Review: Alas, the STI turned in a respectable performance in 1Q21. Its 11.3% gain outperformed most global equity indices and asset classes, except commodities (Figure 4). Leading the rally were cyclical stocks: shipping, transportation and finance. REITs were the major underperformers (Figure 2). DPUs in FY20 were cut by 16%. The recovery in most sub-sectors such as retail, office and industrial was lacklustre. Rising interest rates further dampened investor appetite for the sector.
Outlook: We remain positive on equity markets. Global economic momentum is picking up and we see signs of reflation everywhere, notably in commodity and housing prices. Global PMI is above pre-pandemic levels (Figure 8), container imports into the US surged 32% (Figure 9) in the first two months of this year and several commodities are at around decade-highs such as copper, tin, iron ores, soybeans and palm oil. On the flip side, rising interest rates have created nervousness and periodic selling in the market. There is concern that the Fed will tighten monetary policy earlier than the 2024 projection. We are more sanguine.
Firstly, rising interest rates historically coincided with major rallies in equity markets (Figure 10). The real equity bears are recessions. Secondly, despite the recent spike in interest rates, monetary policy remains ultra-accommodative. With the U.S. economy expected to jump 6.5% in 2021, current 10-year yields of 1.7% will hardly hinder economic activities. In past periods when U.S. economic growth topped 5%, interest rates were as high as 6%, or 2.5% in real terms (Figure 11). Finally, we do not expect the Fed to pre-emptively tighten monetary policy, a mistake it made in late 2018. Instead, the Fed has repeatedly communicated that it is far from its goal of maximum employment. Any rise in inflation is expected to be transient due to reopening and base effects. The Fed is telling us, the music will still be playing, so investors should keep dancing.
Recommendation: Singapore’s economic recovery is nascent. Its easing of large group gatherings and workers returning to office are still underway. Externally, global growth should tick up as COVID-19 vaccinations gather pace (Figure 7). Biden’s massive fiscal stimulus in the U.S. is another accelerant for global growth, on top of large base effects following the unprecedented economic fallout in 2Q/3Q last year. Cyclical sectors such as electronics, commodities and banks should be the first beneficiaries of this recovery. We expect a multi-year boom for electronics from demand for autos, 5G, IoT, data analytics, cloud computing, gaming and of course, bitcoin mining. The upsurge in commodities is spurred by China’s re-leveraging and reinvestment cycle. We still favour banks. Banks’ head fake in accelerating loan provisions last year due to the pandemic and loan moratoriums is unravelling. Earnings should spike in FY21e (Figure 12). As the economy recovers, we expect loan growth to return, followed by fee income and later interest rates (or margins). Another bonus for investors would be a normal resumption of dividends if the MAS allows. Singapore banks now have a CET 1 of 14.6%, against their preference of 13%. Special dividends that are double the level of 2019 are possible, in our opinion. While we like most cyclical sectors and recovery prospects, optimism over international travel looks inflated to us. SIA’s market cap is at a decade-high (Figure 14), despite considerably more leverage and relatively unchanged global competition. Among the REIT sectors, we favour U.S. offices. Yields are attractive at 8% and confidence in the US$ and employment is returning. Land transportation should recuperate from increased taxi and rail traffic as the workforce returns. We recently initiated coverage of two building-material stocks: BRC Asia and Pan United. We expect a rebound of as much as 31% in contracts for the construction sector in 2021, after the paralysis last year (Figure 15). Both building-material stocks have material market shares and are poised to secure a slice of the construction contracts, regardless of which contractors win.