Review: 3Q21 was sluggish, with the STI down 1.4%. Despite a jump in vaccination rates to 82% of the population in September, COVID-19 cases in Singapore spiked to record highs. Dining and office restrictions returned. The virus also triggered record high cases in Southeast Asia. This hurt regional consumer stocks on the STI, namely the Jardine Group of companies (Figure 2). Of the 30 STI names, only nine made gains during the quarter. Restructuring themes outperformed, namely CapitaLand Investment and Singtel (Figure 3).

Outlook: Inflation is increasing in the global economy, especially in the U.S. Major inflation indicators are at decade highs with little signs of abating. Even after three rounds of quantitative easing (QE) from 2008 to 2012, money supply hardly budged. The current QE4 combined with fiscal stimulus has resulted in an unprecedented spike in liquidity into the real economy (Figure 4). Cost pressures are building up for manufacturers and consumers, from commodity prices (Figure 5), PMI inputs (Figure 6), transport (Figure 7) and energy (Figure 8). While not runaway, inflation is likely to be higher than market expectations. We see upside risk for interest rates. Bond yields are historically too low compared to core inflation in the U.S. (Figure 9).  Since the 1960s, investors have been demanding real returns in interest rates that exceed inflation (or CPI). The repricing of higher interest rates forms the macro backdrop for our equity strategy. Prime beneficiaries of higher interest rates will be financials: banks for their variable-rate loans and excess deposits, and SGX for its collateral float from derivatives clearing members of S$13bn. Our STI target is unchanged at 3400.

We remain positive on the re-opening trade. COVID-19 is now a pandemic for the unvaccinated. Vaccinations globally could hit 50% by year-end, with developed countries leading the way at 65-70% (Figure 10). Countries are cautiously re-opening borders for the vaccinated. Domestic travel and hospitality should enjoy a huge rebound when travel is relaxed (Figure 11). As vaccinations expand globally to include the young and anti-viral drugs are approved for use, we expect even more aggressive global re-openings.

Recommendation: We favour financials. Asset reflation, economic recoveries and rising interest rates will be major tailwinds for banks. Another sector that will likely benefit is property. Rising residential property prices in Singapore are backed by affordability, still-low interest rates and increasing replacement costs. The property price index has risen around 7% over the past 12-months, a shade below its high-single-digit growth before cooling measures kicked in. Furthermore, over the past eight years, the index was only up 6.7% (Figure 12). Our pick is City Development (CDL SP, BUY, TP S$9.19). It is the largest listed Singapore residential developer. Its stock has been languishing at multi-year lows despite a S$3bn pipeline of residential projects, a potential recovery for its 152 hotels and the potential monetisation of UK commercial assets through a REIT.

Ultimately, the largest catalyst for the STI will be a complete re-opening of borders. Tourist arrivals this year were a pathetic 153k. The number was 19mn in 2019. Many sectors will enjoy an uplift when travellers return. Primary beneficiaries will be hospitality, travel, malls and even telecommunications. We recommend investors to stick to this theme, despite the disappointment so far. High vaccination rates have not resulted in “freedom days”. Instead, the recent spike in cases has placed a huge burden on the country’s healthcare infrastructure (Figure 13). This is being addressed, with living with an endemic COVID-19 being the goal.