Singapore Stock Strategy In The Year Of Rabbit - OCBC Investment 2023-01-18: Be Hoptimistic!

Singapore Stock Strategy In The Year Of Rabbit - Be Hoptimistic!

Singapore Stock Strategy – OCBC Investment Research | SGinvestors.ioCAPITALAND ASCENDAS REIT (SGX:A17U) CAPITALAND ASCOTT TRUST (SGX:HMN)
  • Based on the S&P 500 Index, which has a longer trading history, it is interesting to note that in the past Years of the Rabbit, which occurred in 1951, 1963, 1975, 1987, 1999 and 2011, the annual gain in those years was an average 14.7%!

Be hoptimistic!

  • With the Lunar New Year around the corner, Chinese zodiac and Feng Shui talks are hugely popular as investors try to glimpse into what the Year of the Rabbit has to offer.
  • Based on the S&P 500 Index, which has a longer trading history, it is interesting to note that in the past Years of the Rabbit, which occurred in 1951, 1963, 1975, 1987, 1999 and 2011, the annual gain in those years was an average 14.7%! This is the 4th best annual average return among the 12 zodiac animals.
  • So, what does this new Year of the Rabbit holds for Singapore equities?

Singapore is stable, not boring

  • Singapore market’s lack of excitement versus other markets is a common view held by investors with global exposure. However, heading into a year of great uncertainty for the global market, especially in an environment of persistently elevated inflation and high interest rates, it is prudent to have some exposure to the stable Singapore market.
  • Singapore is a good diversifier since it offers a stable group of core value stocks which will help to reduce the overall volatility of any equity portfolios.
  • Last year, the Straits Times Index (STI) ended the year with a gain of 4.1%. With a dividend yield of 4.1%, this means that the total return for the year was 8.2%! This is remarkable especially in view of the massive losses for equities and bonds globally in 2022. See also SGX market update: The Straits Times Index (STI) Led Asia Pacific & Developed Stock Benchmarks in 2022.
  • Additionally, global equities saw huge fluctuations within the year. Based on the MSCI World Index, global equities shed almost 29.0% from 2022’s high to 2022’s low, before recovering with a gain of 12.4% from the 2022 low to close the year still in negative territory. In Singapore, the STI saw a narrower trading range, it shed 14% from 2022 high to 2022 low and then added 9.5% from 2022 low to close the year in positive territory.

Will earnings be cut?

  • With the weak outlook for the global economy in 2023, there is valid concern that earnings could be further cut in 1Q 2023 after the corporate result season in late January to February 2023. So far, 2023 earnings estimates have seen progressive cuts since the start of the Russian-Ukraine war, which sparked higher input costs and concerns over margins compression and lower revenues and earnings. Earnings growth in 2023 is widely forecasted to be near the single-digit level.
  • Earnings growth for the STI is estimated at a healthy 7.9% in 2023 – better than the growth rate for Asia ex-Japan, but slightly below the MSCI World Index.
  • Based on the MSCI World Index, 2023 consensus earnings have seen several rounds of downwards revisions since 2Q 2022. In contrast, 2023 EPS estimates for the STI have been moving higher. This largely reflects the anticipated stronger performance from the financial sector due to the current higher interest rates environment. The financial sector accounts for an estimated 45% of the index.
  • As an indication, and based on consensus earnings estimates, the banking sector is projected to see an average 19% increase in net profits in 2023 – a strong double-digit performance, largely supported by strong interest income.

Influx of Chinese tourists and expected improvement in tourism receipts

  • Based on information from (as of 13 Jan), travel bookings from mainland Chinese tourists to Southeast Asia surged 10x as of 12 Jan 2023 compared with the same period last year. The top 5 destinations are Thailand, Singapore, Malaysia, Cambodia and Indonesia.
  • Pre-COVID, Singapore welcomed 19.1 million tourists in 2019. Of this, visitors from China accounted for 3.63 million or 19.0% – the top international visitor-generating market! More importantly, Mainland Chinese tourists were also the top tourism receipts generating group in Singapore, accounting for S$4.1 billion or 19.0% of total 2019 tourism receipts of S$21.7 billion. However, by 2022, the top 5 countries to visit Singapore were Indonesia (508,490), India (370,490), Malaysia (264,170), Australia (250,670) and Vietnam (177,510). China accounted for only 66,060. In addition, tourism receipts were S$4.83 billion, a sharp decline from 2019 of S$21.7 billion.
  • With the re-opening and the return of Chinese tourists, this will help to boost revenues for tourism-related industries, including hotels, F&B outlets, leisure, gaming, entertainment, retail and other consumer-related products and services. Airlines and transport companies are also likely to benefit from the higher inflow of visitors to the country. The re-opening theme has sparked renewed interest for consumer discretionary items and the FTSE ST All-Share Consumer Discretionary Index rose 1.9% so far this year.
  • The Singapore Tourism Board (STB) has just released its projections for 2023 and is expecting visitor arrivals into Singapore to grow from 6.3 million in 2022 to 12-14 million in 2023. With this strong improvement, tourism receipts are projected to grow from S$13.8-14.3 billion in 2022 to S$18-20 billion. The government has also set aside S$500 million to boost this industry for 2023-2024. Several major events are planned for 2023. This included the just concluded Art SG and SailGP. New events include Olympic Esports Week and Professional Triathletes Organisation Asian Open. In the MICE (meetings, incentives, conferences, and exhibitions) space, the Herbalife APAC Extravaganza and the 25th World Congress of Dermatology are some events taking place in 2023.
  • However, we believe that part of the re-opening optimism has already been priced into stock prices. For example,
    • CapitaLand Ascott Trust (SGX:HMN), which owns hotels, serviced residences and other hospitality assets, hit a recent low of S$0.87 in Oct 2022. Since then, it has recovered about 25% to close at S$1.09 (as of 17 Jan 2023) – a strong performance over 3 months!
    • Similarly, SIA (SGX:C6L) has also posted a strong recovery from the recent low in Oct 2022. The stock fell to a low of S$4.99 in Oct 2022, but recent re-opening optimism has buoyed sentiment for the stock, and it is now up 17% to close trading at S$5.83 (as of 17 Jan 2023).

Earnings cut sensitivity analysis

  • We are of the view that Singapore’s earnings cuts in 2023 will be modest, if any, versus other market, largely due to the support from the improvement in earnings from the banking sector.
  • Assuming a further 10% cut in 2023 earnings and a conservative P/E ratio of 12.1x, which is at -1 standard deviation from the historical 10-year average of 13.2x, this will give an estimated STI level of 3,484, which is still a 6.2% upside from current level of 3,280.51 (as of 17 Jan 2023). Even using a more aggressive -2 standard deviation parameter, this brings the estimated STI level to 3,197 or a manageable 3% downside from current level.

Valuations are not demanding

OCBC Research Team OCBC Investment Research | 2023-01-18

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