• Singapore’s equity market jumped rose equities up 7.6%, the best since 1Q21’s 11.3% gain. REITs chalked up gains of 13% during the quarter.
• We expect another two to three rate cuts over the next six months. A positive driver for REITs but it makes us more cautious on banks in the medium term.
• Our strategy is to maintain a high dividend yield in the portfolio with selected growth opportunities. We expect a global de-risking or risk-off scenario as US Presidential elections come closer. Risks could linger even when a winner is decided. Sectors we favour are REITs, air transport services, construction and defence
Review: Singapore equities marked a milestone by reaching a 17-year high on 23 September. Buy-and-hold investors can breathe a sigh of relief after 17 years. The market is up 10.6% this year, still 9% shy of the record achieved in October 2007. For the quarter, equities were up 7.6%, the best since 1Q21’s 11.3% gain. Gains were broad based with losses confined to airlines and technology (Figure 3). Banks continue
to register gains (Figure 1) with some cyclicals being the top gainers (Figure 2). REITs enjoyed a stellar re-rating following the Fed rates cut (Figure 3).
Outlook: We expect further easing by the Federal Reserve in 4Q24. Another two rate cuts is the base case. It is similar to the Fed’s economic projections. Market expectations are three rate cuts this year and another four in 2025 (Figure 6). There is
merit for more rate cuts. Firstly, the real interest rate (i.e. adjusting for inflation) is round 2.2% (Figure 7). This is a restrictive monetary policy compared to the prepandemic average of 0.5%. Secondly, 2-year Treasuries have a close correlation and even lead indicator ahead of Fed Funds. The 2-year is now settling at 3.5% or 1.3% higher than Fed Funds (Figure 8). This is likely the fabled “neutral” interest rate before the Fed pauses. Coincidentally, the Fed projects a 3.4% interest rate by end 2025. Thirdly, the underlying trendline for Core PCE Inflation is to hit 2% by March 2025 (Figure 9). Disinflationary pressure is underway from lower gasoline prices (Figure 10),
Chinese imports and even services if the labour market worsens. As the US Presidential elections approach, we expect a global de-risking or risk-off scenario. Risks could linger even when a winner is decided. Currently, the election remains a
close call. Betting odds give Kamala a slight edge over Trump (Figure 11). With Trump, there will be higher trade tariffs and Kamala will impose higher corporate taxes. The best scenario is likely a divided government. In Singapore, the economy is beginning to pick up momentum. Exports have perked up strongly led by electronics (Figure 12). We believe a major re-stocking is underway in the US (Figure 13). Worries about higher import tariffs may be a restocking trigger. Sectors that continue to enjoy momentum are tourism (Figure 14), building materials and air cargo (Figure 15). Semiconductors are enjoying a rebound in demand but concentrated on AI-related spending, namely capex for high bandwidth memory.
Recommendation: After the strong rally of 19% this year, we are Neutral on banks. We expect 3Q24 earnings to remain healthy from higher wealth management fees as customers shift out of low-margin deposits, pick-up in loan growth and improvement
in trading income from a spike in foreign currency volatility especially in August. Banks should sustain their interest margins, at least till 1H25, as they locked in longer-term securities with their excess deposits. The cost of funds has more room to decline with
the higher composition of fixed deposits. Our preference shifts to UOB because of its higher proportion of fixed deposits and lower exposure to Hong Kong commercial property. Despite the recent rally, REITs are still down 2% this year. We remain upbeat
on REITs as we expect another 4 rate cuts over the next six months. Rate cuts will be the organic growth driver for dividends and raise portfolio valuations. CapitaLand Investment will be a major beneficiary of lower rates from income growth for its REIT
holdings and enabling accretive fee transactions. Its “cradle to afterlife” business model can resume. Another positive is the massive re-rating of China following the recent monetary stimulus by the central bank and support by the Politburo will benefit the economy indirectly. Similar to the Fed’s quantitative easing, it will be the wealth effect of higher equity and bond prices that boosts confidence and spending. It also encourages borrowing as households and private enterprises are deleveraging despite the record-low interest rates. We worry China’s economic conditions will worsen next year. There is funding to complete the housing project but once completed there will be a dearth of activity as developers will be stuck with huge unsold inventory. Demand for building materials, commodities and finished goods will drop even more next year (Figure 16). To avoid a downward spiral, the economy requires fiscal spending to improve the weakness in aggregate demand.
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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.
