Review: Singapore’s equity market was up a meagre 0.4% in 3Q23. Expectations that interest rates will remain elevated for longer triggered a repricing of bond yields and risk assets (Figure 6). Banks recouped most of their losses in the prior quarter after raising interim dividends by 40% (Figure 1). The best performers were commodity-related names (Figure 2). The largest drags were weakness in electronics and poor sentiment on China’s recovery (Figure 3).
Outlook: We expect a far slower US economy in 2024. To short-circuit the upcoming drag will require another round of stimulus. But we don’t think there will be more because the politics of austerity has returned after two sovereign downgrades and threats of government shutdowns.
The US economy has been propped up by an additional US$1tr of fiscal deficit spending (Figure 7), bank bailouts and surging credit card debt (Figure 8). We see multiple upcoming headwinds for the US and global economies. Firstly, excess savings from the pandemic stimulus peaked at US$2.1tr in Aug21 (Figure 9). These savings have been drawn at approximately US$80bn per month as US consumers undersaved on their disposable income. Excess savings will end by this year. Secondly, the cost of living adjustments has allowed social security spending to jump 8.7% (or US$147bn) in 2023. But will decline next year (Figure 10). Thirdly, students have to start repaying their US$1tr credit card debt from Oct23 (Figure 11). This is an almost US180bn drag on consumer spending. Fourthly, real interest rates are at their highest levels in 15 years (Figure 12). In the current cycle, we think the Federal Reserve will be slower to ease, to ensure inflation is completely squashed. Finally, China accounts for around a third of net growth in global economies. Disappointing growth in China especially with a collapse in housing sales will exacerbate the current cyclical weakness in exports. New home sales in China peaked at around 15mn per year in mid-2021. They are now trending at 9mn. A more sustainable figure is 7mn based on 8.5mn marriages and 3mn new household formations (Figure 13). German exports to China are in their eighth month of decline. How deep the the US economic slowdown is depends on whether a bad debt cycle emerges (Figure 14).
The Singapore economy is also facing a slowdown. Exports, retail sales, and employment are all trending down. Pockets enjoying strength are tourism, hospitality and marine. With the global economy expected to dip further in 2024, any recovery will be at end-2024. Structurally Singapore is on a strong footing with record foreign direct investments (Figure 15) and rising foreign reserves (Figure 16). It remains the only triple-A-rated country in Asia.
Recommendation: We remain cautious on Singapore equities. A lack of growth keeps us anchored in dividend yields and non-cyclicals. We favour banks for their resilient dividend yields, especially in an environment of elevated interest rates. Our base case is a rate cut by the Fed, only in 4Q24. Slower growth and a tapering of stubborn rental inflation will provide the Fed with comfort that inflation heading towards it targeted 2%. This is possible by mid-2024. We do not expect any dividend growth for REITs. Their business model is challenged in a negative carry environment. REITs become a relative rather than an absolute return bet as growth slows and interest rates peak. There is a window to trade Singapore tech stocks on a short inventory re-stocking cycle. But we doubt there will be any meaningful rebound as end consumption for electronics is still weak. We removed SGX from our model portfolio, Phillip Absolute 10. Despite healthy earnings from interest income, sluggish trading volumes have reined in its share price. We also removed CDL as high-end property sales will be difficult to turn around. We added our newly initiated ST Engineering for resilience in defence spending, a record order book and pick-up in aircraft maintenance. We have also added Singtel. Mobile prices are gradually recovering for most of its regional associates, led by India. Also, Singtel is looking to monetize some S$6bn of its assets, including real estate, data centres and associate stakes.
Phillip Absolute 10
During the quarter our model portfolio was down -1.4% YoY. Our property and hospitality exposure were the weakest performers. PropNex was down 13% on soft results and worries over future transaction volume. CapitaLand Ascott plummeted after a S$300mn equity fundraising plan for acquisitions. CapitaLand Investment fell on lower transaction activities and worries over the slowing Chinese economy. ComfortDelgro was the best performer with expectations of a strong rebound in 2H23 earnings.
4Q22 – Add: SGX; Remove: Asian PayTV
1Q23 – Add: Prime US REIT; Remove: Singtel
2Q23 – Add: FCT, PropNex, CLI; Remove: Prime US REIT, Del Monte Pacific, HRnetGroup
3Q23 – Add: Thai Beverage; Remove: DBS
4Q23 – Add: ST Engineering, Singtel; Remove: CDL, SGX
Strategy commentary: Our cautious view on the market is reflected in the portfolio through a larger exposure to non-cyclicals such as defence, dividend yield and telcos.
Changes to model: We removed CDL and SGX. Sluggish high-end residential sales will cap earnings upside for CDL. Sluggish equity and derivatives volumes will remain a share price overhang despite surging interest income. We added ST Engineering and Singtel to the model as growth and re-rating plays, respectively.