|
Review: STI recovered in 2021, rising 9.8% (2020: -11.8%). All the gains came from the banks. DBS alone accounted for around 60% of the rise in STI. Removal of dividend caps and better asset quality provided a re-rating catalyst and an earnings recovery for the banks. Only one-third of the STI component stocks enjoyed gains this year. Outlook: We worry equities may struggle in 1H22. A stagflation head fake of slower economic growth and rising inflation will worry investors. Global growth faces a near-term risk from Omicron concerns and renewed lockdowns. The yield curve is flattening with expectations of slower growth. PMIs and industrial commodities are rolling over. Even with slower growth, interest rates are expected to rise. This follows the Fed’s hawkish pivot. Futures market is pricing three rate hikes by December 2022. After this period of volatility, we expect equities to recover in 2H22. Driving the rally will be the next two tapers. Nope, not the Fed taper. The first taper will be a decline in infections. Omicron is more contagious but early indications suggest less deadly. In South Africa, where Omicron accounts for 98% of all COVID-19 cases, infections underwent a parabolic rise but mortality rates were stable. The situation in the UK mirrors this, where even hospitalization numbers are low. The current pandemic scenario is unlike the 2020 abyss. We have mass vaccinations, including for the children, and anti-viral drugs being introduced. After this terrible wave, our base case is a major tapering off in cases. The next taper will be inflation. Supply bottlenecks will persist with the current lockdowns worsening. But we believe supply constraints and inflation have peaked but not normalised. Freight rates are starting to roll over. Semiconductor capacity is responding to the shortage with a US$240bn spending in foundry capex over two years, a 40% jump. Recommendation: We are positive on building materials, consumer and services. We expect construction to recover sharply with the return of the foreign workforce. The industry has lost 67,000 workers since the pandemic. Beneficiaries of the rebound in construction are building material stocks Pan-United and BRC Asia. Consumer names such as Dairy Farm and Thai Beverage have suffered due to severe lockdowns across SE Asia in 2021. As cases start to drop and lockdowns ease, earnings can normalise against a weak base year. Our preference in the consumer sector is Del Monte. US operations are turning around with new products, higher product prices and restructuring of sales channels and factories. Balance sheet improvement is a bonus. We remain positive on the recovery theme. Our preference includes Ascott Residence Trust. We expect borders to re-open further after the current wave of infections. Hospitality to gain from pent-up demand. ComfortDelgro has disappointed with lockdowns, taxi rebates and poor rail traffic. The stock is 41% below pre-pandemic levels but free cash flow has risen around $400mn over the past two years. In the services sectors, HRnetGroup will benefit from record job vacancies for permanent and flexible staffing. We expect volume and pricing growth to fuel bumper earnings in the coming year.
|
|
2021 REVIEW STI recovered in 2021, rising 9.8% (2020: -11.8%). All the gains came from the banks (Figure 1). DBS alone accounted for around 60% of the rise in STI. Removal of dividend caps and better asset quality provided a re-rating catalyst and an earnings recovery for the banks. Only one-third of the STI component stocks enjoyed gains this year. Deep cyclicals Yangzijiang and corporate restructurings CapitaLand Investment were the other gainers (Figure 2). Lockdowns and movement restrictions hurt Dairy Farm and ComfortDelgro (Figure 3). Compared to other asset classes, STI is up 7.7% (USD terms), outperforming REITs and Asia Ex-Japan equities (Figure 4) but remains below pre-pandemic levels. US equities registered the 2nd consecutive year of double-digit gains. |
|
OUTLOOK We worry equities may struggle in 1H22. A stagflation head fake of slower economic growth and rising inflation will worry investors. Global growth faces a near-term risk from Omicron concerns and renewed lockdowns (Figure 5). The yield curve is flattening with expectations of slower growth (Figure 6). PMIs and industrial commodities are rolling over. Even with slower growth, interest rates are expected to rise. This follows the Fed’s hawkish pivot. Futures market is pricing three rate hikes by December 2022 (Figure 7). After this period of volatility, we expect equities to recover in 2H22. Driving the rally will be the next two tapers. Nope, not the Fed taper. The first taper will be a decline in infections. Omicron is more contagious but early indications suggest less deadly. In South Africa, where Omicron accounts for 98% of all COVID-19 cases, infections underwent a parabolic rise but mortality rates were stable (Figure 8). The situation in the UK mirrors this, where even hospitalization numbers are low. The current pandemic scenario is unlike the 2020 abyss. We have mass vaccinations, including for the children, and anti-viral drugs are being introduced. After this terrible wave, our base case is a major tapering off in cases. Ironically, immunity from infection is building up with Omicron. The next taper will be inflation. Supply bottlenecks will persist with the current lockdowns worsening. But we believe supply constraints and inflation have peaked but not normalised. Freight rates are starting to roll over (Figure 10). Semiconductor capacity is responding to the shortage with a US$240bn spending in foundry capex over two years, a 40% jump (Figure 11). Companies have started to get accustomed to the tight supply chain and long lead times. |
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
Paul has 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.
He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.
