singapore's economy. Furthermore, the impact of a full reopening in China, possibly in 2H23F, could propel Singapore’s economy even further towards the end of next year.
  • The potential beneficiaries of the China reopening may be beneficiaries of China’s domestic reopening and/or companies that will gain from the return of business once China relaxes border restrictions.
  • Within our coverage universe, we see DFI Retail Group (SGX:D01) as one of the key beneficiaries of China’s domestic reopening, while CDL Hospitality Trusts (SGX:J85), ComfortDelGro (SGX:C52), Raffles Medical (SGX:BSL), SingTel (SGX:Z74) and Thai Beverage (SGX:Y92) should benefit from the return of Chinese tourists.

REITs could benefit from the pausing of the rising interest rate cycle

  • We believe that we are coming to an end of the interest rate upcycle. Our bullish expectations of GDP growth and a strong rebound in economic activity, especially in 2H23, compel us to think that investors should revisit the Singapore REITs (S-REITs) sector, which delivered a dismal performance in 2022. The clarity of our views on above-consensus economic growth in 2023 will be determined by how economic events unfold in the first half of the year.
  • We estimate and aggregate DPS growth at 0.9% y-o-y for all REITs covered by us. However, we note that this growth will be uneven throughout the year, and also uneven across the sectors. This should be reflected in the performance of the stocks.
  • Defensive REITs, ie those that offer resilient DPS growth and have strong balance sheets, should deliver an outperformance in 1H23. In the meantime, REITs that will benefit from strong economic growth and the relaxation of China’s zero-COVID policy should chalk an outperformance in 2H23.
  • Industrial demand remains strong, mitigating supply concerns. We expect industrial rental rates to continue rising, while occupancy rates are expected to remain relatively flattish. Among the sub-sectors, we like logistics, hi-tech, and good-quality business parks, as they continue to benefit from changing market dynamics brought about by COVID-19 and the Government’s longer-term push to transform Singapore into a Smart Nation.
  • Our preferred exposure in the S-REITs sector is AIMS APAC REIT (SGX:O5RU), CapitaLand Ascendas REIT (SGX:A17U) and ESR-LOGOS REIT (SGX:J91U). If our macroeconomic forecast pans out as expected, we believe there could be opportunities to rotate into hospitality and retail REITs in 2H23.

Shekhar Jaiswal RHB Securities Research | 2023-01-05

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