Review: Singapore equities consolidated in August with a modest 0.4% decline (after the 3.7% gain last month. The market is holding on to its year-to-date gains of 6.3%. Singapore REITs leads the performance for the 2 nd consecutive month with cumulative gains of 9.4%. It remains the best performer among major asset classes (Figure 5) and a strong performer in Asian equity markets (in local currency terms – Figure 6). Real estate has started to outperform on expectations of interest rate cuts. Hong Kong Land was up 16% in August. We think the rally is ahead of the fundamentals. Office vacancy rates in Central Hong Kong are still surging, rising 2.2%
points to 12.1% in just the first six months of the year. Vacancy rates is up 6x from 2018’s 1.8% since the student protest and pandemic began (Figure 8). In comparison, Singapore's CBD vacancy has been largely flat at 5.6% since 2018.
Economy: Macro conditions in Singapore are largely stable. Exports are down 2% till July this year but an improvement over the 2023 drop of 13%. Electronics exports have recovered by 3% after the 20% collapse in 2023 (Figure 9). Pharma and
chemicals are still weak and contracted 17% this year. Tourist arrivals are still rising, with July rising 13% YoY to 1.6mn arrivals. All the growth was due to a 78% jump in China arrivals (Figure 10). Arrivals from Indonesia have started to contract.
Sectors: In our recent REITs sector report, 1H24 dividends per unit (DPU) announced by REITs contracted an average 12% YoY due to higher financing costs. Despite the weakness in DPU, REITs rallied. Rather than wait for DPUs to recover, markets are already re-rating the sector that lower interest expense will materialise or at least rates have peaked. In the Jackson Hole Symposium on 23 rd August, Fed Chair Powell effectively announced interest rate cuts for the upcoming 18 September FOMC meeting. Powell said, "Time has come for policy to adjust". Whether it is two rate cuts will depend on payroll gains where expectations are for 164k jobs.
Recommendation: We remain overweight REITs and even banks. Banks reported earnings growth of around 6% YoY in 1H24, led by DBS and OCBC. Dividend yields are close to 6%. We think bank net interest margins are shielded from lower interest rates as they lock in their excess liquidity into longer duration (or tenure) assets. We think 3Q24 should be healthy as the recent volatility in equities and foreign exchange will drive fee and trading income. A peak in interest rate could see customers shift out of low margin deposits into investments. However, banks look like an overweight as we enter 2025. If markets start to price the four or five rate cuts in 2025 (Figure 11), bank’s earnings will be vulnerable as interest margins will fall sharply. Sectors we like are construction and telecommunications. The construction industry will enjoy a huge boost in orders next year as the two integrated resorts start their expansion and refurbishment work totalling S$13-14bn and Terminal 5 construction kicks off. Our overweight on telecommunications is largely Singtel. The company is enjoying revenue growth from higher mobile prices in Australia and non-telco revenue such as NCS and data centres. Data centre capacity is expected to triple by 2026 and introduce GPU-as-a-Service. There are also aggressive $200mn p.a. cost cuts underway. The issuance of the 700MHz spectrum will be a negative for the mobile industry.
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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.