Phillip Singapore Monthly – Jan24 Disappointing start February 2, 2024 104

·        A tough start for the Singapore market, down 2.7% in January. The weakest sectors were electronics and commodities. Outperformers were transportation and shipping.

·        Headline economic news was favourable with Singapore’s GDP expanding at a faster pace of 2.8% YoY in 4Q23 (3Q23: +1%). But most indicators remain sluggish. December manufacturing and export indicators were down 3.1% and 1.5% YoY respectively. REITs results were operationally healthy, but interest expense and currency dragged down dividends. Around two-thirds of REITs reported a contraction in their DPU. China was the weak spot, with either negative rental reversions or arrears creeping up.

·        Our key sector Overweights are conglomerates, REITs and telecommunications. Another sector we favour is building materials. The construction sector is gaining momentum with 2023 awards reaching S$33.8bn, exceeding the BCA forecast of S$27bn-32bn. There is visibility of a strong 2024 with forecasted construction awards ranging between S$32bn and S$38bn.

 

 

Review: It was a poor start for Singapore with a 2.7% decline in January.  Most asset classes eked out meagre gains. S&P 500 outperformed with a rise of 1.6% (Fig. 5).  Most sectors in Singapore were in the red, except for shipping and transportation (Fig. 6). Rallies in Yangzijiang Shipping (YZJ) and Samudera Shipping (+3.8%) bolstered performance. Contract wins for YZJ and buoyant container freight rates due to the Red Sea attacks supported the sector.  The award of a 600MW power plant to YTL PowerSeraya was construed as catering to the rising demand for electricity in Singapore, more than doubling the previous 1.5% p.a. demand to 3.4%. The news drove a rally in Sembcorp Industries and Keppel Ltd share prices.

 

Economy:  Most economic data points were soft (from manufacturing to exports). A surprise has been declining RevPAR (Fig. 8) despite arrivals still growing at 33% YoY in December (Fig. 9). The jump in tourism was reflected in record earnings for Marina Bay Sands (Fig. 10). There is visibility of strong tourist arrivals with the string of major concerts and events over the next three months plus the introduction of 30-day visa free travel for travellers from China.

 

Sectors:  REITs succumbed to selling pressure following lacklustre results and a rally in the prior two months of 15%. Operationally, the strongest segments have been logistics, especially in Australia and Singapore office. Rental reversions were in the low to high double digits. China is the soft spot with logistics rental reversion declining by around 20% in Tier 2 cities. Some data centres in China are also facing major arrears. The semiconductor sector is getting a huge tailwind from a surge in AI applications. However, Singapore-listed names are unlikely to benefit significantly from this uplift. Apart from Intel, most foundries such as TSMC and Hynix, are keeping their capital expenditure plans unchanged. Key semiconductor equipment maker ASML is also guiding for flat sales in 2024. We expect any recovery to be later part of the year.

Recommendation:  We are still positive on REITs as we expect rate cuts to occur this year. Inflation at 2.9% is trending even below Fed expectations of 3.2% (Fig. 11). Furthermore, US core inflation is close to its three-year lows when the Fed Fund rate was still zero (Fig. 12). The Federal Reserve has ruled out a hike in March but mentioned it still favoured an interest rate cut this year. The first cut is possibly in May after three more inflation data points. In telecommunications, we favour Singtel for the multiple share price catalysts. We believe mobile price repair is occurring in most of its markets, the planned S$600mn of cost cuts are underway and another S$4bn of divestments are on track. Also, there is now a new driver, which is AI. Separately, Singtel is working with Nvidia to build green AI-ready data centres.

 

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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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