Phillip 3Q24 Singapore Strategy – Seizing the yield July 1, 2024 146

•                  Singapore’s equity market rose 3.4% in 2Q24, the best performance in six quarters. Banks share prices registered another commendable quarter.

•                  Economic momentum in the US is slowing and we have a Federal Reserve ready to cut rates.

•                  Our strategy is to seize or capture yield in our portfolio. REITs are becoming a more attractive relative bet. The headwind from higher interest rates and unwinding of hedges will largely end this year. We favour sectors with attractive yield, namely banks, REITs and telecommunications.

 

 

Review: Singapore’s equity market rose 3.4% in 2Q24, the best performance in six quarters. Banks registered another commendable quarter. Attractive dividend yield and recovery in fee income drove share prices (Figure 1). Yangzijiang chalked up a stellar performance (Figure 2), with container freight rates surging 75% over three months. Seatrium’s share price was spooked (Figure 3) by new investigations related to Brazil. This was despite securing multiple new contracts, including two FPSO contracts worth S$11bn. REITs remain a major laggard (Figure 4), weighed down by rising interest expenses. US equities, namely technology, continue to outperform against major asset classes (Figure 5).
Outlook: Economic momentum in the US is slowing. Consumer spending on discretionary items, such as auto sales (Figure 6) and electronics (Figure 7), is slowing down. US government deficits are cooling off (Figure 8), and savings rates (Figure 9) need to creep up from exceptionally low levels. In the US Presidential elections, betting averages now give Trump a clear lead of 54% against Biden’s 19%. The lead widened by almost 20% after the recent presidential debate. If Trump uses tariffs for political leverage, at risk will be ASEAN with its surging trade surplus with the US (Figure 10).
Our base case on interest rates is one rate cut in December. We have a Federal Reserve ready to cut rates. Its recent economic projections show that core PCE inflation is not expected to hit its 2% target until 2026. Nevertheless, the Fed expects to still project an interest rate of 3% by 2026, or 2.25% points lower than the current level. Core PCE inflation of 2.6% is already below its projection of 2.8% (Figure 11). We believe the Singapore economy is also lacklustre and drifting sideways. Exports, the PMI survey, industrial production, loans, and retail are all trending sideways and returning to pre-pandemic levels. Sectors with stronger momentum are tourism, building materials (Figure 12), shipping (Figure 13), and oil and gas (Figure 14). Residential sales this year have been horrendous. New home sales this year until May are down 48% YoY (Figure 15). A delay in approvals for new launches has raised the risk for developers. It likely contributed to a recent land sale with no bidders.
Recommendation: We believe REITs have become a more attractive relative bet. Most REITs hedge their interest rates on a three-year basis. We are entering the second year of rate hikes after the Federal Reserve’s first rate hike in March 2022. The headwind of surging interest expenses will largely end by this year. So, rental growth can begin to outpace interest expenses. The first cut in interest rates will also signa its peak, providing clarity for real estate investors and sparking more transaction activity. We favour Cromwell REIT [BUY, TP EUR1.91] as the European Central Bank turns more aggressive in loosening monetary policy. The narrative has moved to two additional rate cuts this year. OUE REIT [BUY, TP S$0.33] pays an attractive 8% yield with a portfolio of Singapore assets trading at a discount of 50%. CapitaLand Investment [BUY, TP S$3.38] will benefit from increased real estate transaction activity and improve the performance of the six REITs it manages. On semiconductors, we expect another set of weak 2Q24 results but believe an inventory replenishment cycle can drive recovery later this year. We believe a better way to gain exposure to semiconductors is through their US counterparts [Figure 16]. The listed SGX semiconductor company customers are equipment makers that have a virtual monopoly in their respective equipment sectors. Alternatively, an index of diversified semiconductor names is less volatile and lowers company-specific risk. Banks remain
an attractive bet with a yield of 6%. Any upside surprise will come from higher dividends and strong fee income. We removed Thai Beverage [BUY, TP S$0.63] from our model portfolio. The share price took another leg down due to higher alcohol duties proposed in Vietnam. Our BUY recommendation is unchanged as valuations have turned attractive at 11x PE and consumption in Thailand is recovering over the past few months. We are overweight Banks, Defence, REITs, and Telecommunications.

 

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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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