Phillip 2024 Singapore Strategy – The Federal Reserve Got Your Back January 2, 2024 218

Review: The Singapore market was down a muted 0.3% in 2023, clawing back the major outperformance and modest gains of 4% a year ago. Compared to other asset classes, Singapore stocks outperformed commodities but underperformed bonds and US equities (Figure 4). For the second consecutive year, the standout gainers were conglomerates Sembcorp Industries and Keppel Ltd (Figure 3).

Outlook:   Singapore equities struggled in 2023. Slowing economic growth and peak interest rates hurt sentiment on banks’ ability to maintain earnings (Figure 1). As we enter 2024, economic growth is not robust but a modest recovery is underway (Figure 5). Spearheading this recovery is inventory replenishment. However, we worry about sustainability as end-demand remains lacklustre. We believe the US consumer will be stretched by lower pandemic savings (Figure 6), slower job additions (Figure 7), rising debt (Figure 8), cutbacks in fiscal handouts (Figure 9) and the return of student loan repayments. We had primed ourselves for a modest recession in the US last year. This did not occur due to huge incremental spending by the US government, equivalent to a US$1.3tr deficit, or 3% of GDP (Figure 10). Furthermore, China’s growth is sluggish, weighed down by falling investments and a moribund property sector. Still, we are optimistic on Singapore equities and bonds as we enter a monetary easing cycle. The Fed is not only prepared to cut rates three times in 2024 but also cut them pre-emptively. Given its recognition of a time lag in the transmission of higher interest rates to economic activity, it is willing to cut even before it senses a meaningful economic slowdown or inflation hits its 2% target. With a Fed ready to act, any economic slowdown will be backstopped by easier financial conditions. Singapore is likely to go back to trend growth of 1-2%. A modest recovery in exports, foreign direct investments, tourism and population growth will drive this growth.  

Recommendation:  Against a backdrop of slow growth and falling interest rates, we expect rate- sensitive assets to outperform. Sectors we favour are REITs, conglomerates and telecommunications. REITs will enjoy a triple boost of dividend yields more attractive than bonds, lower interest expenses and higher valuations as cap rates compress. If asset prices get reflated, deeply discounted Singapore REITs potentially have the highest upside. For conglomerates, electricity margins are likely to remain elevated due to low reserve margins. Additional capacity will only materialise in 2026. ST Engineering will ride rising global defence spending and increased stockpiling of weapons as geopolitics and conflicts escalate. We also like telecommunication as industry consolidation and cost pressures have allowed mobile operators to start raising prices. Telcos are structurally pivoting to higher-growth segments (IT services, data centres, cyber security), rightsizing their cost structures, and monetizing more assets.  ASEAN consumer stocks reeled from rising inflation and weak consumer demand in 2023. We expect a rebound on the back of a healthier export sector and fiscal stimulus. We have added names with attractive valuations and dividend yields, cash-rich balance sheets and good earnings visibility to our model portfolio. They are Valuetronics and China Aviation Oil.

 

 

 

2023 REVIEW

The Singapore market was down a muted 0.3% in 2023, holding on to the modest gains of 4% a year ago. Compared to other asset classes, Singapore stocks outperformed commodities but underperformed bonds and US equities (Figure 4). For the second consecutive year, the standout gainers were conglomerates Sembcorp Industries and Keppel Ltd (Figure 3). Utilities are enjoying higher valuations as they raise exposure to renewable energy. The re-rating is perhaps due to the high growth potential and future-proofing of returns.

 

OUTLOOK

Singapore equities struggled in 2023. Slowing economic growth and peak interest rates also hurt sentiment on banks’ ability to maintain earnings (Figure 1). As we enter 2024,  economic growth is not robust but a modest recovery is underway (Figure 5). Spearheading this is inventory replenishment. However, we worry about sustainability as end-demand remains lacklustre. Our concern is weaker US economic growth in 2024. We believe the US consumer will be stretched by lower pandemic savings ((Figure 6), slower job additions (Figure 7), rising debt (Figure 8), cutbacks in fiscal handouts (Figure 9) and the return of student loan repayments. We had primed ourselves for a modest recession in the US last year. This did not occur due to huge incremental spending by the US government, equivalent to a US$1.3tr deficit, or 3% of GDP (Figure 10). Furthermore, China’s growth is sluggish, weighed down by falling investments (Figure 11) and a moribund property sector. China is unlikely to contribute to global growth unless there is a major fiscal impulse by its government. Still, we are optimistic on equities and bonds as we enter a monetary easing cycle. The Fed is not only prepared to cut rates three times in 2024 but also cut them pre-emptively. Given its recognition of a time lag in the transmission of higher interest rates to economic activity, it is willing to cut even before it senses a meaningful economic slowdown or inflation hits its 2% target. With a Fed ready to act, any economic slowdown will be backstopped by easier financial conditions. The market is expecting six cuts, double the Fed’s three. Disinflation underway in the US will provide cover for the Fed to cut. Singapore is likely to go back to trend growth of 1-2%. A modest recovery in exports, foreign direct investments, tourism and population growth will drive this growth.  

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About the author

Profile photo of Paul Chew

Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

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.

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