Phillip Singapore Monthly: May24 – Stagflation risk rising June 4, 2024 142

  • Singapore equities were up 1.3% in May. It is the 3rd consecutive month of gains, the longest streak since 1Q21. Financials drove the returns this month with a gain of 2.2%.
  • Finally, AI was not the hottest sector last month. It was shipping containers. Freight rates spiked 60% in May and tripled on a YoY basis.   Yangzijiang Shipbuilding’s share price jumped by 29% with European container companies surging more than 20%.
  • Our macro view is inflation is spreading. Apart from freight rates, commodities, especially metals, are rallying despite weak economic conditions in China. We could enter a period of stagflation. Multiple indicators flash a slower US consumer spending, especially burdened by record credit card balance. This year’s three main themes are interest rates, geopolitics, and AI. For geopolitics, ST Engineering benefits from increased defence spending and stockpiling. Banks’ attractive yield can ride any inflation risk and delay in rate cuts.

 

Review: Singapore equities are enjoying a modest streak. It has risen for three consecutive months with cumulative gains of 6%. The rise of 1.3% in May was supported by strong gains in shipping, transportation, and finance (Figure 6). The Red Sea is estimated to handle 30% of global container trade. The current conflict and security concerns have caused vessels to divert. It adds 2.5 weeks of sail time, and more vessels need to be deployed. Container freight rates from China to the US spiked 60% in May and tripled on a year-on-year basis (Figure 7). Around one-third of Yangzijiang order wins this year are from container ships.

Economy:  We believe the US economy is entering a period of stagflation. Inflation risk on goods is rising and spreading. Apart from higher freight rates, multiple commodity prices, especially metals, are also up strongly this year, including nickel (+19%), copper (+17%), and aluminum (+11%). Commodity prices are a lead indicator of inflation (Figure 8). There are also signs US consumer spending is slowing. US auto sales declined for the first time in 21 months (Figure 10), and retail sales (ex-motor vehicle) are below expectations. We also believe the consumer is burdened by the huge student and credit card loans (Figures 11 and 12). In Singapore, most data points were soft. Industrial production is contracting (Figure 13), exports are lacklustre (Figure 14), and retail sales are softening. Tourism remains the bright spot. Arrivals in April grew 20% YoY, with arrivals from China surging almost 2.5x YoY. Current arrivals are at an annualised 15mn against the peak of 19.2mn pre-pandemic (Figure 15). But hotel RevPAR is starting to stabilise with a rise of 3% YoY. Another sector performing well is construction. Ready-mixed concrete demand is up 10% in 1Q24, followed by steel bars jumping 40%. Residential property transactions are still down 33% this year, contributing to weakness in developer share prices (Figure 3).

Sectors: UOB 1Q24 results were within expectation but the weakest of the three banks. OCBC earnings were ahead of the forecast due to better fees and trading income. StarHub met our expectations, but mobile competition in Singapore is intensifying. We are more positive about Singtel as we see more aggressive cost-cutting in Optus and a S$6bn monetisation plan. Revenue from electronic manufacturers Venture Corp. and Valuetronics was sluggish due to weak demand, destocking, and delays in new launches. ThaiBev results were within our forecast, with the beer division returning to volume growth after four quarters of contraction. ST Engineering results were ahead of our estimates.
Recommendation:  We do not see a robust macro environment. Our strategy is to buy attractive dividend yield backed by strong balance sheets or monetization plans. Stocks under this bucket include Singtel, DBS, Keppel Corp., Valuetronics, and Cromwell REIT.  On earnings growth, stocks we favour include ST Engineering, China Aviation Oil, ComfortDelGro, BRC Asia, and Pan-United.  Value names under our coverage include City Developments, Suntec REIT, and Thai Beverage.

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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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