|
Review: The STI was up 9.1% in 1Q22. This was its best performance since an 11.3% rally in 1Q21. Banks (Figure 1) and conglomerates (Figure 3) led the gainers. Rising interest rates was the dominant theme in the quarter. Banks rallied as higher interest rates will lift margins. On the flip side, REITs retreated (Figure 2) as higher rates can affect dividend growth and lower the attractiveness of their leveraged dividend yields. Conglomerates were the major outperformers from higher electricity spreads, increased dividends and aggressive share buybacks. Outlook: The global economy is facing stagflation (i.e. high prices but lower incomes) shock. Inflation has been made worse by the Russia-Ukraine conflict, which has driven up crude oil prices to their highest in 13 years. Global growth is expected to decelerate as interest rates continue to climb. The yield curve has recently inverted, placing the market back on recession watch (Figure 5). The debate rages as to whether the Fed can orchestrate a soft landing for the economy. We are more upbeat. In the recent six rate-hiking cycles, two led to a soft landing (no recession) and three were followed by recessions that were not entirely triggered by the hiking cycle (Figure 6). The Singapore market stands out as a shelter in the current stagflation environment. We will say this – it is an alpha generator in global equities. Almost every sector in the STI enjoys a tailwind: (i) Bank earnings will enjoy a huge lift as we enter an interest-rate cycle (Figure 7). A 100 basis point rise in rates can increase earnings by around 18%. We believe the three domestic banks have excess deposits or float totalling S$160bn that can immediately benefit from the rise in short-term rates. Banks are well represented, with a 45% weighting on the STI; (ii) The reopening of borders and relaxation of social restrictions will be a further boost for corporate earnings. Primary beneficiaries are transport, telecommunications, retail and hospitality. They make up a combined 20% of the STI (Figure 8). Tourism accounted for 5% of GDP in 2019 (Figure 9). So, it becomes a huge economic driver over the next 12-18 months. (iii) Singapore has not been dragged down by the current de-rating of tech stocks from stretched valuations, regulatory risks and supply-chain disruptions. Tech is only 2% of the STI; and (iv) Another 6% of the STI are rerating candidates due to share buybacks, restructuring and defence-related spending. Finally, the Singapore dollar is expected to stand firmer against regional currencies with the MAS tightening bias. Recommendation: The Ukraine conflict has long-term implications for several sectors, most notably defence. An unfortunate arms race has developed due to this conflict. Germany kick-started the race with a one-off EUR100bn fund to upgrade its defence budget. It will be investing more than 2% of its GDP in defence. We worry every country will now look to outdo one another in military spending. The two stocks with defence-related revenue are ST Engineering (STE SP, Not Rated) and CIVMEC (CVL SP, Not Rated). Another repercussion is the diversification of energy sources away from Russian energy and the volatility (or unreliability) of renewable energy. Renewable is still dependent on the weather. Last year, renewable energy production in the UK fell 15% (Figure 10). A repricing of energy is underway after years of underinvestment in fossil fuels. Coal looks interesting, as even the German Chancellor mentioned the need to build a reserve for coal. In Singapore, we favour the financial, construction and reopening sectors. Financials will ride the rise in interest rates. The Fed funds rate is expected to rise by more than 2 percentage points this year (Figure 11), producing a two-year tailwind for the banks and exchanges. Construction, namely building materials, will gain from a return of foreign labour and construction activity. Following the government’s relaxation of border controls and group activities (aka “Near Freedom Day”) on 29 March, reopening stocks look attractive to us. Comfort Delgro (CD SP, BUY, TP S$1.80) is down 48% from pre-pandemic levels despite generating S$905mn of FCF over the past two pandemic years. Telcos are another reopening sector. Roaming is around 15% mobile revenue and almost pure profit. We estimate roaming is around 50% of Starhub’s (STH SP, NEUTRAL, TP S$1.35) 2019 PATMI. |
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.
